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Friday, 28 November 2008

10 previous leaks

Daniel Finkelstein of The Times has prepared a dossier for the Metropolitan Police. It allows them to follow a disturbing pattern of leaks.

The Times January 4th 1988:

Mrs Margaret Thatcher was at the centre of the political storm last night after the leak of a confidential Whitehall memorandum disclosing that tough new rules are to be applied to state support for scientific research and development.

Officials at the department refused to comment on 'information that fails into someone's hands as a result of an unauthorized disclosure'.

Sources did confirm, however, that the memorandum from Mr Anthony Kesten, a senior official in the department's official Research and Technology Policy Unit, was genuine. They also indicated that a high-level internal inquiry is likely to begin today into how the document came to be passed to Mr Gordon Brown, opposition Treasury spokesman.

The Times July 2nd 1991:

The government last night seemed to be retreating from plans to include in its citizens' charter tougher consumer protection measures for users of the privatised utilities.

New draft documents leaked by Labour suggest that ministers and officials inthe trade department have dropped proposals for a reiew of the utilities and the performance of their regulators.

Labour claimed the latest document showed that Mr Major's proposed charter was worthless. Gordon Brown, shadow trade secretary, said the draft document had been prepared for the prime minister and circulated last Thursday to be included in the charter. It was drawn up after ministerial and official discussions of an earlier draft leaked by Labour.

The Times July 18th 1991:

[Defence Secretary Tom King] said that Labour claims, led by Gordon Brown, the shadow industry secretary and local MP, that the Rosyth base was to be closed had caused considerable alarm. People were led to believe that decisions had been taken when they had not.

Against a background of noisy protests from Labour MPs, he said that he hoped that the Leader of the Opposition, who was in his place, would consider the way a leaked document had been used and the fact that Rosyth was a defence ministry site used for the refitting of nuclear submarines.

He added: "The Leader of the Opposition will realise that these are grave matters and I am sure that he will be concerned that people on his front bench used leaked documents from such a source as though this was not a matter of considerable gravity.''

He hoped that those who hoped to be the future government would take seriously the fact that people who might be working for them felt free to leak documents no matter what their nature might be.

The Times December 19th 1991:

If Michael Heseltine wanted to leak a government document, he would have had more sense than to do so through a Labour spokesman.

He can therefore be acquitted of responsibility for the disclosure by Gordon Brown of his memorandum to fellow cabinet ministers arguing for a different treatment of EC funds to support the less well-off regions of the UK. The leak, more to the point, is salutory. The case he makes is now assured the public airing it deserves.

Sunday Times June 6th 1993:

Major blamed the party's opponents for spreading ``scare stories'' when he addressed the Tory women's conference in London on Friday. Yesterday, Michael Portillo, chief secretary to the Treasury, followed suit when asked about an apparent leak of Whitehall information to Gordon Brown, Labour's shadow chancellor.

Brown said that a team at the social security department was exploring ways to cut housing and sickness benefits.

Evening Standard June 11th 1993:

The documents the Government was today hit by fresh leaks of its planned clampdown on social security spending.

As ministers tried to brush over the banana skin of last night's leak on plans to tax invalidity benefit claims and make them harder, the Labour Party received more than 30 other pages of documents.

The documents were given to Shadow Chancellor Gordon Brown and his Social Security colleague Donald Dewar

Daily Mirror June 2nd 1993:

Secret papers showing plans for a Government blitz on the welfare state provoked outrage last night.

Premier John Major was accused of threatening cuts ``deeper and more insidious'' than anything contemplated under Margaret Thatcher.

The Whitehall papers leaked to Shadow Chancellor Gordon Brown reveal that seven task forces of senior civil servants have been ordered to examine the system from top to bottom for benefits to axe.

Daily Mirror March 18th 1994:

Virginia Bottomley's appointment as Minister for the Family was exposed as a sham last night. A leaked official document revealed that her ministry has rejected every option for better childcare.

Despite the Government's party-of-the-family rhetoric, the Department of Health has squashed every idea on one of the key areas of family policy. Shadow Chancellor Gordon Brown, who will unveil Labour's childcare plans next week, said: "This shows that Mrs Bottomley's appointment is just window dressing".

Daily Mirror September 10th 1994:

Shock Tory plans to dismantle the Welfare State have been exposed in a leaked Government document. Whitehall committees have been working on how to slash or means-test benefits paid to every family in the country.

Child benefit, pensions, sick pay, and unemployment benefit have all been targetted for cuts, the document called the "Review of Social Security - Second Stage" shows.

Shadow Chancellor Gordon Brown, who was sent the paper, said six of the seven Treasury-inspired committees had already reported.

Independent on Sunday May 4th 1997:

A front bencher from the last parliament said frankly: "None of us has the first sodding idea about what government means, whether any of us will be any good at it, or even what being good at it means....... Some of my colleagues have made a career out of being a conduit for leaks from the Civil Service to the press. That's hardly going to be much good in government."


Tuesday, 25 November 2008

What are you going to do with your share of the fiscal stimulus?

