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.
Sunday, 10 May 2009
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?
Tuesday, 21 April 2009
Spot the loony
Despite working in a bank I lost the belief that public ownership in itself was a good thing some time ago. Despite this the idea of part privatising the post office within say the next 18 months strikes me as mad for all sorts of obvious reasons.
The stock market is at a major low right now something that would be reflected in whatever the government received for selling off one of our assets. Added to this the continued constraints on the ability to borrow due to the credit crunch would reduce (assuming the debt could even be found) what any business could bid and also means the number of institutions able to bid is teeny, additional factors that would make for a low sale price. Finally, no big business - I’ll rephrase that - few big businesses are daft enough to make a bid without having a good shufty at the books before agreeing a price. I’m sure the latest post office trading data show its revenues have fallen due to the recession, which means a basic valuation based on earning multiples (how much cash the business is likely to generate over the next however many years) would be less now than it was say a year ago or in 2 years time for that matter.
With common sense and commercial realities all screaming “DON’T BE SO FECKIN STUPID”, its no wonder Peter Mandelson, judging by recent reports, looks like he’s trying to recast a stupid business decision as a matter of (dogmatic) political conviction (1). To put this dogma into practice it seems that he’s having exclusive talks with just one potential buyer (TNT) i.e. avoiding the kind of auction that would generate the highest sale price i.e. the best value for public money. But its not just about money he might say, which is fair enough but then in better times there would be far more scope for arranging a beauty contest of potential buyers who coul dbe selected according to additional criteria.
But hey ho it’s not as if government doesn’t have a track record for selling off public assets on the cheap. There was the windfall tax for one thing, a one-off levy Labour charged in 1997 on the excess profits earned by the 33 utilities the Tories privatised and as sure a sign as any that they were sold off too cheaply and regulated too lightly. But, don’t think for an instant Labour are any better given Gordon Brown’s decision as Chancellor to sell off a huge chunk of our gold reserves for hee haw.
So it looks like a fire sale of British taxpayer assets could be happening near you. There again it’s not as if doing so provides much support for the private-good/public-bad credo that’s dominated government thinking for god knows how long, besides the credit crunch there are however many examples now emerging of private sector stupidity and waste.
To get a sense of how feckin stupid may I direct you to chapter 1, table 1.3, page 28 of the latest IMF financial stability report - Table 1.3 estimates that banks will have a cumulative loss rate on European loans and securities of 5% compared to a US figure of 10.2%. So go go Europe we’re better placed than the yanks. Except 5% is horrendous for businesses that exist on charging borrowers a few %% more than they pay to get the funds they lend, in other words charging a margin of just 1 or 2% on loans forecast to end up losing 5%!
This looks like banking is moving from a 2007 and 2008 when the change in liquidity conditions exposed strategic failures (pay too much for a business after we’ve passed the top of the cycle? That’ll do nicely. Develop an over reliance on wholesale funding that’s never been tested? You betcha!) to a 2009 and 2010 when a grinding recession will screw profitability the good old fashioned way via customers insolvencies, defaults, repossessions, etc.
If it’s any consolation it should also keep chucking up examples of how feckin stupid bankers were. The latest I’ve heard involved a non-UK bank that thought British commercial property was the bee’s knees so got into it big time. This was despite not having the infrastructure to cope by which I mean a proper credit risk function and credit process i.e. independent decision-makers tasked with assessing the quality not just the quantity of lending. Instead, the relationship managers went out and agreed in principle to punt as much credit as possible on stupidly generous terms to as many people as they could. They then submitted these applications for approval to a quorum of err relationship managers i.e. the self-same sales reps with sales targets to meet, who sat down and took the big decisions. And you bet these sales targeted plumbs decided to lend lots and lots and lots and lots of cash too cheaply to too many people.
Obviously, that bank is utterly fecked right now, much to the dismay of the taxpayers currently bailing it out. I wonder though if the halfwits who decided to throw it's money away are still in place? My guess is yes most of them probably are along with the senior bods who thought getting sales reps to decide whether to sell was a good idea. To explain why, as we say where I work (with more than a hint of irony), I’m sure the idiots whose decisions made clear they have no commercial judgement whatsoever have the kind of “influencing skills” every organisation will need in the future. And as if all this wasn’t bad enough, the film “In the loop” was good, but no that good. Pants.
(1) Presumably pension obligations will also feature somewhere, except I'd guess any shortfalls here would also be exacerbated by the downturn in share prices while the policies used to calculate fund obligations give big scope for political interference.
The stock market is at a major low right now something that would be reflected in whatever the government received for selling off one of our assets. Added to this the continued constraints on the ability to borrow due to the credit crunch would reduce (assuming the debt could even be found) what any business could bid and also means the number of institutions able to bid is teeny, additional factors that would make for a low sale price. Finally, no big business - I’ll rephrase that - few big businesses are daft enough to make a bid without having a good shufty at the books before agreeing a price. I’m sure the latest post office trading data show its revenues have fallen due to the recession, which means a basic valuation based on earning multiples (how much cash the business is likely to generate over the next however many years) would be less now than it was say a year ago or in 2 years time for that matter.
With common sense and commercial realities all screaming “DON’T BE SO FECKIN STUPID”, its no wonder Peter Mandelson, judging by recent reports, looks like he’s trying to recast a stupid business decision as a matter of (dogmatic) political conviction (1). To put this dogma into practice it seems that he’s having exclusive talks with just one potential buyer (TNT) i.e. avoiding the kind of auction that would generate the highest sale price i.e. the best value for public money. But its not just about money he might say, which is fair enough but then in better times there would be far more scope for arranging a beauty contest of potential buyers who coul dbe selected according to additional criteria.
But hey ho it’s not as if government doesn’t have a track record for selling off public assets on the cheap. There was the windfall tax for one thing, a one-off levy Labour charged in 1997 on the excess profits earned by the 33 utilities the Tories privatised and as sure a sign as any that they were sold off too cheaply and regulated too lightly. But, don’t think for an instant Labour are any better given Gordon Brown’s decision as Chancellor to sell off a huge chunk of our gold reserves for hee haw.
So it looks like a fire sale of British taxpayer assets could be happening near you. There again it’s not as if doing so provides much support for the private-good/public-bad credo that’s dominated government thinking for god knows how long, besides the credit crunch there are however many examples now emerging of private sector stupidity and waste.
