Tighter than a gnat's chuff

Old skool banking meant borrowing money from savers (e.g. via a savings account) then lending it onto borrowers (e.g. via overdraft facilities). In this way old skool banks were intermediaries that facilitated the transfer of cash between those wanting to save and those wanting to borrow. Even better old skool bankers did a time transmogrification thingy as well; because they knew there’d always be cash sloshing about in a mix of savings and current accounts (Mr A has made a withdrawal? Who cares Mrs B has just had her salary paid in), they could borrow short-term and lend long.

The obvious point here is that the volume of deposits a bank has determines how much cash it has to lend i.e. a small deposit base is a constraint. The discovery of wholesale funding bypassed this , most obviously at Northern Rock, which was able to lend oodles and oodles because around three-quarters of its funding came from wholesale markets rather than depositors.

In fact am sure I can remember seeing some graph produced in 2008/2009 that ranked every big financial institution in Britain by the % of funding they derived from wholesale sources. Northern Rock was the clear outlier, but as you looked at who was second, then third and fourth in line you realised you were looking at which banks (lets be honest, which former building society) would be the next to go under.

The moral of this is pretty clear – any bank reliant on wholesale funding shouldn’t be let near any part of the retail banking market. Except, I’m having difficulty squaring this with John Kay’s proposals for “narrow banking”.

Originally, in a paper what he wrote in September 2009 he defined “narrow banking” as follows: “Only narrow banks specialising in these activities could describe themselves as banks. Only narrow banks could take deposits from the general public (deposits of less than a minimum amount, say £50,000). Only narrow banks could access the principal payments systems (CHAPS or BACS), or qualify for deposit protection.

Narrow banks might (but need not) engage in consumer lending, lend on mortgage, and lend to businesses, but would not enjoy a monopoly of these functions.”

This to my mind is all well and good. Except, listening in to a half decent Radio 4 “Analysis” programme broadcast this month yer man Professor Kay appeared to have redefined his definition somewhat judging by the transcript: “Professor Kay believes that because so much has changed since the 1930s what’s needed now is a variation on the Glass-Steagal theme. He calls his version “narrow banking”. He would limit the activities of retail banks to the most basic banking functions; looking after your money and making sure the payment system works. Narrow banks would only invest in government bonds, and the government would guarantee their deposits in return.

KAY: Now what I would do would be establish retail banks that take deposits and access the payment system, but the business of providing even consumer credit and mortgages and small and medium size loans would be done by specialist lenders. And some of them I think would be standalone organisations and others would probably be parts of bigger financial holding companies, which would run narrow banks but would also provide a range of other services to retail customers.”

The killer point here for me is the comment “only invest in government bonds”. Like where has the financial intermediation between private savers and private borrowers gone? Does this mean narrow banks wouldn't sell mortgages, credit cards or personal loans? Like is narrow banking simply about hoovering up retail deposits to pass on to government?

That’s not necessarily a bad thing to be honest, given it potentially minimises the imprtance of selling sovereign debt into international markets and all the rating agency shite that entails. But, if “narrow banks” only engage in retail deposit taking, who is going to lend to private individuals (e.g. sell you a mortgage) and, more importantly, how will they fund it, via wholesale markets in a Northern Rock style? Am confused rather than critical if honest, but my take on the latest definition of a “narrow bank” is that it appears so tight as to engender unnecessary risks.

Rating agencies are fucktards part 709b

A credit rating provides a measure of how likely a borrower is to be able to repay a loan; the lower the rating, the greater the risk, the higher the cost of borrowing *. Right now politicians and “experts” and what not across the world are looking to cut their respective government borrowing levels to preserve national credit ratings.

Take George Osborne for instance “maintaining the U.K.'s top-notch credit rating would not be easy but said it would be a central "benchmark" on which his party's economic management would be judged if it wins power this year … and pledged Tuesday that a Conservative Party government would hold onto the U.K.'s AAA credit rating,”

Now as a political strategy that is one top class bitch move cos it means you can blame someone else every time you cut public spending AND link it to the greater good.

Like when you does stuff like
- introduce a 3 year public sector pay freeze
- tighten eligibility for benefits (but not actual payment levels) to reduce spending
- cut capital spending on roads, schools, hospitals, social housing and what not
- hack back funding for “non-core” public services like libraries
- and so on and so on

All you need say, in a big boy done it and run away type voice, is something like “we are taking these TOUGH decisions to preserve Great Britain’s TRIPLE-A credit rating because of all the MAD/BAD shit Labour did. By doing this we will ………………………. (stop the cost of government borrowing increasing, except this last fundamental bit is usually too much to include in a soundbite. Plus it alludes to the creditors who are directly/indirectly dictating what a democratically elected government has to do in ways that will adversely affect lives).

Even better, if the rating is maintained, then depriving people of public services and decent pay can actually be presented as a good thing. Who cares if a growing number of auld yins are left sat for days in their own piss, our credit rating is still AAA!

With political debate now simply a question of what to cut, when and by how much, rating agencies are apparently defining the parameters and direction within which government sets its policies and budgets, regardless of whose prime minister **.

Except I once worked besides a bloke who’d worked in a rating agency and was an utter tosspot. Seriously, he used to spout inaccurate, inane, unrealistic, ignorant gibberish c.60% of the time, but only after forcing people to wait for him to gather his “thoughts” from a mind he claimed “was full of ideas”.

