This link has been bookmarked by 20 people . It was first bookmarked on 23 May 2009, by tony curzon price.
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30 Jul 09
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30 Jun 09
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This is a well-run old firm with members of the original founding family still
in charge. It has grown at 10 per cent a year for decades, and its business
model is the same one it had during those years, one of steady incremental
growth through the old-fashioned method of making a better widget than its
competitors. The stock market takes one look at its figures and reacts with a
colossal, neck-ricking yawn. There is no glamorous upside here and no reason to
believe in any growth beyond the kind that Goodwidget has proved it can achieve.
Thus, although Goodwidget actually sells more widgets and makes more money than
eWidget – it made £500 million last year – because it seems to have less
potential for growth, its shares are, in terms of their earnings, cheaper. -
The new company is worth £10 billion plus £5 billion, yes? No – and this, from
the stock market’s point of view, is the beautiful part. Goodwidget’s £500
million of earnings are now added to the total revenue of eWidget, so the merged
firm is earning £700 million a year. Remember that eWidget is valued at 50 times
its earnings (so that £700 million of earnings implies a market capitalisation
of £35 billion), which means that eWidget shares are about to more than treble
in price. - 22 more annotations...
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Debt securities 276,427 127,251 -
Derivatives 332,060 118,112 -
Since banks are mainly in the business of lending money, high levels of assets
mean high levels of loans. That means that a bank’s main assets are other
people’s debts. This is another distinctive feature of bank balance sheets, the
fact that its principal assets are other people’s debts to it. -
Banking should be much more solid than computers/gadgets/music, but the fact
that banks will always have elephantine balance sheets, in proportion to their
equity, means they have a tendency to be a little less secure than they look at
first glance. That’s one of the many reasons banks are, in their corporate
body-language, so keen to look as imposing and rock-like as they possibly can. -
For that reason the nature of the assets – the loans – are all important; and
risk is not some marginal factor but the core of a bank’s business. Risk is
always an important issue for any company, but for a bank, it isn’t just
important, it’s their whole business. Banking does not just involve the
management of risk; banking is the management of risk. -
According to the Daily Telegraph, the answer is simple: the bank had
much bigger exposure to the sub-prime market than it admitted -
RBS turned out to have quite a lot of exposure to sub-prime risk, and to be
steadily acquiring more. On the 2007 balance sheet, it appears to be under ‘Debt
securities’. -
Already in 2006 some analysts were citing the firm as the world’s third biggest
player in sub-prime mortgages -
And that’s the problem: not fancy derivatives and sub-prime loans from the US,
not indecipherable off balance sheet SIVs, just plain old mortgages which
customers can’t afford to repay. Only 7 per cent of HBOS’s troubled assets are
the fancy-pants imported sub-prime variety. The rest are all home-grown, created
during the UK housing bubble. -
It’s probably the case that the bulk of the company’s mortgages, perhaps the
overwhelming bulk of them, perhaps including the worrisome recent loans, are
viable. People’s houses might not be worth what they paid for them, but in most
cases their owners are going to continue paying the mortgages anyway. There must
be many comparable examples out there, of highly out-of-fashion mortgage-based
investments which aren’t as deeply in trouble as the markets currently think. It
might make sense, if you were an experienced investor in those markets, to
investigate the possibility of buying some of these investments at a bargain
price. The problem is that these prices are, from the banks’ point of view, too
low. -
It isn’t too low in the sense that they quite fancy the idea of a higher price;
it’s too low in the sense that, if they accept the valuation, they have a
gigantic hole on the left-hand side of the balance sheet -
If the global economic crisis can be reduced to one single phenomenon, it is
this: the fact that nobody knows which banks are solvent -
the banks are being given two totally incompatible goals. One is to rebuild
their balance sheet and recapitalise themselves so they’re no longer at risk of
going broke. The second is to keep lending money. They’re being told to save and
to keep spending at the same time -
Many of the banks will turn out to be insolvent. In that case the bank is
nationalised, or at the very least goes into administration and receivership.