Mine is going in the Christmas pudding.

Welcome to Alphaville

“... where the betas are all smaller than any preassigned number and the alphas are all above average” E.Derman

I can’t remember the number of times I have heard someone say that their hedge fund holdings were down, but it wasn’t that bad given the state of the market. But hang on a moment, I thought hedge funds were supposed to be all about absolute returns, all excess return and no market correlation. Apparently not. My socks appear to have outperformed the market as a repository for excess cash this year and they don’t charge a 2% management fee. Private equity hasn’t worked any better. The firms that have invested in MBI’s and LBO’s have gone south with the market, and the infrastructure funds such as Macquarie, Allco and Babcock & Brown have all but bitten the dust.

Mind you, I never held with the notion that price volatility was a reliable indicator of risk (variations in price could have a direct but volatile causation such as the weather even although the risk of outright default might be low), nor that diversification that reduced volatility necessarily gave rise to reduced risk (two assets might exhibit a negative correlation, but the fact that one does well when the other does badly doesn’t really reduce the risk that either might fail, even though the risk that both will fail at the same time may be very low).

But that diversification doesn’t seem to help any more. There are so many markets linked by alternative investments that any risk diversification seems to be pointless. When the NYSE falls, so do Asian commodities because it is the same money driving both markets. When one market takes fright so does the other. More than that, asset pricing models probably expect some sort of normal behaviour where prices fluctuate within certain reasonable bounds. They don’t really handle catastrophic failure, or fear of the same, very well. In a normal market there may be very little correlation between US housing and the price of Pacific Island coconuts, but when the former nosedives far enough everybody including the coconut farmer gets hurt.

Ex-NatWest Banker Transferred to U.K. to Finish Prison Sentence

By Laurel Brubaker Calkins and Thom Weidlich
Nov. 25 (Bloomberg) -- The first of three British former bankers who pleaded guilty in a $20 million Enron Corp. fraud scheme was transferred from the U.S. to the U.K. to serve out his sentence.
David Bermingham, 46, one of the so-called NatWest Three, was flown from New York to the U.K. Nov. 21, his lawyer Jimmy Ardoin said. Bermingham and his confessed co-conspirators, Giles Darby and Gary Mulgrew, also 46, worked for Royal Bank of Scotland Group Plc's Greenwich NatWest unit. The three have spent about six months in U.S. prisons.
Darby and Mulgrew were also granted court approval Nov. 6 to be returned to Great Britain. All three may be paroled as early as next November under U.K. law.
"He left on Thursday, and he landed on Friday," Ardoin said yesterday in an interview, confirming the former banker's arrival in Britain.
Bermingham, Mulgrew and Darby were charged with helping to skim about $20 million from the bank using an off-books partnership in a conspiracy with Enron executives Andrew Fastow and Michael Kopper.
After being extradited to the U.S. in 2006, the bankers remained in Houston under court-ordered electronic monitoring. They pleaded guilty to fraud in November 2007 and received 37- month prison sentences.
Mulgrew entered prison in April; Darby and Bermingham, in May. They are returning to England under a law that allows repatriation of criminals to their home countries with court approval. Unlike the U.S. federal prison system, Britain's permits parole.
Parole Dates
"They would be eligible for automatic release once they've served half their sentences," Mitchell Jeffrey, media officer with the British Consulate in Houston, said Nov. 6. "At that point, it will be up to the Ministry of Justice to review their cases."
In pleading guilty, the three agreed to the sentence and a total payment of $7.35 million in restitution to NatWest's parent company.
Their crime netted another $13 million for Fastow, Enron's chief financial officer, and Kopper, who managed the partnership, U.S. prosecutors said.
Bermingham, Mulgrew and Darby were originally charged with seven counts of wire fraud and faced as many as 35 years in prison if convicted. They were moved early this month from separate prisons to a transfer facility in New York in anticipation of their repatriation.
Overseas Transfers
There's no set period of time prisoners must remain in American custody before they are eligible for transfer to foreign prisons. The U.S. government's commitment to support the men's request to serve the bulk of their sentences in U.K. facilities was a key factor in their decisions to plead guilty, Bermingham's attorney Dan Cogdell said when they were sentenced.
The bankers were among 34 defendants in criminal cases resulting from the December 2001 collapse of Houston-based Enron, which plunged into bankruptcy after a widespread accounting fraud was made public.
More than 5,000 jobs and $1 billion in employee retirement funds were wiped out, and investors sued to recover more than $40 billion in losses. Enron, once the world's largest energy trader, was worth $68 billion at its share-price high in August 2000.
Fastow pleaded guilty to conspiracy to commit fraud at Enron and is serving a six-year prison sentence in Oakdale, Louisiana. Kopper got a three-year, one-month sentence and was fined $50,000. He served most of his term in a Texarkana, Texas, facility and is in a Houston halfway house awaiting release in January.
The case is U.S. v. Bermingham, 02-cr-00597, U.S. District Court, Southern District of Texas (Houston).