To get a sense of how feckin stupid may I direct you to chapter 1, table 1.3, page 28 of the latest IMF financial stability report - Table 1.3 estimates that banks will have a cumulative loss rate on European loans and securities of 5% compared to a US figure of 10.2%. So go go Europe we’re better placed than the yanks. Except 5% is horrendous for businesses that exist on charging borrowers a few %% more than they pay to get the funds they lend, in other words charging a margin of just 1 or 2% on loans forecast to end up losing 5%!
This looks like banking is moving from a 2007 and 2008 when the change in liquidity conditions exposed strategic failures (pay too much for a business after we’ve passed the top of the cycle? That’ll do nicely. Develop an over reliance on wholesale funding that’s never been tested? You betcha!) to a 2009 and 2010 when a grinding recession will screw profitability the good old fashioned way via customers insolvencies, defaults, repossessions, etc.
If it’s any consolation it should also keep chucking up examples of how feckin stupid bankers were. The latest I’ve heard involved a non-UK bank that thought British commercial property was the bee’s knees so got into it big time. This was despite not having the infrastructure to cope by which I mean a proper credit risk function and credit process i.e. independent decision-makers tasked with assessing the quality not just the quantity of lending. Instead, the relationship managers went out and agreed in principle to punt as much credit as possible on stupidly generous terms to as many people as they could. They then submitted these applications for approval to a quorum of err relationship managers i.e. the self-same sales reps with sales targets to meet, who sat down and took the big decisions. And you bet these sales targeted plumbs decided to lend lots and lots and lots and lots of cash too cheaply to too many people.
Obviously, that bank is utterly fecked right now, much to the dismay of the taxpayers currently bailing it out. I wonder though if the halfwits who decided to throw it's money away are still in place? My guess is yes most of them probably are along with the senior bods who thought getting sales reps to decide whether to sell was a good idea. To explain why, as we say where I work (with more than a hint of irony), I’m sure the idiots whose decisions made clear they have no commercial judgement whatsoever have the kind of “influencing skills” every organisation will need in the future. And as if all this wasn’t bad enough, the film “In the loop” was good, but no that good. Pants.
(1) Presumably pension obligations will also feature somewhere, except I'd guess any shortfalls here would also be exacerbated by the downturn in share prices while the policies used to calculate fund obligations give big scope for political interference.
Saturday, 4 April 2009
Cat skinning
There’s more than one way to skin a cat and as my neighbour’s keeps using my front garden as a litter tray my preference is for whichever is the most painful. Similarly there’s more than one way to recapitalise a bank. One way, the couldn’t be higher profile if it had a million flaming rockets up its jacksie way, is for government to commit to underwriting bank rights issues (the issue of additional ordinary shares), which sees an issue price being set, then government buying up however many of the new shares private investors chose not to invest in (typically because the rights issue price is higher than the shares were trading at in the immediate run up to the issue).
It’s just I’m thinking another, cheekier approach is going on right now. This other approach involves the more traditional thang of banks retaining earnings to bolster their capital bases. Here, hang on a mo for a quick digression; a bank’s capital gives it the wherewithal to afford losses made on lending and investing. So the bigger the capital base the more confidence you can have in a bank, hence the government emphasis on recapitalising banks to rebuild confidence in them. Ahhhh!
Right, digression over, so aye, recapitalistion via retained earnings. The primary way banks boost earnings is by increasing the margin between what they pay to raise funds (e.g. interest paid on deposits) and what they charge the borrowers of those same funds. This all got complicated by the credit crunch. In fact it’s still complicated. One of the markers of the extent to which confidence was lost in banks was the margin that suddenly appeared between the Base rate set by the Bank of England and LIBOR rates, LIBOR being the London Interbank Offered Rate, or what one bank charges to lend another one. Due to the crisis of confidence banks are still contending with (essentially the realisation that big banks can fail), LIBOR rates stopped closely following base rate.
Instead they shot up. The resultant spread between LIBOR and base rate provides both a yardstick for measuring confidence in banks and a guide to actual bank funding costs. One final point, the spread that emerged broke the connection between base rate and the interest rates actually paid by borrowers, undermining traditional monetary policy. Oops, again I’m digressing. Anyhow, regardless of what base rate was/is, mortgage rates jumped up, and have stayed up because LIBOR remains so relatively high.
This is surprising from a housing market perspective because the typical loan to value on mortgages has plummeted since the middle of last year, which matters big time because it means, on average, every new mortgage/remortgage is getting progressively safer and safer.
Here, a quick, simplified, example – I borrow £90 to buy a £100 house, so that’s a 90% LTV, which was what first time buyers typically got in the years before the credit crunch. Now say my house is repossessed and sold, cos that’d be in a fire sale, chances are it’ll be sold for only £80. So rather than pay the outstanding £10, I declare myself bankrupt and the bank loses £10. Now, say the same thing happened, but I’d only borrowed £79 i.e. a 79% LTV, which would be quite generous today, then the bank would owe me £1 from the fire sale of the house.
So banks have moved themselves from a position where they could lose money on new business to one where they really have to go some to do so. Yet despite this conservative step-change in credit policy and loan quality, mortgages still feel awfy, awfy expensive. Plus we don’t hear that much these days about banks being all nasty and refusing to pass on interest rate cuts (unless its to cut interest rates on savings).
Given what actually seems to be happening, I’m thinking mebbe there’s now a tacit acceptance by government that banks can be allowed to screw borrowers over, with this letting them rebuild their capital by themselves.
So if my hunch is correct, then WHOOPEE - government doesn’t have to invest anymore of our money in them, but BOO - because British banking is only part nationalised, private shareholders will profit from this as will the bank executives who will be proclaimed business heroes in due course, essentially for being allowed to rip off customers in a market that’s lost around a third of the competition. And BOO2, because banks appear to have swung from not pricing for risk and lending too much too cheaply, to potentially “over-pricing” for the far smaller risk attached to less debt, then they’re stuffing the housing market because no one can afford the equity needed for a first time buyer mortgage.
Theres more BOOs, but I figure you get the point.
It’s just I’m thinking another, cheekier approach is going on right now. This other approach involves the more traditional thang of banks retaining earnings to bolster their capital bases. Here, hang on a mo for a quick digression; a bank’s capital gives it the wherewithal to afford losses made on lending and investing. So the bigger the capital base the more confidence you can have in a bank, hence the government emphasis on recapitalising banks to rebuild confidence in them. Ahhhh!
Right, digression over, so aye, recapitalistion via retained earnings. The primary way banks boost earnings is by increasing the margin between what they pay to raise funds (e.g. interest paid on deposits) and what they charge the borrowers of those same funds. This all got complicated by the credit crunch. In fact it’s still complicated. One of the markers of the extent to which confidence was lost in banks was the margin that suddenly appeared between the Base rate set by the Bank of England and LIBOR rates, LIBOR being the London Interbank Offered Rate, or what one bank charges to lend another one. Due to the crisis of confidence banks are still contending with (essentially the realisation that big banks can fail), LIBOR rates stopped closely following base rate.
