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Tuesday, 30 September 2008

What is it with Belgian banks?

First Fortis goes to the government looking for cash and then Dexia (some of us still know it as CCB and CLF) asks for £5 billion.   And I thought they were supposed to be lending to local authorities.  OK they may have some issues in FSA, but they only paid £2.9 billion for that.

Sunday, 28 September 2008

Bradford & Bingley bumps against the buffers

All due to short sellers, global conditions, the US sub-prime market, the gnomes of Zurich and the Conservative party. Allegedly.

Saturday, 27 September 2008

Put the the $700 billion in perspective

$700 bn is the same as £380 billion.

But comparing the UK and US populations that would be the same as £71 billion of support in the UK, or if we allow for the 20% GDP per capita in the US, the same burden on the economy as £59billion in the UK.

Which makes it all the more surprising that the UK should have underwritten £100 billion of liabilities in Northern Rock, with more to come, with little objection from our legislators. Or perhaps not.

Friday, 26 September 2008

Another email scam

Dear American,

I trust you are well. I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transaction is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson


Thursday, 25 September 2008

Let's get a few things straight

Global Economic Crisis?
Where are the French banks in distress, the Swedish, German, Italian, Japanese, Spanish, Brazilian banks hovering on the verge of collapse? There are none. The truth is this is a UK/US affair, probably the last remnant of the "special relationship.

It's all the fault of short sellers
Err, no. There were no short sellers in Northern Rock, or at least not that anybody noticed. Depositors queued to get their money back without any prompting from the stock market. HBOS' share price declined from £11 to £1.50 in a year and in the last week before it was bought by Lloyds only 2.75% of its shares had been lent to short sellers, less than the average for a bearish stock and much less than the 5% of Barclay's stock that was being lent at the same time. Did their share price go down? Thought not.

The problem for HBOS and NR was a classic liquidity squeeze brought about by an overreliance on securitisation, which gave their liabilities book a shorter duration than their asset book. It was clear they would have problems when the market that they had relied on dried up. Think of it as a bank taking hundreds of billions of term deposits from a single depositor. If the depositor changes his mind and starts taking away his funds as the deposits mature then the bank will have a problem. So that's nil points for the HBOS management, but also nil points for the FSA who said in their own report on NR they thought it was the Bank of England's job to spot any liquidity problems. What a shame that nobody told the Bank of England.

Actually there was plenty of short selling of Northern Rock stock. In fact 20% of it was being lent out. The difference was that the regulators found it easier to blame the board of Northern Rock. When HBOS went down, the management was also at fault and arguably should have seen it coming and worked harder to avoid the problem. But then so should the FSA, so Victor Sants got a dose of ants in his pants and pointed the finger at the evil short sellers. Cue assorted Archbishops discursing on "almost unimaginable wealth ... generated by equally unimaginable levels of fiction" without a hint of irony.

Wall Street is full of crooks
Now this is more credible. After all they seem to be getting off with light sentances. Instead of providing banking to US industry and promoting economic growth in the USA, US banks have been expanding their commercial banking operations to Asia to assist Asian industry. But at the same time they have lending ever more ridiculous amounts to the poorer members of US society who have become increasingly unable to repay those loans as US industry shuts down.

Still that didn't matter so long as the loans could be repackaged and sold to a sucker. And what was left was simply called high yield paper. Trouble was when the music stopped and the parcels were unwrapped, the yield went to zero and everybody found they had bought a pup.

But Wall Street doesn't have a monopoly on shysterism. Some of the blame has to fall on the rating agencies who were giving this stuff a clean bill of health - "it's complicated but trust me, this really is the same risk as a AAA company". And Mr Paulson, the banker's friend, is all too keen to get the US tax payer buy the banks' bad assets at face value to recapitalise the banks, so that they can carry on as before.

There will no doubt be new regulations, but the only regulation needed in the US is "Don't make stupid loans" and the only new rule needed in the UK is "Don't get schmoozed by investment bankers offering low cost securitisation to fund your mortgage loan book: Get your hands dirty, employ some staff, open some branches and take some deposits."

Thursday, 18 September 2008

Gordon Brown to clean up the city


That’s like saying you’ll clean up after a rave that you’ve been letting run in your back garden for the last 5 days.

News you won't hear on the BBC

The Conservatives record 52% in a MORI opinion poll, 28% ahead of Labour on 24% and the Liberal Democrats on 12%


To see how it was reported by Reuters, The Independent, The Guardian and 20 other news sources click here:



No mention on the BBC, but to see the BBC’s report that the Lib Dems are ‘headed for government’



The problem with derivatives

If a bank extends a floating rate loan to a customer then it will generally say that it has an asset of 100 on its books and 100 at risk, or being pernickety 100 plus the value of interest from time to time, or being even more pernickety the principal amount and the amount of interest payable at the next interest payment date discounted to the present at a relevant short term interest rate (i.e. the value a 3rd party would pay for the loan), but in any event the value on the books and the value at risk is pretty close to 100.