Thursday, 20 November 2008

That Barclays bonus sacrifice in more detail

The Barclays dieectors have agreed to wave their bonuses for the year. I haven't got time to read the section on directors' remuneration in their annual report, but I guess their bonuses are based on Total Shareholder Return or outperforming the FTSE.

Looks like they weren't going to get anything anyway.

Monday, 17 November 2008

CBI tells companies: bring out your dead wood

The CBI said it expected unemployment to reach 2 million by the end of this year and rise to 2.88 million, or 9 percent of the workforce, in 2010 -- the year by which the ruling Labour Party must call a general election.

That would be the highest jobless total since the last quarter of 1993. Official figures released last week showed British unemployment rose to its highest since 1997 in the three months to September, with 1.825 million people out of work.

Sunday, 16 November 2008

Not much on borrowing and spending that I can see

Looks like it's all about deregulation.

G20 declaration: Full text

Full text of declaration by world leaders meeting in Washington to discuss the global financial crisis:


1. We, the Leaders of the Group of Twenty, held an initial meeting in Washington on November 15, 2008, amid serious challenges to the world economy and financial markets. We are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world's financial systems.

2. Over the past months our countries have taken urgent and exceptional measures to support the global economy and stabilize financial markets. These efforts must continue. At the same time, we must lay the foundation for reform to help to ensure that a global crisis, such as this one, does not happen again. Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.

Root Causes of the Current Crisis

3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

Actions Taken and to Be Taken

5. We have taken strong and significant actions to date to stimulate our economies, provide liquidity, strengthen the capital of financial institutions, protect savings and deposits, address regulatory deficiencies, unfreeze credit markets, and are working to ensure that international financial institutions (IFIs) can provide critical support for the global economy.

6. But more needs to be done to stabilize financial markets and support economic growth. Economic momentum is slowing substantially in major economies and the global outlook has weakened. Many emerging market economies, which helped sustain the world economy this decade, are still experiencing good growth but increasingly are being adversely impacted by the worldwide slowdown.

7. Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:

• Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.

• Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.

• Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.

• Help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund's (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility.

• Encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda, and we welcome the recent introduction of new facilities by the World Bank in the areas of infrastructure and trade finance.

• Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.

Common Principles for Reform of Financial Markets

8. In addition to the actions taken above, we will implement reforms that will strengthen financial markets and regulatory regimes so as to avoid future crises. Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices.

9. We commit to implementing policies consistent with the following common principles for reform.

• Strengthening Transparency and Accountability: We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions. Incentives should be aligned to avoid excessive risk-taking.

• Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. We will exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct. We will also make regulatory regimes more effective over the economic cycle, while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services. We commit to transparent assessments of our national regulatory systems.

• Promoting Integrity in Financial Markets: We commit to protect the integrity of the world's financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. We will also promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.

• Reinforcing International Cooperation: We call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.

• Reforming International Financial Institutions: We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness. In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation. The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response.

Tasking of Ministers and Experts

10. We are committed to taking rapid action to implement these principles. We instruct our Finance Ministers, as coordinated by their 2009 G-20 leadership (Brazil, UK, Republic of Korea), to initiate processes and a timeline to do so. An initial list of specific measures is set forth in the attached Action Plan, including high priority actions to be completed prior to March 31, 2009.

In consultation with other economies and existing bodies, drawing upon the recommendations of such eminent independent experts as they may appoint, we request our Finance Ministers to formulate additional recommendations, including in the following specific areas:

• Mitigating against pro-cyclicality in regulatory policy;

• Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;

• Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets;

• Reviewing compensation practices as they relate to incentives for risk taking and innovation;

• Reviewing the mandates, governance, and resource requirements of the IFIs; and

• Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.

11. In view of the role of the G-20 in financial systems reform, we will meet again by April 30, 2009, to review the implementation of the principles and decisions agreed today.

Commitment to an Open Global Economy

12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.

13. We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.

14. We are mindful of the impact of the current crisis on developing countries, particularly the most vulnerable. We reaffirm the importance of the Millennium Development Goals, the development assistance commitments we have made, and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy. In this regard, we reaffirm the development principles agreed at the 2002 United Nations Conference on Financing for Development in Monterrey, Mexico, which emphasized country ownership and mobilizing all sources of financing for development.

15. We remain committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.

16. As we move forward, we are confident that through continued partnership, cooperation, and multilateralism, we will overcome the challenges before us and restore stability and prosperity to the world economy.

Action Plan to Implement Principles for Reform

This Action Plan sets forth a comprehensive work plan to implement the five agreed principles for reform. Our finance ministers will work to ensure that the taskings set forth in this Action Plan are fully and vigorously implemented. They are responsible for the development and implementation of these recommendations drawing on the ongoing work of relevant bodies, including the International Monetary Fund (IMF), an expanded Financial Stability Forum (FSF), and standard setting bodies.

Strengthening Transparency and Accountability

Immediate Actions by 31 March 2009

• The key global accounting standards bodies should work to enhance guidance for valuation of securities, also taking into account the valuation of complex, illiquid products, especially during times of stress.