Instead they shot up. The resultant spread between LIBOR and base rate provides both a yardstick for measuring confidence in banks and a guide to actual bank funding costs. One final point, the spread that emerged broke the connection between base rate and the interest rates actually paid by borrowers, undermining traditional monetary policy. Oops, again I’m digressing. Anyhow, regardless of what base rate was/is, mortgage rates jumped up, and have stayed up because LIBOR remains so relatively high.
This is surprising from a housing market perspective because the typical loan to value on mortgages has plummeted since the middle of last year, which matters big time because it means, on average, every new mortgage/remortgage is getting progressively safer and safer.
Here, a quick, simplified, example – I borrow £90 to buy a £100 house, so that’s a 90% LTV, which was what first time buyers typically got in the years before the credit crunch. Now say my house is repossessed and sold, cos that’d be in a fire sale, chances are it’ll be sold for only £80. So rather than pay the outstanding £10, I declare myself bankrupt and the bank loses £10. Now, say the same thing happened, but I’d only borrowed £79 i.e. a 79% LTV, which would be quite generous today, then the bank would owe me £1 from the fire sale of the house.
So banks have moved themselves from a position where they could lose money on new business to one where they really have to go some to do so. Yet despite this conservative step-change in credit policy and loan quality, mortgages still feel awfy, awfy expensive. Plus we don’t hear that much these days about banks being all nasty and refusing to pass on interest rate cuts (unless its to cut interest rates on savings).
Given what actually seems to be happening, I’m thinking mebbe there’s now a tacit acceptance by government that banks can be allowed to screw borrowers over, with this letting them rebuild their capital by themselves.
So if my hunch is correct, then WHOOPEE - government doesn’t have to invest anymore of our money in them, but BOO - because British banking is only part nationalised, private shareholders will profit from this as will the bank executives who will be proclaimed business heroes in due course, essentially for being allowed to rip off customers in a market that’s lost around a third of the competition. And BOO2, because banks appear to have swung from not pricing for risk and lending too much too cheaply, to potentially “over-pricing” for the far smaller risk attached to less debt, then they’re stuffing the housing market because no one can afford the equity needed for a first time buyer mortgage.
Theres more BOOs, but I figure you get the point.
Wednesday, 25 March 2009
For Steve
Here, a quick recap of an earlier post - the collapse of the monoline insurance market meant it was no longer possible to do £100m plus PFIs as monoline wrapped bonds sold onto institutional investors. Big PFI projects instead went back to the banks who, due to liquidity constraints, were (and are) only willing (and able) to handle (a) smaller tranches of individual loans (b) for shorter terms e.g. 7 rather than 25 years (c) and even then only at significantly higher margins.
This left PFIs struggling to raise money on anything even approaching acceptable terms from what had suddenly become an enlarged and much more expensive herd of cats (that being the technical term for a syndicate of banks). The end result was that getting senior debt became the exception rather than the rule and more and more projects couldn’t get signed off.
So the PFI model of mixing government finance, private equity stakes and private debt effectively broke down last year. This was a shame because bringing forward PFI projects was touted by government as a counter-cyclical response to the credit crunch and subsequent recession i.e. a fundamental part of current economic policy. For instance, a January 2009 Department of Transport document on road capital projects emphasised its counter-cyclical benefits e.g. in government right now every policy needs to tick the counter-cyclical spending box cos we’ve all rediscovered Keynes.
To sort this out government finally bit the bullet on March 3rd when the Chief Secretary to the Treasury announced the setting up of a dedicated team, department unit or whatever that will lend to pretty much every current and new PFI project either in isolation or in conjunction with commercial lenders and the European Investment Bank. In other words if a PFI can’t borrow from a bank it can borrow from the Treasury.
Hang on a mo you’re thinking doesn’t the “P” in PFI stand for private not public? Ahh, the Chief Secretary to the Treasury over-emphasised, there’s still the private equity interest in each PFI so it still is “P” for private (give or take the fact that’s only ever been a wee tottie bit of the cash involved). Besides, the loans will be on what’s explicitly referred to as a “commercial” basis, the risk involved will still be transferred to the private sector, via the private equity stake, and what’s currently envisaged is that when things return to normal the loans will be sold on to private investors and the team, unit, department or whatever it is will shut up shop.
So that’s alright then isn’t it? Ish, I mean the stuff will still get built, but this new approach still leaves a coupla wee things to ponder. One is that the Treasury needs to intervene at all because doing so makes clear right now a wholly private sector funded PFI would fail the value for money test that needs to be passed to justify using private rather than public finance. Then there’s the Treasury’s reference to the loans being made on a “commercial” basis. A polite person might describe that as a rhetorical flourish, an honest person would describe it as mince. By definition, the loans can’t be on commercial terms because the Treasury is only intervening due to the fact the commercial terms currently available are unacceptable.
Instead, “commercial” here simply means interest will be charged on debt lent via contractually specific loans. Arranging things this way will make it easier to eventually sell on the debt while neatly confirming the government’s continued commitment to PFI.
Lets try and be understanding for a minute, this approach could arguably be justified on the grounds that we are currently living in exceptional times. Except it effectively assumes private finance will pass the value for money test in due course i.e. in a future nobody can predict give or take the fact we know the cheap private credit PFI depended on is less likely to be available due to the current regulatory response to bank liquidity and balance sheets that will permanently constrain their ability to throw cheap debt at things.
But, hang on a mo, isn’t the government doing this as a counter-cyclical response to the recession? Yup. But, won’t charging interest reduce the total amount being spent on new construction because interest will have to be (re)paid as well as the capital? Err, possibly. So that means the taxpayer will get less bang for their counter-cyclical buck? I’m sorry I don’t quite understand. Well won’t fewer new schools and hospitals get built? Perhaps. So less people will be employed building things and more kids will have to be taught in poor quality buildings for longer essentially because of an ideological commitment to PFI? I really think you need to look at the bigger picture here, after all PFI is a key means of transferring risk from the public to the private sector.