When the same bank lends money at a fixed rate, the analysis is similar except that if the prevailing long term interest rates change the value at risk will also change.  If interest rates drop, then the loan becomes more valuable (or to put it another way, the bank has more value at risk), and if interest rates increase the loan becomes less valuable. Some accounting methods would record the loan at 100, whilst more modern “mark-to-market” approaches would insist that the loan is accounted for at its market price.  This approach would seem to give a better view of the likely value of the asset on redemption or sale, but it fails to give any indication of the inherent riskiness of the fixed price loan compared to the floating rate loan.

This is a simple example but it shows clearly that two assets with similar initial values may differ over time, and it is the understanding and management of this type of risk that is at the heart of the problem of managing the risk in derivatives.

Consider a simple 5 year interest rate swap where a bank agrees to receive a fixed rate of 6% on a notional principal of 100 and pay a floating rate of interest.  The bank would account for this at 0 at inception, but what is the maximum loss?  Well if LIBOR jumps overnight to 1000% (not likely, but let’s not worry about likelihood for the moment), the bank would be paying 1,000 per year and receiving 6, so it would pay out 4,980 over 5 years.  Fortunately the bank could discount its payments at the prevailing interest rate of 1000% so that the discounted value of its loss would be 99.4, and if we repeat the calculation with higher rates of interest we will see that the amount of that loss rises asymptotically to 100 as the interest rate tends to infinity.  In other words the maximum value at risk is 100. 

Now the bullish swaps dealer will say that it is wrong to treat the swap as a potential loss of 100, because the risk of that loss is low and in any event the bank is just as likely to see the market move the other way and make a profit.  So the accountants give way and say, OK so long as you book the mark-to-market value of your swap book in your accounts we will be happy.  The problem is that they are recognising the discounted value of the assets, but not the risk that that valuation will change with a change in underlying conditions.  Banks measure this sort of risk with their value-at-risk systems but the extent to which it is reported is variable.

Now consider how this relates to various derivatives such as options which operate when certain triggering events occur.  An option is in the money if the strike price and price of the underlying make it economically worthwhile to exercise the option and out of the money if not.  An out-of-the-money option is not worthless, but has a value related to the expectation of the extent to which it may become in-the-money.  An in-the-money option has an intrinsic value related to the difference between the strike price and the underlying price and a further value related to expectations of increase in the intrinsic value before expiry.  An option that is close to being in-the-money will show the greatest variation in value with underlying conditions.  And this effect can be even more pronounced for various exotic options such as barrier options and knock in options. 

One of the problems is that there is no consistency in recognising the risk inherent in each type of instrument.  A mechanism that works effectively for loans does not work for swaps, one that works for swaps does not work for options, one that works for simple options does not work for exotic options.  At each stage risk is assessed in terms of a measurable value, but that measure does not record the first derivative of that value with respect to some variable property.  A financial product may show little value at risk under current market conditions, but that value may change with a change in market conditions.

What is the solution?  Hard to tell but one lesson from earlier regulatory regimes is the effectiveness of arbitrariness.  In a less scientific world, banks were required to allocate risk capital to financial transactions in a way that at times seemed inappropriate and in many cases seemed to be excessive.  In order to “modernise” markets bank regulators became more amenable to risk capital allocations that followed value at risk models.  The net result was that banks lowered their use of capital per unit of risk and arguably arbitraged risk/return against their allocated risk capital.  Banks might say they didn’t do this deliberately but the assumption has to be that is a natural consequence of the banks being totally flexible in the structuring of financial products whilst risk capital is allocated to those products using fixed, albeit sophisticated, methodologies. 

Imposing a more heavy handed and somewhat arbitrary allocation of risk capital will reduce the banks capacity to undertake trades and will force them to concentrate on trades that provide the highest reward for the capital at risk.

Wednesday, 10 September 2008

Britain Germany and Spain will be in recession in 2008

.. according to the EU, not that anybody asked them, but we're paying for it anyway.

Of course Spain and Germany don't have an ever bloating public sector trying to grow at 6% per annum, so their private sector doesn't look as bad as the UK.

Tuesday, 9 September 2008

Spare us the sob story, Gordon, we don't care

I am not a fan of Richard Lttlejohn, but this was too true to ignore..