• Accounting standard setters should significantly advance their work to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.

• Regulators and accounting standard setters should enhance the required disclosure of complex financial instruments by firms to market participants.

• With a view toward promoting financial stability, the governance of the international accounting standard setting body should be further enhanced, including by undertaking a review of its membership, in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body and the relevant authorities.

• Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.

Medium-term actions

• The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.

• Regulators, supervisors, and accounting standard setters, as appropriate, should work with each other and the private sector on an ongoing basis to ensure consistent application and enforcement of high-quality accounting standards.

• Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution' financial statements include a complete, accurate, and timely picture of the firm's activities (including off-balance sheet activities) and are reported on a consistent and regular basis.

Enhancing Sound Regulation

Regulatory Regimes

Immediate Actions by 31 March, 2009

• The IMF, expanded FSF, and other regulators and bodies should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends.

Medium-term actions

• To the extent countries or regions have not already done so, each country or region pledges to review and report on the structure and principles of its regulatory system to ensure it is compatible with a modern and increasingly globalized financial system. To this end, all G-20 members commit to undertake a Financial Sector Assessment Program (FSAP) report and support the transparent assessments of countries' national regulatory systems.

• The appropriate bodies should review the differentiated nature of regulation in the banking, securities, and insurance sectors and provide a report outlining the issue and making recommendations on needed improvements. A review of the scope of financial regulation, with a special emphasis on institutions, instruments, and markets that are currently unregulated, along with ensuring that all systemically-important institutions are appropriately regulated, should also be undertaken.

• National and regional authorities should review resolution regimes and bankruptcy laws in light of recent experience to ensure that they permit an orderly wind-down of large complex cross-border financial institutions.

• Definitions of capital should be harmonized in order to achieve consistent measures of capital and capital adequacy.

Prudential Oversight

Immediate Actions by 31 March, 2009

• Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators and that they avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. This will help ensure that credit rating agencies have the right incentives and appropriate oversight to enable them to perform their important role in providing unbiased information and assessments to markets.

• The international organization of securities regulators should review credit rating agencies' adoption of the standards and mechanisms for monitoring compliance.

• Authorities should ensure that financial institutions maintain adequate capital in amounts necessary to sustain confidence. International standard setters should set out strengthened capital requirements for banks' structured credit and securitization activities.

• Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.

Medium-term actions

• Credit Ratings Agencies that provide public ratings should be registered.

• Supervisors and central banks should develop robust and internationally consistent approaches for liquidity supervision of, and central bank liquidity operations for, cross-border banks.

Risk Management

Immediate Actions by 31 March, 2009

• Regulators should develop enhanced guidance to strengthen banks' risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management.

• Regulators should develop and implement procedures to ensure that financial firms implement policies to better manage liquidity risk, including by creating strong liquidity cushions.

• Supervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies.

• Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.

• The Basel Committee should study the need for and help develop firms' new stress testing models, as appropriate.

• Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.

• Banks should exercise effective risk management and due diligence over structured products and securitization.

Medium-term actions

• International standard setting bodies, working with a broad range of economies and other appropriate bodies, should ensure that regulatory policy makers are aware and able to respond rapidly to evolution and innovation in financial markets and products.

• Authorities should monitor substantial changes in asset prices and their implications for the macroeconomy and the financial system.

Promoting Integrity in Financial Markets

Immediate Actions by 31 March, 2009

• Our national and regional authorities should work together to enhance regulatory cooperation between jurisdictions on a regional and international level.

• National and regional authorities should work to promote information sharing about domestic and cross-border threats to market stability and ensure that national (or regional, where applicable) legal provisions are adequate to address these threats.

• National and regional authorities should also review business conduct rules to protect markets and investors, especially against market manipulation and fraud and strengthen their cross-border cooperation to protect the international financial system from illicit actors. In case of misconduct, there should be an appropriate sanctions regime.

Medium-term actions

• National and regional authorities should implement national and international measures that protect the global financial system from uncooperative and non-transparent jurisdictions that pose risks of illicit financial activity.

• The Financial Action Task Force should continue its important work against money laundering and terrorist financing, and we support the efforts of the World Bank - UN Stolen Asset Recovery (StAR) Initiative.

• Tax authorities, drawing upon the work of relevant bodies such as the Organization for Economic Cooperation and Development (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed.

Reinforcing International Cooperation

Immediate Actions by 31 March, 2009

• Supervisors should collaborate to establish supervisory colleges for all major cross-border financial institutions, as part of efforts to strengthen the surveillance of cross-border firms. Major global banks should meet regularly with their supervisory college for comprehensive discussions of the firm's activities and assessment of the risks it faces.

• Regulators should take all steps necessary to strengthen cross-border crisis management arrangements, including on cooperation and communication with each other and with appropriate authorities, and develop comprehensive contact lists and conduct simulation exercises, as appropriate.