Transferring what risk? Well take the Scottish Parliament for example - generalist civil servants managed a wholly government funded project requiring specific skills and repeatedly caved into incessant political tinkering that led to costs reaching astronomical levels, I mean how good an argument in favour of PFI do you need? Ahh, so a PFI establishes a discipline whereby the sponsor agrees a detailed set of specs they are more likely to stick to while whoever won the construction contract has to work within the costs they originally estimated in their tender regardless of whether it turns out the land has all sorts of unexpectedly expensive problems to deal with? Pretty much, I mean look at the example of the PFI contract to build a National Physical Laboratory where, after getting their costs wrong, the private sector ended up losing an estimated £100m on facilities that eventually cost government £140m. Now that’s risk transfer or to be precise that’s the transfer of “construction” risk because the time things are most likely to go wrong is when stuff is getting built. Aye fair enough, but isn’t it much better just to moan about how much PFI costs? Well it certainly makes for better headlines.
Except, wouldn’t establishing an arms length government construction agency or an independently chaired quango to agree final specs with say an executive appointed on 5 year terms, thus at a remove from political tinkering, have much the same effect? Perhaps. And see this risk transfer thing? Uh huh? Well has the credit crunch no suddenly made clear that relying on PFI to finance the construction of infrastructure actually builds a new and unanticipated risk into the provision of basic services and infrastructure i.e. we’ve now learned the reality is that rather than transferring risk, PFI simply swaps one risk (construction) for another? (bank liquidity). Err, yes, but these are exceptional times, so shut it.
And see this funding of this new PFI arrangement? Aye, what? This emphasis on clawing back departmental underspends to create a pot to finance the loans, does that no mean that rather than any additional spending its simply generating different spending with the total unchanged? Mebbe. So it’ll have a limited net effect or even less of an effect given interest will be charged? Well that’s certainly something to consider, however, the announcement also made clear there is now additional scope for government to undertake additional borrowing to fund the loans, so we could well see some real net gains, plus there is the “multiplier effect” due to the types of activity likely to be financed. What’s a “multiplier”? Well buying bricks to build a hospital means brick makers have more money to go out and buy things and so on. So will this multiplier effect outweigh the consequences of charging interest? Err, I don’t know.
And see with the financing being funded via a clawback from existing departmental budgets AND additional government borrowing, does that mean government can borrow for capex cheaper than the private sector? Don’t know. Are you getting huffy? No am no. Aye you are, its no my fault PFI has suddenly become a wholly redundant exercise what with the debt required currently unavailable and the fact that when any Treasury loans are eventually sold down the risk transfer will be completely negligible given it’ll be wholly post construction. Well no one knows the future, so I couldn’t possibly comment.
Aye fair do Nostradamus, its no as if it isn’t feckin obvious, but howabout this risk transfer thing one last time? What about it? Well, is that why post-construction PFI projects typically go back to their lenders and refinance i.e. renegotiate cheaper credit? Yup. So this post-construction refinancing was that why whoever provided the equity in the first PFIs made huge gains simply because the Treasury hadn’t taken it into account? I think that’s a very, very simplistic account of a complex situation. Aye, anyway, what about now? Well, for a few years now any refinancing gains have had to be shared with the Treasury i.e. the taxpayer. Really? That sounds pretty reasonable then. Yup, but again it doesn’t make for good headlines.
So can I ask another question? Sure. Why are you doing this analysis as a fake conversation kinda Q&A session? No idea I should probably stop, there again it is a useful device for pointing out PFI’s practical limitations.
But, isn’t having a go at PFI right now like shooting fish in a barrel? Sort of, except there’s a political consensus in favour of it – the Tories like it as do the leaders of the Labour party, who cares about the LibDems while the SNP’s Scottish Futures Trust alternative looks more and more like a joke every day.
Why does that matter? Well it means any criticisms of PFI tend for the most part to be couched in ideological terms rather than practicalities and as such can be easily rebutted. You know the kind of thing “PFI is the creeping privatisation of the NHS”. To which anyone can say whoop-de-feckin do, isn’t the point of the NHS to provide universal access to the best medical treatment available rather than debate who the providers are (for those interested in this kind of stuff the relevant thing would be the debate over clause 4 of the Labour party constitution and its subsequent rewriting)?
So are there any other practical criticisms of PFI? Yup. Such as? Well, a good one is the fact that by locking local authorities, NHS trusts etc. into 25 year contracts, the client can’t change how they deliver services or at least not without incurring mucho penalty costs. So say in 10 years time it turns out transferring more medical services to GPs would save more lives, there could be an off-puttingly large penalty cost due to it taking business away from PFI hospitals.
Fair do’s, so setting aside the “oohhh, we’re all indebted cos of PFI” and “oooohhhh its privatising the delivery of public services” mince, all this means PFI –
1) No longer passes the value for money test i.e. government borrowing would be cheaper. Moreover, the cost of borrowing from banks is unlikely to fall back to the kind of low levels seen before the credit crunch, ever!
2) It turns out the risk transfer argument is actually about swapping risks and if it involves selling on debt in however many year’s time will simply see government reducing its indebtedness i.e. PFI is simply about playing with balance sheets
3) Government charging interest could well raise the cost of capital spending beyond what it might otherwise have been, reducing the amount of work that gets done as a result
4) The notion of this being counter-cyclical is consequently open to serious scrutiny as a result of these interest costs and the clawback from existing budgets.
5) The market discipline PFI imposes could potentially be permanently achieved by other means that avoid the additional cost of borrowing from the private sector.
“Again I think you’re taking a much too simplistic approach here”, said the Treasury civil servant with responsibility for PFI policy.
P.S. Steve, I hope this makes sense
This left PFIs struggling to raise money on anything even approaching acceptable terms from what had suddenly become an enlarged and much more expensive herd of cats (that being the technical term for a syndicate of banks). The end result was that getting senior debt became the exception rather than the rule and more and more projects couldn’t get signed off.
So the PFI model of mixing government finance, private equity stakes and private debt effectively broke down last year. This was a shame because bringing forward PFI projects was touted by government as a counter-cyclical response to the credit crunch and subsequent recession i.e. a fundamental part of current economic policy. For instance, a January 2009 Department of Transport document on road capital projects emphasised its counter-cyclical benefits e.g. in government right now every policy needs to tick the counter-cyclical spending box cos we’ve all rediscovered Keynes.
To sort this out government finally bit the bullet on March 3rd when the Chief Secretary to the Treasury announced the setting up of a dedicated team, department unit or whatever that will lend to pretty much every current and new PFI project either in isolation or in conjunction with commercial lenders and the European Investment Bank. In other words if a PFI can’t borrow from a bank it can borrow from the Treasury.