My painful personal experience might provide our potential future chancellor with a useful insight into the calibre of the rating agency staff setting a central benchmark with which to assess his performance. Or he might reflect upon how rating agencies used to think sub-prime was the bees knees. Such critique is also more constructive than the usual left-wing hide your head in the sand/anus approach of moaning about the inequities of globalised capitalism then passively accepting whatever it is you neither liked nor understood in the first place.

He might even consider the example of Japan. See, Japan had the same triple AAA credit rating we aspire to maintaining throughout the 1980s and 1990s. That’s lovely you might say, generous even, except the 1990s was what’s called Japan’s “lost decade” throughout which the economy did well when it managed to stagnate.

A major factor driving the Japanese economy into the doldrums was the aftermath of a cheap credit fuelled property bubble that’d been popped in 1991 (sound familiar?). Government and banks collectively thought that economic growth and a recovery in asset prices would sort things out so chose to sit and wait it out. This was a shame because land prices, fer instance, had actually started what turned out to be a 17 year decline that left bank balance sheets clogged up with bad loans they were unwilling to ‘fess up to or write down in the hope of an eventual recovery that never came.

All this was exacerbated by the keiretsu model of closely inter-linked clusters of banks and industrial concerns that characterises much of the Japanese economy. Now to get an insight into these links I mind some Japanese bloke I knew explaining how his grandad’s steel company had been invited to join a keiretsu and that to seal the deal, he was to marry a daughter of one of the bank executives involved. So with relations between keiretsu members close to the point of being incestuous, the mutual obligations these created saw banks tying up chunks of what remained of their assets/capital in even more non-performing loans to companies that would otherwise have been bankrupt without them (those outside a Keiretsu were of course treated less favourably).

Anyhoo, Japanese banks systematically under-reported their non-performing loans for years letting everyone pretend everything was A-OK. Except it wasn’t, bank balance sheets were so bunged up with dreck they had limited scope to do the new lending that would finances consumption and all that good stuff. Eventually, following a rash of bank failures, the government started fucking shit up from 1997/98 onwards; bailing out this bank, nationalising that one and capital injecting others. At the same time banks started to ‘fess up to all the shite they had on their books which meant mucho write-downs and more honest reporting that helped non-performing loans as a % of the total reach a cheeky peak of over 8% in 2002, before falling back on a sustained basis to under 2% by 2008.

All very interesting you might say give or take how come the rating agency fucktards didn't appear to have cottoned on to reality in the 1990s despite them being central benchmarks for and shapers of economic policy. And how do you explain the rating agency response to government efforts to resolve matters, which in 2001 and 2002 i.e. after the worst of of what had become a financial crisis was largely past, meant “penalizing the government of the world's second-largest economy for failing to curtail its fiscal deficit or revive its faltering economy” by repeatedly cutting its credit rating. (see also). See that strikes me as totally counter-intuitive that does, it’s like the rating agency policy was we don’t care if your entire 1990s are fucked, but don’t you dare ‘fess up to problems and try and sort them out or we'll do you ugly.

I asked some economist involved in producing country ratings about this the other day and he said it was to do with the levels of public debt government actions had created. I think this is pants. Instead, I think rather than their having been any great analysis or logic underpinning the rating agencies’ stance towards Japan, some rating agency fucktard kneejerked about the last 2 quarters’ government borrowing figures cos they were too thick to take into account the positive effects this would have; this was debt taken on to sort shit out after all. And ignoring the abso-fucking-horrendous moral hazard aspects of the ways in which Japanese banks were recapitalised, anyone with more than mucus up their arse for a brain can understand that debt-financed government spending can support the future economic growth that generates the tax revenues needed to repay borrowing.

So sure, sure you could try and come up with some justification based on some half-arsed neo-classical economic theory you vaguely remember from university as to why government debt beyond a certain level is a bad thing. Except the definition of acceptable government debt levels is largely arbitrary and its no as if any rating agency fucktard has the right data or skills to produce anything more than crude simulations that - give or take the self-fulfilling aspect of credit ratings where cutting a rating because of concerns about a government’s ability to repay/service its debt makes it less able to repay/service its debt - say fuck all about fuck all. In fact as someone who has seen credit rating models produced by internationally reknowned "experts" used in anger then described by their actual users as random number generators, I can truthfully say credit ratings often say less than fuck all.

Then there are the perverse incentives credit ratings create. In the Japanese case this was potentially to not do anything about its banks. With sub-prime it was more straight forward - it was about precisely designing asset backed securities that ticked all the right rating agency boxes to get rated triple A, but turned out to pose horrendous risk. Closer to home it’s the accounting trick that is PFI/PPP, which is primarily designed to do no more than keep the debt associated with government capital spending out of the national accounts rating agencies use to assess Britain’s credit rating.

So anyway, that’s my reasons for saying rating agencies are fucktards and by implication anyone wanting to use their output as a basis for benchmarking their performance a total fuck-nugget. Personally, I've no idea why rating agency finances, incentives, models, criteria, accuracy and competency aren’t subject to systematic, routine and in-depth public scrutiny, challenge and review, especially given the sub-prime catastrophe. Its time we started to do them ugly.


* That’s the theory, the reality when it comes to say mortgages before and after August 2007 is rather different.

** You could say its actually the people buying the government debt that are the issue. But, as credit ratings determine the price of said debt and the buyers are heavily reliant on the rating agency assessments, you'd be missing the point.

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)