Medium-term actions

• Authorities, drawing especially on the work of regulators, should collect information on areas where convergence in regulatory practices such as accounting standards, auditing, and deposit insurance is making progress, is in need of accelerated progress, or where there may be potential for progress.

• Authorities should ensure that temporary measures to restore stability and confidence have minimal distortions and are unwound in a timely, well-sequenced and coordinated manner.

Reforming International Financial Institutions

Immediate Actions by 31 March, 2009

• The FSF should expand to a broader membership of emerging economies.

• The IMF, with its focus on surveillance, and the expanded FSF, with its focus on standard setting, should strengthen their collaboration, enhancing efforts to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.

• The IMF, given its universal membership and core macro-financial expertise, should, in close coordination with the FSF and others, take a leading role in drawing lessons from the current crisis, consistent with its mandate.

• We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary. The IFIs should also continue to review and adapt their lending instruments to adequately meet their members' needs and revise their lending role in the light of the ongoing financial crisis.

• We should explore ways to restore emerging and developing countries' access to credit and resume private capital flows which are critical for sustainable growth and development, including ongoing infrastructure investment.

• In cases where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure arrangements are in place to support, as needed, those countries with a good track record and sound policies.

Medium-term actions

• We underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions.

• The IMF should conduct vigorous and even-handed surveillance reviews of all countries, as well as giving greater attention to their financial sectors and better integrating the reviews with the joint IMF/World Bank financial sector assessment programs. On this basis, the role of the IMF in providing macro-financial policy advice would be strengthened.

• Advanced economies, the IMF, and other international organizations should provide capacity-building programs for emerging market economies and developing countries on the formulation and the implementation of new major regulations, consistent with international standards.


Wednesday, 12 November 2008

Do you want the good news or the bad news?

The good news is that inflation is well under control at 1%. The bad news is that we entered a recession in the middle of 2008 according to the Bank of England.


Tuesday, 11 November 2008

Wall Street Greed: a defense (sic)

P.J.O’Rourke (always good value) has somthing to say on the credit crunch, amongst other things here:

Under constant political pressure, which went almost unresisted by conservatives, a lot of lousy mortgages that would never be repaid were handed out to Jim Jerk and his drinking buddies and all the ex-wives and single mothers with whom Jim and his pals have littered the nation.

Wall Street looked at the worthless paper and thought, "How can we make a buck off this?" The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions--bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a "collateralized debt obligation" with a triple-A rating. Good as cash. Until it wasn't.

Or, put another way, Wall Street was pulling the "room full of horse s--" trick. Brokerages were saying, "We're going to sell you a room full of horse s--. And with that much horse s--, you just know there's a pony in there somewhere."

“Anyway, it's no use blaming Wall Street. Blaming Wall Street for being greedy is like scolding defensive linemen for being big and aggressive. The people on Wall Street never claimed to be public servants. They took no oath of office. They're in it for the money. We pay them to be in it for the money. We don't want our retirement accounts to get a 2 percent return. (Although that sounds pretty good at the moment.)

What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult, which conservatives have asked Americans to take on faith. That's not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.

We, the conservatives, who do understand the free market, had the responsibility to--as it were--foreclose upon this mess. The market is a measurement, but that measuring does not work to the advantage of a nation or its citizens unless the assessments of volume, circumference, and weight are conducted with transparency and under the rule of law. We've had the rule of law largely in our hands since 1980. Where is the transparency? It's one more job we botched.

Scottish bankers' HBOS plan dismissed

Some of HBOS’s biggest investors have dismissed an attempt by two of Scotland’s most prominent bankers to preserve the independence of the UK’s biggest mortgage lender. Sir Peter Burt and Sir George Mathewson, former chief executives of Bank of Scotland and Royal Bank of Scotland respectively, proposed removing the current management and keeping the bank independent as an alternative to a takeover by Lloyds TSB. One of HBOS’s largest investors said Monday that the pair had “no credibility, no support.”

Not surprising really.  After all, the pair were instrumental in the appointments of the current senior executives at both banks, so why should they do any better second time around.  What counts these days is hard cash, not bankers saying they can do a better job.


Monday, 10 November 2008

Brown drowns but Tories are all at sea

From The Sun..


THE Tories are leading in the latest poll by 13 per cent. Can you believe that?

If so, with the Conservatives virtually mute on the world’s worst economic crisis, Labour really is finished.

The International Monetary Fund says Britain is rudderless, with few lifeboats and no rescue in sight.

Last week interest rates were slammed into reverse — but too late to save this sucker going down.

Skipper ... Gordon Brown

Yet as jobs and homes start sinking, it is Gordon Brown who looks like a real skipper, with David Cameron and Shadow Chancellor George Osborne just bit players in Titanic.

We can see their faces on TV, but the words are muffled.

It was left to the Queen to ask the question on everyone’s lips: “Why didn’t anyone see this coming?”

The economy should be home turf for a party of commerce and high finance.

Yet it is Lib Dem Vince Cable who makes us sit up and listen, not Mr Osborne.

It’s not as if the Tories are short of ammunition — or targets.