Hang on a mo you’re thinking doesn’t the “P” in PFI stand for private not public? Ahh, the Chief Secretary to the Treasury over-emphasised, there’s still the private equity interest in each PFI so it still is “P” for private (give or take the fact that’s only ever been a wee tottie bit of the cash involved). Besides, the loans will be on what’s explicitly referred to as a “commercial” basis, the risk involved will still be transferred to the private sector, via the private equity stake, and what’s currently envisaged is that when things return to normal the loans will be sold on to private investors and the team, unit, department or whatever it is will shut up shop.
So that’s alright then isn’t it? Ish, I mean the stuff will still get built, but this new approach still leaves a coupla wee things to ponder. One is that the Treasury needs to intervene at all because doing so makes clear right now a wholly private sector funded PFI would fail the value for money test that needs to be passed to justify using private rather than public finance. Then there’s the Treasury’s reference to the loans being made on a “commercial” basis. A polite person might describe that as a rhetorical flourish, an honest person would describe it as mince. By definition, the loans can’t be on commercial terms because the Treasury is only intervening due to the fact the commercial terms currently available are unacceptable.
Instead, “commercial” here simply means interest will be charged on debt lent via contractually specific loans. Arranging things this way will make it easier to eventually sell on the debt while neatly confirming the government’s continued commitment to PFI.
Lets try and be understanding for a minute, this approach could arguably be justified on the grounds that we are currently living in exceptional times. Except it effectively assumes private finance will pass the value for money test in due course i.e. in a future nobody can predict give or take the fact we know the cheap private credit PFI depended on is less likely to be available due to the current regulatory response to bank liquidity and balance sheets that will permanently constrain their ability to throw cheap debt at things.
But, hang on a mo, isn’t the government doing this as a counter-cyclical response to the recession? Yup. But, won’t charging interest reduce the total amount being spent on new construction because interest will have to be (re)paid as well as the capital? Err, possibly. So that means the taxpayer will get less bang for their counter-cyclical buck? I’m sorry I don’t quite understand. Well won’t fewer new schools and hospitals get built? Perhaps. So less people will be employed building things and more kids will have to be taught in poor quality buildings for longer essentially because of an ideological commitment to PFI? I really think you need to look at the bigger picture here, after all PFI is a key means of transferring risk from the public to the private sector.
Transferring what risk? Well take the Scottish Parliament for example - generalist civil servants managed a wholly government funded project requiring specific skills and repeatedly caved into incessant political tinkering that led to costs reaching astronomical levels, I mean how good an argument in favour of PFI do you need? Ahh, so a PFI establishes a discipline whereby the sponsor agrees a detailed set of specs they are more likely to stick to while whoever won the construction contract has to work within the costs they originally estimated in their tender regardless of whether it turns out the land has all sorts of unexpectedly expensive problems to deal with? Pretty much, I mean look at the example of the PFI contract to build a National Physical Laboratory where, after getting their costs wrong, the private sector ended up losing an estimated £100m on facilities that eventually cost government £140m. Now that’s risk transfer or to be precise that’s the transfer of “construction” risk because the time things are most likely to go wrong is when stuff is getting built. Aye fair enough, but isn’t it much better just to moan about how much PFI costs? Well it certainly makes for better headlines.
Except, wouldn’t establishing an arms length government construction agency or an independently chaired quango to agree final specs with say an executive appointed on 5 year terms, thus at a remove from political tinkering, have much the same effect? Perhaps. And see this risk transfer thing? Uh huh? Well has the credit crunch no suddenly made clear that relying on PFI to finance the construction of infrastructure actually builds a new and unanticipated risk into the provision of basic services and infrastructure i.e. we’ve now learned the reality is that rather than transferring risk, PFI simply swaps one risk (construction) for another? (bank liquidity). Err, yes, but these are exceptional times, so shut it.
And see this funding of this new PFI arrangement? Aye, what? This emphasis on clawing back departmental underspends to create a pot to finance the loans, does that no mean that rather than any additional spending its simply generating different spending with the total unchanged? Mebbe. So it’ll have a limited net effect or even less of an effect given interest will be charged? Well that’s certainly something to consider, however, the announcement also made clear there is now additional scope for government to undertake additional borrowing to fund the loans, so we could well see some real net gains, plus there is the “multiplier effect” due to the types of activity likely to be financed. What’s a “multiplier”? Well buying bricks to build a hospital means brick makers have more money to go out and buy things and so on. So will this multiplier effect outweigh the consequences of charging interest? Err, I don’t know.
And see with the financing being funded via a clawback from existing departmental budgets AND additional government borrowing, does that mean government can borrow for capex cheaper than the private sector? Don’t know. Are you getting huffy? No am no. Aye you are, its no my fault PFI has suddenly become a wholly redundant exercise what with the debt required currently unavailable and the fact that when any Treasury loans are eventually sold down the risk transfer will be completely negligible given it’ll be wholly post construction. Well no one knows the future, so I couldn’t possibly comment.
Aye fair do Nostradamus, its no as if it isn’t feckin obvious, but howabout this risk transfer thing one last time? What about it? Well, is that why post-construction PFI projects typically go back to their lenders and refinance i.e. renegotiate cheaper credit? Yup. So this post-construction refinancing was that why whoever provided the equity in the first PFIs made huge gains simply because the Treasury hadn’t taken it into account? I think that’s a very, very simplistic account of a complex situation. Aye, anyway, what about now? Well, for a few years now any refinancing gains have had to be shared with the Treasury i.e. the taxpayer. Really? That sounds pretty reasonable then. Yup, but again it doesn’t make for good headlines.
So can I ask another question? Sure. Why are you doing this analysis as a fake conversation kinda Q&A session? No idea I should probably stop, there again it is a useful device for pointing out PFI’s practical limitations.
But, isn’t having a go at PFI right now like shooting fish in a barrel? Sort of, except there’s a political consensus in favour of it – the Tories like it as do the leaders of the Labour party, who cares about the LibDems while the SNP’s Scottish Futures Trust alternative looks more and more like a joke every day.
Why does that matter? Well it means any criticisms of PFI tend for the most part to be couched in ideological terms rather than practicalities and as such can be easily rebutted. You know the kind of thing “PFI is the creeping privatisation of the NHS”. To which anyone can say whoop-de-feckin do, isn’t the point of the NHS to provide universal access to the best medical treatment available rather than debate who the providers are (for those interested in this kind of stuff the relevant thing would be the debate over clause 4 of the Labour party constitution and its subsequent rewriting)?
So are there any other practical criticisms of PFI? Yup. Such as? Well, a good one is the fact that by locking local authorities, NHS trusts etc. into 25 year contracts, the client can’t change how they deliver services or at least not without incurring mucho penalty costs. So say in 10 years time it turns out transferring more medical services to GPs would save more lives, there could be an off-puttingly large penalty cost due to it taking business away from PFI hospitals.