Then, a number of options become available, one of the principal ones being to
break the bank up into the viable part of the business, which will eventually be
refloated back onto the market, and a ‘bad bank’ of dodgy assets which must be
sold off (or arguably held until the values recover) in whatever way makes the
most possible money for the taxpayer. -
The distinctive feature of the UK scheme is the way the government took stakes
in the banks as a way of recapitalising them and helping them to stay in
business -
How are the banks to be prevented from gouging horribly unfair sums of money
from the taxpayer? After all, the market has broken down because the gap between
what sellers are willing to accept and buyers are willing to pay is so great
that the two parties can’t do deals. So the government waltzes in and agrees to
be the patsy, overpaying for assets which the bank knows far more about than the
government does? It’s not just buying a pig in a poke: it’s buying a pig in a
poke at a price determined by the seller, at a time when there is no market in
pigs -
To the relevant bigshots of the financial sector – people Tim Geithner knows
well from his time as head of the New York Federal Reserve – this plan
represents a bold, sane, ingenious attempt to create a space for the so-called
assets to return to their rightful values. To many other observers, it’s not so
different from dressing up in a costume and dancing in a circle praying for the
intervention of the Market Gods. The plan embodies a desperate yearning for this
to be a crisis of liquidity rather than one of solvency, and hopes that by
acting on that belief, it will make it come true -
The UK and US plans are different, as I’ve said, but at their heart they both
show the governments going to tremendous, Basil Fawltyish lengths in order to
avoid taking the troubled banks into public ownership. Our governments are
prepared to pay for them, but not to take them over. -
They also don’t want to admit the extent to which we are all now liable for the
losses made by the banks. Guess what, though: it’s too late. The 30 per cent
collapse in the value of sterling over the last months is something which is
only just beginning to be noticed by the public at large; but it is unlikely to
go away as quickly as it arrived. The reason sterling has crashed is simple: the
markets are pricing in the fact that we the taxpayer are on the hook for the
losses made by our banks. -
The investor-pundit Jim Rogers, colleague of George Soros, is advising anyone
who will listen to ‘sell any sterling you might have. It’s finished. I hate to
say it, but I would not put any money in the UK.’ This isn’t nice or polite, but
it puts into the public domain what a lot of international money men are saying
in private. More to the point, it’s a policy on which they have already acted.
This is the reason an auction of government debt held in March failed. The debt
was for 40-year bonds paying out at a rate of 4.25 per cent, and the reason it
failed to sell everything on offer – the last time that happened was in 2002 –
is that the markets thought inflation likely to rise, making the bonds a bad
bet. -
The drop in sterling, for instance, means that prices for all sorts of goods
will go up just as oil and gas prices have spiked downwards. -
The level of future public spending cuts implied in Darling’s recent budget –
which included the laughably optimistic idea that the economy will grow by 1.25
per cent next year – is greater than the level of cuts implemented by Thatcher.
Remember, that’s the optimistic version. If we’re lucky, it won’t be any worse
than Thatcherism.
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27 Jun 09
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21 Jun 09
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These feared and despised instruments, whose history has long been of interest to economists, come in three varieties from three issuing banks: the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank. Small countries with big ambitions but few natural resources need ingenious banking systems.
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In other words, RBS had its origins in a failed speculation, a bail-out, and a financial crash so big it helped destroy Scotland’s status as a separate nation.
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. To outsiders, it doesn’t make sense to have a ‘guaranteed bonus’: if your bonus is guaranteed, it isn’t a bonus, it’s a salary. In the interests of preserving their trade’s reputation, it’s bankers who should be leading the attack on Sir Fred’s clearly indefensible pension; instead, they’re chirruping about the evils of ‘banker bashing’.
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(The trick is to keep these projected and made-up figures sounding sensible and achievable: don’t claim that the net will be all the market, and that you’ll get all of that business. State a huge number for the total market, and claim to be after a sensible fraction of it.)
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All money is not created equal. The money earned by Goodwidget is worth much less than the money earned by eWidget. This is one of those points of stock-market logic which seems surreal, nonsensical and wholly counterintuitive to civilians, but which to market participants is as familiar as beans on toast.
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Banking does not just involve the management of risk; banking is the management of risk.
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In the foreword to RBS’s 2006 annual report, published in April 2007, Sir Fred wrote: ‘Sound control of risk is fundamental to the Group’s business . . . Central to this is our long-standing aversion to sub-prime lending, wherever we do business.’
On the principle that people deny something only when there’s something to deny, this remark might be the biggest single clue anywhere in the RBS accounts as to the risks the bank was running. RBS turned out to have quite a lot of exposure to sub-prime risk, and to be steadily acquiring more.