Last week’s emergency 1.5 per cent rate cut was an admission of failure.

Bank of England Governor Mervyn King has bungled his job — controlling inflation — and condemned us to a deeper slump than need be.

But he was acting on the orders of Gordon Brown, who set the Bank’s terms in 1997 and has been basking in approval ever since.

It was also Mr Brown who abolished its watchdog role over High Street banks, leaving them free to lend recklessly then expect taxpayers to bail them out.

If the SS Great Britain is holed below the waterline, these were the two torpedoes that caused the damage — not a “Made in America” iceberg.

It was also Gordon Brown who loaded the ship with debt, tax and high spending, leaving us to wallow in treacherous waters.


The Opposition has made these points — but with nothing like the effect Labour mustered in the 1990s recession.

Back then, Shadow Chancellor Gordon Brown was a roaring lion, ripping shreds off hapless Prime Minister John Major.

It was this forensic triumph that paved the way to Labour’s long run in power.

David Cameron cannot do the same because he has spiked his own guns.

He could have trumpeted Labour extravagance, promised to cut spending and taxes and establish the Tories as the party of economic competence.

Instead, he not only ruled out tax cuts but promised to match the Government’s spending spree.

Sinking ... David Cameron

Cuts of any sort, he feared, would revive the image of the Tories as the Nasty Party.

Now, as voters face meltdown over jobs, pensions and homes, they have little to say that really hits a nerve.

That is why, even after giving Britain’s recession an extra kick, Gordon Brown remains ahead as an economic manager.

Belatedly, Mr Cameron is now talking about cutting tax and putting money back into hard-pressed family budgets.

But this is not cutting-edge thinking. The whole world is doing the same to stop the economy seizing up.

Even Gordon Brown, who at any other time would rather swallow poison, is ready to use this month’s Pre-Budget Report to cut tax.

The speed of this downturn has exposed lots of sloppy assumptions.

One was the belief that, with Tony Blair gone, the Tories could sit back and wait for Gordon to hand them the keys to Downing Street.

And it almost worked. Six weeks ago Gordon looked doomed.

Today, he has turned a pig’s ear into a silk purse, winning accolades for saving Europe’s banks.

He is President Obama’s new best friend and competing ferociously with French President Nicolas Sarkozy as the main man in the EU.

And to cap a good run, he shocked everyone by winning last week’s Glenrothes by-election.

In the end Labour will probably lose next time simply because they have been around too long.

By next spring — the earliest time Mr Brown can call a General Election — unemployment will be starting to soar as firms go bust.

He should carry the can for turning a safe ship into a potential wreck.

But right now, neither Mr Cameron nor Mr Osborne have captured our imagination with a reassuring alternative.

Sunday, 9 November 2008

PCP Capital Partners / Amanda Staveley

If you are making a fortune out of hooking up Arabs with UK companies such as Manchester City plc and Barclays, then you would have thought that a little bit of FSA registration might be in order. Particularly if you blag about your activities to the press.

Under Section 19 of the Financial Services & Markets Act 2000 (FSMA), any person who carries on a regulated activity in the UK must be authorised by the FSA or exempt (an appointed representative or some other exemption). Breach of section 19 may be a criminal offence and punishable on indictment by a maximum term of two years imprisonment and/or a fine.

The regulated activities and specified investments are detailed in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which is secondary legislation under FSMA. Regulated activities are defined in Part II of the RAO and consist of, amongst others, advising on investments and arranging deals in investments, and investments for these purposes include shares.

A search of the FSA register shows nothing for PCP Capital Partners or for Amanda Staveley. PCP Capital Partners might be hard to track down because they aren’t in the phone book and they appear to have no office address. Their registered address appears to be that of Forsters, a firm of solicitors.

Perhaps the FSA might like to call on Roger Jenkins, Barclays double dipper and highest paid banker, to find out.

Friday, 7 November 2008

The Australian Finance Minister speaks

Seriously, it would have been easier to make up a figure.

Life is a series of linear and non-linear optimisation problems with non-trivial objective functions - and the markets are worse than that

Let’s start with a story: An old lady walks into a bank and says “I’d like to make a deposit please.” “Certainly madam, for how long?” “Some just overnight and the rest up to 7 days.” replied the old lady. “Well madam, at the moment we are offering an attractive rate of 4.5%.” “Never mind about that”, said the old lady, “I will be happy to take only 3%. I am worried about the state of the economy and I want to ease the burden of borrowers. I may be back with more cash tomorrow.” The cashier, not wishing to look a gift horse in the mouth, takes the deposit and the old lady leaves the bank.