Fair do’s, so setting aside the “oohhh, we’re all indebted cos of PFI” and “oooohhhh its privatising the delivery of public services” mince, all this means PFI –
1) No longer passes the value for money test i.e. government borrowing would be cheaper. Moreover, the cost of borrowing from banks is unlikely to fall back to the kind of low levels seen before the credit crunch, ever!
2) It turns out the risk transfer argument is actually about swapping risks and if it involves selling on debt in however many year’s time will simply see government reducing its indebtedness i.e. PFI is simply about playing with balance sheets
3) Government charging interest could well raise the cost of capital spending beyond what it might otherwise have been, reducing the amount of work that gets done as a result
4) The notion of this being counter-cyclical is consequently open to serious scrutiny as a result of these interest costs and the clawback from existing budgets.
5) The market discipline PFI imposes could potentially be permanently achieved by other means that avoid the additional cost of borrowing from the private sector.
“Again I think you’re taking a much too simplistic approach here”, said the Treasury civil servant with responsibility for PFI policy.
P.S. Steve, I hope this makes sense
Sunday, 22 March 2009
The bankers strike back
Best to ignore fro the time-being the ineffectual, British huffing and puffing over the Sir Fred Goodwin pension for the cack-handed, disgusting little sideshow it is. By contrast the US House of Representatives has approved a bill to impose 90 per cent tax on bonuses to employees whose gross income exceeded $250,000 at bailed-out firms. Now that’s action!
In response the FT states “Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions” (20/3/09). Struck back? Really? How exactly?
By saying things of course. Fer instance, one banker was quoted saying “It’s like a McCarthy witch-hunt...This is the most profoundly anti- American thing I’ve ever seen.” Wooooh, scary. Sticks and stones and all that give or take the assumption its somehow wrong to take away the bonuses of people who directly contributed to a financial disaster now costing millions of people their livelihoods.
But, said one investment banker, these taxes could “send [the US] back to the stone age”. Crikey, crivens and help ma’boab! So taxing a few hundred or mebbe a few thousand people will do that to the world’s biggest economy? If it’s that fragile presumably its going to topple over anyway? And how exactly?
Thru staff retention of course judging by the comments of Vikram Pandit, Citigroup’s chief executive, in an internal memo; “The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people”. So that’s us over a barrel then if these people aren’t free to earn tons of cash.
Alternatively, I don’t think these people realise the wider implications of what they're saying. Fair enough its fun to have it made clear employees are motivated almost entirely by cash; we sell our labour in a labour market for a price after all. And sure thats the last however many years of HR dogma on employee engagement and motivation out the window to the extent I'm betting every training courses run by a bank HR department is being duly amended as I type this (or not). But, to be honest all I'm left thinking is the people making these statements sound increasingly like ignorant tosspots.
Desperately guddling about for actual evidence one noted “Commodity traders are already moving to companies like BP where they can make as much money as they used to”. So that’ll be a couple of dozen people at most have got jobs with a single company in an area that only really came to prominence because there was nothing left to speculate in towards the end of the bubble? Crikey!
Alternatively, the reality is most high finance labour markets will be notably cooler for the foreseeable future because they're oversupplied with high financiers that have recently been made redundant. I’d even expect commodity trader bonuses at energy companies to fall regardless of what governments do elsewhere because of this and the general state of commodity markets now that the change in status of the remaining investment banks has permanently clipped the wings of the hedge funds.
It’s this kinda rank stupidity and failure to see the bigger picture that makes me doubt if Vikram’s got it right. Are the same commodity traders who exacerbated oil price swings really helping to stabilise the financial system? My jacksie they are, its central bankers, treasury officials, finance officers and regulatory and risk experts thatare doing the ground work here.
Lets be honest, Vikram is most likely cacking it that when these other people (who earn significantly less than top traders) finally help achieve some sort of stability he won’t be able to pile back into high earning businesses because all the big bonus bods will have naffed off to err, I'm not sure exactly, its not as if most other countries aren't biting down hard on the bonus culture. And anyway this kidna piling into markets type thing is exactly the kind of herd mentality that helped create the credit crunch in the first place.
It all leaves me thinking these guys really, really don’t have a clue about how much attitudes have changed or much shame for that matter (even worse they were given the otherwise credible platform of an FT article from which to whine). Rather than striking back, right now it comes across as no more than huffing and puffing outside a big brick house, except this time its the piggies trying to blow it down. If I was them and was wanting to get my bonus back I’d treble my political lobbying budget to try and sway government behind the scenes, cos the arguments being made in public are selfish, half-arsed, incoherent mince for the most part.
In response the FT states “Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions” (20/3/09). Struck back? Really? How exactly?
By saying things of course. Fer instance, one banker was quoted saying “It’s like a McCarthy witch-hunt...This is the most profoundly anti- American thing I’ve ever seen.” Wooooh, scary. Sticks and stones and all that give or take the assumption its somehow wrong to take away the bonuses of people who directly contributed to a financial disaster now costing millions of people their livelihoods.
But, said one investment banker, these taxes could “send [the US] back to the stone age”. Crikey, crivens and help ma’boab! So taxing a few hundred or mebbe a few thousand people will do that to the world’s biggest economy? If it’s that fragile presumably its going to topple over anyway? And how exactly?
Thru staff retention of course judging by the comments of Vikram Pandit, Citigroup’s chief executive, in an internal memo; “The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people”. So that’s us over a barrel then if these people aren’t free to earn tons of cash.
Alternatively, I don’t think these people realise the wider implications of what they're saying. Fair enough its fun to have it made clear employees are motivated almost entirely by cash; we sell our labour in a labour market for a price after all. And sure thats the last however many years of HR dogma on employee engagement and motivation out the window to the extent I'm betting every training courses run by a bank HR department is being duly amended as I type this (or not). But, to be honest all I'm left thinking is the people making these statements sound increasingly like ignorant tosspots.
Desperately guddling about for actual evidence one noted “Commodity traders are already moving to companies like BP where they can make as much money as they used to”. So that’ll be a couple of dozen people at most have got jobs with a single company in an area that only really came to prominence because there was nothing left to speculate in towards the end of the bubble? Crikey!
Alternatively, the reality is most high finance labour markets will be notably cooler for the foreseeable future because they're oversupplied with high financiers that have recently been made redundant. I’d even expect commodity trader bonuses at energy companies to fall regardless of what governments do elsewhere because of this and the general state of commodity markets now that the change in status of the remaining investment banks has permanently clipped the wings of the hedge funds.