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Put simply, this is an insurance scheme. The government is insuring the banks against losses on their assets. There’s nothing unusual about such schemes: they’re a standard feature of the banking world. In fact, they are one of the sources of the current crisis. In the commercial world, a deal in which one financial institution insures another against defaults, in return for a fee, is called a credit default swap, or CDS. In effect, the UK government has undertaken a CDS with our imploded banks.
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The story was a distraction from the real scandal about AIG, which is what was happening to the other 99.9 per cent of the money the government was pumping into the company. Since AIG wrote CDSs, which are effectively insurance against losses, and since those losses had occurred, why then the cash was going to companies that had lost money in the credit crunch: companies such as Société Générale, which received $11.9 billion; Goldman Sachs, $12.9 billion; Merrill Lynch, $6.8 billion; Deutsche Bank, $11.8 billion; Barclays, $8.5 billion; BNP Paribas, $4.9 billion. Nothing could better illustrate the way in which this has be- come a systemic international crisis than the fact that the US Treasury is transferring these gigantic sums to foreign banks, because they feel they have no choice if they’re to keep the financial system functioning.
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I guarantee that at this very moment, somewhere in the world, somebody at one of the big banks is sitting with his head in his hands, looking at the company’s balance sheet and sweating over this very problem. If the global economic crisis can be reduced to one single phenomenon, it is this: the fact that nobody knows which banks are solvent.
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The trouble is that banks are not households. If banks sit on their hands and wait for valuations to recover, the economy grinds to a halt. The flow of money would stop and the recession would be even more severe than it is already certain to be. That’s because a situation in which banks are insolvent but stay in business means that you have ‘zombie banks’. A zombie bank is a bank which is dead – insolvent – but has a horrible pseudo-life because it is being allowed to keep trading by (usually) an overindulgent government. Zombie banks are not hypothetical: it was zombie banks, created by a t0o-cosy relationship between banks and the state, which after 1989 turned the Japanese economy from a wonder of the world to a comatose onlooker on global growth.
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1. Because the government would be bad at it. This is the only reason governments are willing to give in public, and it fails the most elementary test of all: only a professional politician can say it with a straight face. Bad at running the banks, compared to the bankers who broke capitalism? Please.
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The investor-pundit Jim Rogers, colleague of George Soros, is advising anyone who will listen to ‘sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the UK.’ This isn’t nice or polite, but it puts into the public domain what a lot of international money men are saying in private. More to the point, it’s a policy on which they have already acted.
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In 1976, Britain went broke running an annual deficit – the gap between tax revenues and government spending – of 6 per cent of GDP. Next year that figure is going to hit 12.4 per cent. A bad omen.
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There needs to be a general acceptance that the current model has failed. The brakes-off, deregulate or die, privatise or stagnate, lunch is for wimps, greed is good, what’s good for the financial sector is good for the economy model; the sack the bottom 10 per cent, bonus-driven, if you can’t measure it, it isn’t real model; the model that spread from the City to government and from there through the whole culture, in which the idea of value has gradually faded to be replaced by the idea of price.
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20 Jun 09
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08 Jun 09
PhilI get the strong impression, talking to people, that the penny hasn’t fully dropped. As the ultra-bleak condition of our finances becomes more and more apparent people are going to ask increasingly angry questions about how we got into this predicament. The drop in sterling, for instance, means that prices for all sorts of goods will go up just as oil and gas prices have spiked downwards. Combined with job losses – a million people are forecast to lose their jobs this year, taking unemployment back to Thatcherite levels – and tax rises, and inflation, and the increasing realisation that the cost of the financial crisis is going to be paid not over a few years but over a generation, we have a perfect formula for a deep and growing anger. Expectations have risen a lot, over the last three decades; that’s going to have a big impact on how furious people feel about the hard years ahead. The level of future public spending cuts implied in Darling’s recent budget – which included the laughably optimistic idea that the economy will grow by 1.25 per cent next year – is greater than the level of cuts implemented by Thatcher. Remember, that’s the optimistic version. If we’re lucky, it won’t be any worse than Thatcherism.