Ten minutes later, the old lady’s angry husband (let's call him Mr Chancellor, who is married to the former Miss Threadneedle-Street) storms in asks why the bank hasn’t dropped the rate on his neighbour’s floating rate mortgage, by 1.5%. “But” replies the cashier, “your wife’s deposit is only a small part of or depositor base, and while it may influence sentiment, it hasn’t as yet filtered through to the rest of the market to lower the cost at which we borrow generally, nor I daresay has it altered the cost at which you can borrow, so your wife, well intentioned though she may be has simply given the bank 1.5% of extra interest without any discernable impact on the market”

Jesus was a great communicator and he knew that complex issues could be illustrated with simple stories. Would that are politicians and central bank see things in such simple terms. Unfortunately they can’t. They cloud their minds with ideas from economics and try to predict future consequences of their actions using models based on prior behaviour. In normal times those models may work, but these are not normal times.

Let's ignore the economists’ mindset and consider a mindset that looks at many financial situations as optimisation problems, the objective of which is maximise (or minimise) a value, often defined in terms of a combination of parameters subject to set of constraints. It is a methodology widely used in engineering and logistics. I do it all the time. Why? Well first of all I just do, because I have spent many years looking at financial structures in exactly that way, and secondly because it provides a very good framework for how both markets and businesses behave. In practice there may be no rigorous evaluation of optimal positions and the constraints may be somewhat fuzzy, but there is an undeniable tendency in business for each party to seek to maximise its value (objective function) within the constraints imposed by prices, capital, capacity, legislation and a myriad of other factors.

A simple example would be cross currency interest rate arbitrage, using the simple 4 way relationship between spot and forward rates between 2 currencies and their relative interest rates. For most of the time the rates will move independently but usually ensuring that there is no arbitrage opportunity by using three of the instruments to create a synthetic version of the fourth instrument at a cost that ensures an arbitrage profit because the bid and offer prices have become so far out of line. Generally that happens rarely because the markets move within well understood constraints.

Now, let's not think much more about optimisation (you can read about it in undergraduate mathematics texts), but let's think about binding and non-binding constraints. Imagine legislation that says all motor vehicles must be sold for a price between £5.00 and £50,000,000.00. It is a valid law and applies to all buyers and sellers of cars, but in practice it has no effect. It is a non-binding constraint. On the other hand, an alternative law that required all cars to be sold between £25,000 and £26,000 would be binding not only on all sales of Fiat 500s but also on Mercedes sedans. Widening the band of permitted prices would increase the number of types of car that would be sold, and narrowing the band would reduce that number. Varying the constraints has an impact because they are binding.

Now let us think about the Bank of England’s interventions in the money market. Why does that work? The commercial banks do not take all of their funding from the Bank of England. As we know from HBOS, Bradford & Bingley and Northern Rock the banks fund their assets from the capital markets. They also hold a lot of our cash on short term and longer term deposits. The Bank of England funding is a relatively small part of their borrowing. So how does it affect interest rates in general? Is it a question of sentiment? No, the money market is a rational optimisation problem. So what is the limiting constraint? The answer is that an increase in the central bank discount rate generally greats a greater drag on the banks’ capital making them less willing to lend and interest rates will tend to rise as the demand for capital increases. The banks have limited capital and are obliged to maintain minimum ratios between their equity capital and the asset books. Creating a small drag on profits can constrain capital and reduce lending appetite. Conversely, a fall in the central bank discount rate reduces the drag on capital, making banks more willing to lend and leading to lower interest rates to match the lower demand for capital. That is the economists' and the central bankers' model, but it only works because there is a binding or near binding constraint: the ratio between the banks' assets and the banks Tier 1 & Tier 2 capital.

Unfortunately, this model doesn’t work at present. The banks have been told to raise extra capital in anticipation of the coming recession. In addition, the government has set aside £35 billion of bank equity underwriting capacity. So in one version of reality (the version where the banks’ reported balance sheets reflect the value of their assets and any credit losses are fully and accurately reported) the banks are flush with capital. So long as the audience keeps clapping and the sound balance sheet fairy is kept alive, the capital constraints that in normal times would have made the Bank of England interventions work are no longer binding.

On the one hand the government is offering the banks plentiful equity through its underwriting facility and on the other it is reducing interest rates in the expectation that this will give the banks more capital to lend. But the banks already have more capital than they can use, because they can't find safe homes for the funds they already have. The capital constraint is no longer binding, so easing the constraint by reducing the discount rate will have no effect. To use another metaphor the Bank of England is revving the engine, but the gears are in neutral. To reduce central bank discount rates at the present time is like pushing on a piece of string.

So what are the binding constraints? The answer is the remaining distrust between the banks puts a floor on the risk premium for interbank lending. In a fair market interbank rates are always a tad higher than government rates because the government is OK, they can always lean on the tax payer, but you never know what is just around the corner for the banks. But these days the picture is very different. The banks look at each other and think “I know there is probably still some bad news left in the bank over the street, but I don’t know how much. It might be enough to knock them over, or they might be OK”. And they are probably right. The Bank of England’s interventions will be pointless until the bank regulators get to the heart of every bank’s asset book and strips out all of the poor quality assets and brings back on the books all of the off-balance sheet trades.

So Dr King, your model is wrong. Put away your Lipsey, and get out your Dantzig.