It’s this kinda rank stupidity and failure to see the bigger picture that makes me doubt if Vikram’s got it right. Are the same commodity traders who exacerbated oil price swings really helping to stabilise the financial system? My jacksie they are, its central bankers, treasury officials, finance officers and regulatory and risk experts thatare doing the ground work here.
Lets be honest, Vikram is most likely cacking it that when these other people (who earn significantly less than top traders) finally help achieve some sort of stability he won’t be able to pile back into high earning businesses because all the big bonus bods will have naffed off to err, I'm not sure exactly, its not as if most other countries aren't biting down hard on the bonus culture. And anyway this kidna piling into markets type thing is exactly the kind of herd mentality that helped create the credit crunch in the first place.
It all leaves me thinking these guys really, really don’t have a clue about how much attitudes have changed or much shame for that matter (even worse they were given the otherwise credible platform of an FT article from which to whine). Rather than striking back, right now it comes across as no more than huffing and puffing outside a big brick house, except this time its the piggies trying to blow it down. If I was them and was wanting to get my bonus back I’d treble my political lobbying budget to try and sway government behind the scenes, cos the arguments being made in public are selfish, half-arsed, incoherent mince for the most part.
Wednesday, 18 March 2009
Sausage? Nah, just the sizzle
I blame Rudolf Hilferding myself. By 1910 the notion of an owner managed capitalism that underpinned classical Marxist theory was more than a bit iffy due to the emergence of big, private, bureaucratic organisations across a range of industries. To accommodate this Hilferding devised the notion of “Finance capital”, which for him only arose at a distinct stage of capitalism and constituted the coming together of finance capital - banks - and industrial capital - industry. The theory was very much a product of Germany at that time and the close links already formed there between big banks and big business. By contrast in Britain where banks remained wedded to the provision of working capital and senior debt as opposed to any equity, the relationship remained more arms length.
Regardless of its applicability elsewhere, Hilferding sought to establish a meaningful and relevant theory of capitalism as he saw it. For me that kind of intellectual endeavour (and effort) should at least be acknowledged. However, I still think the subsequent notion of “managerial capitalism” is the more relevant, especially as developed by Alfred Chandler Jr.
Chandler distinguishes managerial capitalism from Marx’s personal capitalism by detailing how decisions concerning the production and distribution of goods and services are made at a remove from the market by hierarchical teams of salaried managers with little or no equity ownership in the enterprises they manage. Ownership is instead at a remove, typically in the hands of institutional investors such as pension funds. Even better by describing this as the “visible hand” as opposed to Adam Smith’s “invisible hand” he introduced a wonderfully powerful metaphor that by itself made clear the fundamental change in how things were.
There was an attempt in the 70s to claim managerial capitalism was no more by I think it was Maurice Zeitlin, except his argument was pants. Essentially it was executives have been given so many shares and share options they count as owners i.e. lets all go back to classical Marxism to avoid the fact that when you have to distinguish between ownership and control in a capitalist enterprise, Max Weber’s class theory is more useful for analysing things than Marxist approaches.
And there you are then, a horrendously brief summary of some serious attempts by social theorists, business historians and sociologists to understand the location of ownership, control and authority within capitalist society, and the structuring of capitalist enterprises. By contrast what we now have are jizz slobbers fixated on generating a funky title first and only then some barely coherent assertions to substantiate it.
So now fer instance we have “casino capitalism”. Err right, but capitalism is predicated on risk taking, that being the reward for investors and entreprenuers so who gives a monkeys whether that's in a casino or not. Casino capitalism? And?
That kind of pants leaves you with the feeling that because managerial capitalism still largely rules the roost, these people are struggling here for something new to say to justify the advance given by their publisher. This is a shame because privatisation, fer instance, created a regulatory capitalism where strategic direction and capital allocation is set by private managers in relation to public sector fdetermined rameworks, objectives and representatives i.e. it constitutes a new form of locating, managing and structuring control and authority. Crikey, that might be a useful starting point for approaching the part-nationalisation of banking!
Except, that would be a bore. Much better is Noreena Hertz’s “Gucci capitalism”. Now Noreena is a cutey. She also knows Bono (I mind she kept saying this when she gave a speech at some corporate shindig I was at). She is also wonderfully, wonderfully vacuous despite having an otherwise impressive CV. Good ankles too.
But, rather than digress any further, I'll quote - “We are witnessing the death of a paradigm”, “The public recognises it has the moral right and authority to condemn the ideology that resulted in this.” No not really, the public is more concerned with Jade Goody right now while paradigm and ideology imply a worked out set of principles rather than the vague and untested list of assumptions and prejudices that more accurately describes the thought of the great and the good who created the credit crunch.
Oops I'm digressing again. Back to Noreena - “The next phase of capitalism will combine policies of localisation with an understanding that there are problems we share - such as carbon-dioxide emissions - that cannot be tackled alone. And it will actively seek to redefine what is valuable, so children growing up today do not make the mistakes of this generation in confusing success with the ability to purchase another pair of Nikes or a Gucci bag.”
See that just betrays a complete failure to understand human nature that does.The only way the kids are going to stop fiending for Gucci and Nike is if something more fashionable coming along. Ahh, but that’s just a consequence of capitalist cultural hegemony said the social worker who’d done an Open University sociology module too many years ago. Aye well, feck off ya plumb. Here, have a real example – so there was me in Havana a coupla years back sipping an espresso with a mate who got out his mobile phone. Allova sudden a product of the socialist revolution came over and started trying to buy his phone off him cos you know how the Cuban chicks dig a man with a flashy mobile.
But anyway, Noreena and what not – so that’ll be localisation and globalisation all mixed together then? That’s just meaningless drivel that is. Besides compared to say Hilferding and Chandler, Noreena misses the point big time in a manner that sounds groovy, but is actually deeply, deeply conservative to an extent that explains (even more than her being easy on the eye) why banks are happy to have her as a guest speaker.
Noreena's Gucci capitalism signifies nothing more than an environmentally destructive, selfish fixation with brands and conspicuous consumption i.e. a specific set of assumptions completely at a remove from issues of ownership, control, authority and the allocation of resources. As such they could as easily occur in a capitalist society as in a socialist one. Besides, if you take Thorstein Veblen at his word much of this was kicking about 100 years ago anyway or even 250 years ago if your preference is for recent academic accounts of conspicuous consumption in eighteenth century England.
This lack of analytical purchase and depth leaves the issues Gucci capitalism highlights looking no more than the kind of things a more detailed Corporate Social Responsibility policy could address, give or take establishing an emissions trading market. In other words things are dandy just as they are so long as institutions co-operate more and get a bit more fluffy.