With his one good eye on events the other side of the Atlantic, Gordon Brown has decided to share his personal 'story' with us.
He has convinced himself that if he reminds us about his rugby injury and his dead daughter, we'll forget about his incompetence, deceit, duplicity, dishonesty, downright lying, bullying, cowardice, volcanic temper tantrums, vanity, sulking, unjustified sense of entitlement, betrayal, bungling and boasting.
We'll be so overcome with emotion, empathy, sympathy and admiration that we will overlook the fact that this is the Man Who Stole Your Old Age, who shamefully sold out our sovereignty to unaccountable foreign politicians and judges, flogged off our gold reserves to the lowest bidder, destroyed the Union and taxed us into penury.
Sorry, guv, some of us have memories longer than a dragonfly's.
Which bit of getting kicked in the face when he was a teenager and losing a child equips him to be Prime Minister and erases his atrocious record in government?
Today, he attempted to disguise his contempt for the paying public by venturing out of his bunker and holding a Cabinet meeting in Birmingham. What was that all about?
How does having his Rag, Tag and Bobtail army trample their carbon footprints all over the West Midlands help anyone?
It's supposed to prove that he's 'listening'. Some hope. Gordon may be blind in one eye, but he's deaf in both ears when it comes to public opinion.
In the morning he pitched up at the Jaguar car factory, turned on his unnerving, insincere grin and attempted to bask in the reflected glory of his fellow Scot, Andy Murray - a young man who says he has no desire to be seen as 'British' and, just like Gordon, makes no attempt to conceal his contempt for the English majority. Clearly, Brown has no sense of the ridiculous.
As Prime Minister - and previously, as Chancellor - he has done his level best to put Jaguar out of business.
He has piled tax upon tax upon tax upon drivers of 'gas guzzlers' like Jags, which stand accused of poisoning bay-bees, punching holes in the ozone layer, slaughtering polar bears and generally being driven by Tories in the south of England.
That's why sales of luxury cars have gone through the sub-basement and Jaguar's sister company, Land Rover, has been forced onto short-time working.
If he had spoken to typical Jaguar production workers - as opposed to the usual, carefully selected procession of suits and sycophants - he might have heard a few home truths.
Gordon Brown and Alistair Darling on a visit to Jaguar's Castle Bromwich plant in Birmingham
They'd have told him to slash road tax and stop holding a highwayman's pistol to our heads at the petrol pumps.
They would also ask him why he set out to smash private sector, final-salary pension schemes and make them work until they drop - while at the same time raiding their pay packets to provide gold-plated, index-linked, early-retirement pensions for public 'servants' who contribute less than zero to the real economy.
It would have been a waste of breath. Gordon would simply have ignored them. Instead, we are to be treated to a heap of drivel about his own 'personal life experiences' designed to tug at our heart-strings.
He's been inspired by the extraordinary stories of Barack Obama, John McCain and Sarah Palin, which are being peddled to destruction in the U.S. The trouble is that Gordon hasn't got a 'story' which comes anywhere close to these three.
Obama is the son of a Kenyan goat-herd and Kansas mother, who rose from relative poverty to become the first African-American presidential nominee of a major party.
McCain served his country as a member of the armed forces and picked himself up after enduring unspeakable torture in a Vietnamese prisoner-of-war camp.
He has a proud record of political integrity and has never been afraid to vote against his party on principle.
Sarah Palin is a mother of five, from humble beginnings, who has been a mayor, a state governor and is now the first woman to run on the Republican vice-presidential ticket.
Gordon's problem is that he hasn't really got a 'story' - aside from being kicked in the head and losing his daughter shortly after she was born. He is entitled to our sympathy, but nothing else.
He's never had to struggle, like Obama, or endure, like McCain. He hasn't had to juggle career and family, like Palin.
No one could accuse Gordon of having any political integrity, or being a maverick. Or standing up for ordinary people. He's never even had a proper job.
He seems to have been born believing it was his destiny to become Prime Minister. He spent ten years in a petulant sulk because Tony Blair beat him, and then, having driven Blair out, had no idea what to do when he got there.
Unlike his American role models, Gordon didn't go out on the stump, glad-handing voters in village halls, travelling thousands of miles talking to Town Hall meetings or taking part in televised debates against his opponents.
He didn't have to go through a gruelling primary season to become PM. His 'campaign' involved a bit of boasting to a few audiences chosen from Labour Party central casting.
Gordon didn't even face an election. He went out of his way to avoid one and then signed away Britain's political birthright while reneging on a promise to hold a referendum.
When he has been forced to come face to face with the electorate - in Crewe, in Glasgow East - he's been humiliated.
For someone who considers himself the heir to Keir Hardie, he has reduced the Labour Party to a hated rabble, less popular than when they were run by Worzel Gummidge, and led Britain into what his own Chancellor describes as the worst recession since the Norman Invasion.
He asks not what he can do for his country, but what his country can do for him.
That is Gordon Brown's story.
So spare us the violins, old son. We're not interested.

Tuesday, 2 September 2008