NatWest Three Cleared For Return To UK

David Bermingham, Giles Darby and Gary Mulgrew, three British investment bankers known as the NatWest Three, will now be able to leave for the UK to serve the remainder of their 37 month prison sentences.

On Thursday, the three men appeared before US Magistrate Judge Frank Maas in New York, who approved the transfers. The former Greenwich NatWest bankers were indicted on seven counts of wire fraud in 2002 in connection with a scheme devised by former Enron CFO Andrew Fastow and his right-hand man Michael Kopper. They pleaded guilty in 2007 to one count of wire fraud and were sentenced to 37 months in prison plus a total of $7.3 million in restitution by US District Judge Ewing Werlein in Houston on February 22, 2008. Their plea agreements allowed a transfer to the UK after several months, where they will be eligible for parole after serving half their sentences. Each has already served about six months.

Wednesday, 5 November 2008

UK service sector hits the buffers

LONDON, Nov 5 (Reuters) - Britain's dominant services sector shrank in October at its fastest pace since the series began in 1996 and optimism, employment and new and outstanding business all slumped to record lows, a survey showed on Wednesday.
October's services report from Britain's Chartered Institute of Purchasing and Supply increases the odds that the Bank of England will cut rates on Thursday by more than the half percentage point forecast by economists -- especially after grim manufacturing and construction data earlier this week.
The headline services activity figure of 42.4 was well below the mid-range forecast of 44.5 from a Reuters poll ECONGB and September's 46.0 reading. It marks the sixth straight month below the growth threshold of 50 for the sector, the longest losing streak in the survey's 12-year history.
Official data published separately showed manufacturing output fell for the seventh month running in September, the longest stretch of declines in 28 years.
The pound dropped around half a cent against the dollar after the data as investors bet a big rate cut from 4.5 percent would be on the cards for Thursday.
"The sharp deterioration in October's report on services could well be enough to tip the balance in favour of a full 100 basis points cut at tomorrow's MPC meeting," said Vicky Redwood at Capital Economics.
"Overall, these figures provide further evidence that the UK is entering a deep recession. Whatever happens tomorrow, interest rates need to fall to very low levels."
The survey's price data should reassure the Bank of England that British inflation will still fall from its current record 5.2 percent even if interest rates are cut aggressively from their present level of 4.5 percent.
Prices charged by the services sector -- which spans businesses from cafes to banks, and makes up three quarters of British economic output -- rose at their slowest pace since February 2006, and the sector's input costs rose at their weakest pace in 13 months.

Crime of the week: well crime of the week several years ago


Lord Glentoran asked Her Majesty’s Government:

How many tonnes of gold have been sold from United Kingdom reserves since 1 May 1997; how much revenue was received from the sale of those gold reserves; and what the gold would be worth at current prices.

Lord Davies of Oldham: My Lords, in view of the volatility of gold prices, 395 tonnes of gold were sold from the reserves as part of a restructuring programme to reduce the risk exposure of the official holdings portfolio between July 1999 and March 2002. The total proceeds were around $3.5 billion, equivalent to £1.9 billion. On 3 November, the current market value of the gold sold was around $9.3 billion, equivalent to £5.7 billion.


Tuesday, 4 November 2008

The twits in parliament

I was left speechless by the ignorance of parliamentarians. Reducing the discount rate may influence the interest rate environment, but it doesn't mean that banks can drop the rate on their assets by the same amount.

The discount rate is the rate at which private banks (meaning all those in Great Britain other than the Bank of England) will discount bills of exchange for account of the owners or last indorsers, and this discount is governed by the Bank of England discount rate, and also by the supply of bills in the market for discount, but, except under unusual conditions, the private discount rate will always be about 0.25% below the Bank of England official minimum discount rate. Banks reduce their cost of funds when the discount rate goes down but only to the extent directly that their is an adequate supply of bills of exchange.

Equally the discount rate represents a cap on the rate that commercial banks in the London Discount Market will be earn on their overnight cash and short term call deposits placed with discount houses.

This has nothing to do with the interest rates on mortgage loans that have been securitised or which are linked to LIBOR funding, where the funding cost will only reduce to the extent that relevant LIBOR (3/6/12 months) or long term interest rates do likewise.

Similarly, banks are hardly likely to drop the rate at which they lend many hundreds of billions to the public just because the Bank of England drops the rate at which it will accept several billions of short term deposits from discount houses. That can only happen if the whold market moves downward, which is outside th control of any individual bank, or even of the government.

It is bad enough that they talk about these things when they know or understand so little. The shame is that it is the taxpayer (mostly banks) who has to pay for it.

Pass on rate cuts, MPs tell banks

Lord Mandelson urged banks to cut interest rates while visiting the Gulf
The Bank of England's monetary policy committee has been urged by a group of more than 20 MPs to cut interest rates when it meets on Thursday.

They have also tabled a motion in parliament urging all UK banks to pass on benefits to customers.

The MPs, led by Labour's Jim Sheridan, said the benefits of previous cuts had still not been passed on to consumers.

They acted after Business Secretary Lord Mandelson said the public would be "surprised" if no action were taken.