Personally, you can take that and shove it. If Gucci capitalism is about the self aggrandizing triumph of the superficial, then Noreena's attempts at theory are as emblematic of it as kids aspiring to own branded goods.
Back in the real world Her Majesty’s Treasury came out with its latest survey of economic forecasts today. The new, average, independent forecast made in March is that in 2009 the British economy will shrink by 3.1%. Given the February average was -2.7% it seems pretty reasonable to expect a further downgrade next montt. if so, FECK! -3.1% would already be the lowest rate of growth – give or take World War II – since the great depression.
So it seems when Dr Sentence PHD of the MPC and formerly of BA and the CBI went to the IEA and said things were only looking as bad as the 70s and 80s he really was talking pants and isn’t anywhere near as good a forecaster as he thinks. Given that and in the spirit of the lovely Noreena here’s my localised, globalised typology for the current stage of capitalism – fucked.
Regardless of its applicability elsewhere, Hilferding sought to establish a meaningful and relevant theory of capitalism as he saw it. For me that kind of intellectual endeavour (and effort) should at least be acknowledged. However, I still think the subsequent notion of “managerial capitalism” is the more relevant, especially as developed by Alfred Chandler Jr.
Chandler distinguishes managerial capitalism from Marx’s personal capitalism by detailing how decisions concerning the production and distribution of goods and services are made at a remove from the market by hierarchical teams of salaried managers with little or no equity ownership in the enterprises they manage. Ownership is instead at a remove, typically in the hands of institutional investors such as pension funds. Even better by describing this as the “visible hand” as opposed to Adam Smith’s “invisible hand” he introduced a wonderfully powerful metaphor that by itself made clear the fundamental change in how things were.
There was an attempt in the 70s to claim managerial capitalism was no more by I think it was Maurice Zeitlin, except his argument was pants. Essentially it was executives have been given so many shares and share options they count as owners i.e. lets all go back to classical Marxism to avoid the fact that when you have to distinguish between ownership and control in a capitalist enterprise, Max Weber’s class theory is more useful for analysing things than Marxist approaches.
And there you are then, a horrendously brief summary of some serious attempts by social theorists, business historians and sociologists to understand the location of ownership, control and authority within capitalist society, and the structuring of capitalist enterprises. By contrast what we now have are jizz slobbers fixated on generating a funky title first and only then some barely coherent assertions to substantiate it.
So now fer instance we have “casino capitalism”. Err right, but capitalism is predicated on risk taking, that being the reward for investors and entreprenuers so who gives a monkeys whether that's in a casino or not. Casino capitalism? And?
That kind of pants leaves you with the feeling that because managerial capitalism still largely rules the roost, these people are struggling here for something new to say to justify the advance given by their publisher. This is a shame because privatisation, fer instance, created a regulatory capitalism where strategic direction and capital allocation is set by private managers in relation to public sector fdetermined rameworks, objectives and representatives i.e. it constitutes a new form of locating, managing and structuring control and authority. Crikey, that might be a useful starting point for approaching the part-nationalisation of banking!
Except, that would be a bore. Much better is Noreena Hertz’s “Gucci capitalism”. Now Noreena is a cutey. She also knows Bono (I mind she kept saying this when she gave a speech at some corporate shindig I was at). She is also wonderfully, wonderfully vacuous despite having an otherwise impressive CV. Good ankles too.
But, rather than digress any further, I'll quote - “We are witnessing the death of a paradigm”, “The public recognises it has the moral right and authority to condemn the ideology that resulted in this.” No not really, the public is more concerned with Jade Goody right now while paradigm and ideology imply a worked out set of principles rather than the vague and untested list of assumptions and prejudices that more accurately describes the thought of the great and the good who created the credit crunch.
Oops I'm digressing again. Back to Noreena - “The next phase of capitalism will combine policies of localisation with an understanding that there are problems we share - such as carbon-dioxide emissions - that cannot be tackled alone. And it will actively seek to redefine what is valuable, so children growing up today do not make the mistakes of this generation in confusing success with the ability to purchase another pair of Nikes or a Gucci bag.”
See that just betrays a complete failure to understand human nature that does.The only way the kids are going to stop fiending for Gucci and Nike is if something more fashionable coming along. Ahh, but that’s just a consequence of capitalist cultural hegemony said the social worker who’d done an Open University sociology module too many years ago. Aye well, feck off ya plumb. Here, have a real example – so there was me in Havana a coupla years back sipping an espresso with a mate who got out his mobile phone. Allova sudden a product of the socialist revolution came over and started trying to buy his phone off him cos you know how the Cuban chicks dig a man with a flashy mobile.
But anyway, Noreena and what not – so that’ll be localisation and globalisation all mixed together then? That’s just meaningless drivel that is. Besides compared to say Hilferding and Chandler, Noreena misses the point big time in a manner that sounds groovy, but is actually deeply, deeply conservative to an extent that explains (even more than her being easy on the eye) why banks are happy to have her as a guest speaker.
Noreena's Gucci capitalism signifies nothing more than an environmentally destructive, selfish fixation with brands and conspicuous consumption i.e. a specific set of assumptions completely at a remove from issues of ownership, control, authority and the allocation of resources. As such they could as easily occur in a capitalist society as in a socialist one. Besides, if you take Thorstein Veblen at his word much of this was kicking about 100 years ago anyway or even 250 years ago if your preference is for recent academic accounts of conspicuous consumption in eighteenth century England.
This lack of analytical purchase and depth leaves the issues Gucci capitalism highlights looking no more than the kind of things a more detailed Corporate Social Responsibility policy could address, give or take establishing an emissions trading market. In other words things are dandy just as they are so long as institutions co-operate more and get a bit more fluffy.
Personally, you can take that and shove it. If Gucci capitalism is about the self aggrandizing triumph of the superficial, then Noreena's attempts at theory are as emblematic of it as kids aspiring to own branded goods.
Back in the real world Her Majesty’s Treasury came out with its latest survey of economic forecasts today. The new, average, independent forecast made in March is that in 2009 the British economy will shrink by 3.1%. Given the February average was -2.7% it seems pretty reasonable to expect a further downgrade next montt. if so, FECK! -3.1% would already be the lowest rate of growth – give or take World War II – since the great depression.
So it seems when Dr Sentence PHD of the MPC and formerly of BA and the CBI went to the IEA and said things were only looking as bad as the 70s and 80s he really was talking pants and isn’t anywhere near as good a forecaster as he thinks. Given that and in the spirit of the lovely Noreena here’s my localised, globalised typology for the current stage of capitalism – fucked.
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