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07 Jun 09
Geekgirl 397Even if we fall short of the IMF option in favour of a run-of-the-mill severe recession, the consequences for Britain are going to be horrific. Roads and schools and hospitals will go unbuilt and unrepaired, medical treatments will go unbought, nurses and policemen and council workers will be laid off. Six hundred thousand jobs have been created in local government in the last few years. Most of them will have to go
economy lanchester finance rbs uk banking 2009 crash economics
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03 Jun 09
raman srinivasanIt’s a moment of confusion and loathing that most of us have experienced. You’re in a shop. It’s time to pay. You reach for your purse or wallet and take out your last note. Something about it doesn’t feel quite right. It’s the wrong shape or the wrong colour and the design is odd too and the note just doesn’t seem right and . . . By now you’ve realised: oh shit! It’s the dreaded Scottish banknote! Tentatively, shyly – or briskly, brazenly, according to character – you proffer the note. One of three things then happens. If you’re lucky, the tradesperson takes the note without demur. Unusual, but it does sometimes happen. If you’re less lucky, he or she takes the note with all the good grace of someone accepting delivery of a four-week-dead haddock. If you’re less lucky still, he or she will flatly refuse your money. And here’s the really annoying part: he or she would be well within his or her rights, because Scottish banknotes are not legal tender. ‘Legal tender’ is defined as any financial instrument which cannot be refused in settlement of a debt. Bank of England notes are legal tender in England and Wales, and Bank of England coins are legal tender throughout the UK, but no paper currency is. The bizarre fact of the matter is that Scottish banknotes are promissory notes, with the same legal status as cheq
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The same principles apply to company balance sheets. They look a lot more complicated, but the underlying factors are the same. At business schools, they play a game – sorry, ‘undertake an exercise’ – in which students are given balance sheets and asked to determine what type of business the company is in. Sums are in millions of pounds. So what’s the business whose balance sheet is shown here?
Group Company
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02 Jun 09
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28 May 09
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27 May 09
pjmoydIt's Finished is a witty and erudite essay by MeFi lurker John Lanchester in The London Review of Books on how completely and utterly screwed the British economy is. In the process of laying out his case Lanchester touches on varied issues, such Scottish banknotes, why Alan Hollinghurst's phrase "tremendous, Basil Fawltyish lengths" is applicable to the reaction by the US and UK governments to the banking meltdown, the value destruction of corporate mergers, the invention of modern accounting, and why no one really knows how large a share of the failed banks is owned by governments.
posted by Kattullus at 1:10 PM - 27 comments -
25 May 09
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‘RBS is a responsible company. We carry out rigorous research so that we can be confident we know the issues that are most important to our stakeholders and we take practical steps to respond to what they tell us. Then occasionally, we blow all that shit off, fire up some crystal meth, and throw money around with such crazed abandon that it helps destroy the public finances of the world’s fifth biggest economy.’ See if you can guess which of those sentences is not in the report.
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Put problem one and problem two together, and we have the current situation, in which the big banks are completely untransparent but also too big to fail. That is a catastrophic formula. We (the taxpaying we) have no choice but to keep them in business, and yet no real idea what’s going on inside them.
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That means tax rises, a near total freeze on government spending, swingeing public-sector job cuts, companies laying off every worker they can to save costs, and a dramatic upward spike in unemployment. The one easy thing the government will be able to do to help itself is to make inflation go up – that helps, because it decreases the real cost of the debt.
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1. You don’t want to have had a boom based on a property bubble. 2. You don’t want to have a consumer credit bubble. 3. You don’t want to have an economy based on financial services. 4. You don’t want your government to have just gone on a massive spending spree. We have all four of those things that you don’t want.
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The political polarisation between public and private sector employees, the savagery of the cuts, the bitterness of the arguments, the furious sense of righteousness on both sides? It’ll be Thatcher all over again, and the current period of managerial non-politics will seem as distant as the Butskellite consensus did in the 1980s.
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the model that spread from the City to government and from there through the whole culture, in which the idea of value has gradually faded to be replaced by the idea of price. Thatcher began, and Labour continued, the switch towards an economy which was reliant on financial services at the expense of other areas of society. What was equally damaging for Britain was the hegemony of economic, or quasi-economic, thinking. The economic metaphor came to be applied to every aspect of modern life, especially the areas where it simply didn’t belong. In fields such as education, equality of opportunity, health, employees’ rights, the social contract and culture, the first conversation to happen should be about values; then you have the conversation about costs. In Britain in the last 20 to 30 years that has all been the wrong way round. There was a reverse takeover, in which City values came to dominate the whole of British life.
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