Having it both ways?

From a sidebar at our “adopted half-sister paper”:

Some of the most vocal critics of short selling have found themselves accused of double standards as the extent to which shorting is part of standard investment practice has been revealed.

The Church of England, Britain’s Liberal Democrats and John Mack, chief executive of Morgan Stanley, have all attacked shorting in intemperate terms.

Mr Mack told employees at the height of the panic over the bank that “we’re in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down”. In a memo two days before the short selling ban was introduced in mid-September, he said he had raised the issue with the US Treasury and the market watchdog, and was telling shareholders and customers about the bank’s financial strength.

This did him little good, with clients deserting the bank as credit default swaps – the cost of insuring against default on loans – soared to levels indicating market concern about Morgan Stanley’s survival.

It also annoyed an important group of clients: the hedge funds that relied on Morgan Stanley’s prime brokerage, the world’s largest, to help them with their business – including short selling.

The Church of England and the LibDems were also found to be profiting from the actions of hedge funds that use short selling.

The Church is now reviewing its policy of lending out foreign stock, which aids shorting, although it defends its investment in the Man Group, saying it does not invest in the hedge fund manager’s products.

After the LibDems launched an attack on the Conservatives, the main UK opposition party, claiming they did not want a ban on shorting because they had accepted donations from several large hedge funds, it took only hours for the Tories to dig up the fact that one of the LibDems’ biggest donors is a hedge fund manager. The pension fund of members of the UK parliament, including LibDem MPs, also invests in hedge funds.

 

The Leader speaks

“I want the message to go out from this meeting today that no sound, solvent bank should be allowed to fail through lack of liquidity.”

 

By definition, no solvent bank will fail through a lack of liquidity.

Emergency Economic Stabilization Act of 2008

Q: How does a 7 page bill grow to a 451 page bill in 7 days?

A: Pork barrel.

 

http://banking.senate.gov/public/_files/latestversionAYO08C32_xml.pdf

 

I particularly liked Sec. 503. Exemption from excise tax for certain wooden arrows designed for

use by children. Presumably that is how they will regulate the short sellers.

You have to admire the French

When there is money to be made, they are happy to put up the money. When there is money to be paid it becomes a matter for the EU.

Those evil short sellers

... in Parliament. The parliamentary pension fund has invested £7m with Quellos a Californian hedgefund manager that has been lending stock to short sellers, according to the FT.

So why do the US Treasury need to inject $700 billion

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

This is how to apply for a loan.

 

The Paulson plan

A great comment from a US professor of risk on the Paulson plan to inject $700 billion of capital into the US banking system on Radio 4 this morning. “This isn’t nationalisation of the banks.  This is a takeover of the government by the banks.”

WPP Eyes Ireland as Tax Haven

This is what happens when the UK taxman gets too greedy and tries to tax more offshore subsidiaries under the CFC rules. The group flips its structure and holds all of its subs under a new holding company in Ireland, out of the hands of the UK tax man.

From ADWEEK:
WPP Group said it intends to create a new Ireland-based parent entity in a bid to prevent its annual tax payments from increasing potentially by tens of millions of dollars under proposed changes in U.K. tax laws.

Separately, the company said TNS shareholders representing almost 43 percent of outstanding shares now favor the takeover of the research firm by WPP and will tender their shares accordingly.

The new tally is up 9 percent from the 34 percent of shareholders who indicated they would accept the WPP bid last Friday when WPP extended the deadline to accept its $2.2 billion acquisition offer until Oct. 3.

London-based WPP said the planned relocation to Ireland comes in response to "possible changes to the U.K.'s taxation of foreign profits," which could result in a significantly higher annual tax bill. Under the proposed changes, profits derived from off-shore operations would likely increase. Currently, less than 15 percent of the company's profits are from British-based operations, WPP said.

The new "scheme," WPP said "should provide the opportunity to reduce the overall tax rate of the group in the short to medium term." The plan must be approved by WPP investors who will vote on the proposal in late October, as well as by the British High Court, which has scheduled a hearing on the matter for Nov. 18.

The company said the move would have no impact on day-to-day operations or involve any changes in management or the corporate board.

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.

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.

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.

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

 

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."

Gordon Brown to clean up the city

http://news.bbc.co.uk/1/hi/uk_politics/7623053.stm

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:

http://news.google.com/news?rls=com.microsoft:en-gb:IE-SearchBox&oe=UTF-8&sourceid=ie7&rlz=1I7ADBS_en-US&tab=wn&resnum=0&cd=1&ncl=1247474923&hl=en&rfilter=0

 

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

http://news.bbc.co.uk/1/hi/uk_politics/7620720.stm

 

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 3^rd 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.

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.

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.

NHS car parking charges abolished

... in Scotland.

 

The SNP just do this to embarrass Labour.

Is there anybody out there?

Just a test

Well done Great Britain

Much as it pains me to see the vast amount of tax payers money (and I include Lottery money, the stupidity tax) wasted on a glorified school sports day, I salute the achievements of the British athletes at the Olympics, but especially the winners of 47 medals. None of them appear to have resorted to using artificial stimulants, most of them were gallant and gracious in victory and defeat (especially Adlington, Brabants and Hoy) and best of all they didn't have to sink to the depths of synchronised swimming or artistic gymnastics to win their prizes.

Usain Bolt

9.69 for the 100m sounds impressive, but imagine what he could have done if he had tied his shoelaces.

Vote for me

Cricket Scores

This is the news from the BBC

Northern Rock, a bank that was in the headlines a while back, has got into a spot of bother. They have lost some more money, but it is bound to turn up sooner or later. They were last in the news when Mr Darling, the Chancellor, bought the bank with the government's money. Not your money, so don't panic, it was the government's own money from the biscuit tin under a bed in number 11 Downing Street.

Now the government is going to put in another £3 billion. Not that Northern Rock need the extra money you understand, although they managed to lose £585 million in the last six months. That's £585 million of losses because they aren't going to get back as much as they thought they were going to get back, well actually it must be more than £585 million because the write off has wiped out all their margin income on their good loans as well as giving a net loss of £585 million, which is quite some going given that they have slashed their costs and stopped taking new business.

Well as I mentioned earlier, the government has decided to put in this new £3 billion, not because they have to, but because the FSA, which is coincidentally run by the government, says they have to, because you see the Treasury have to run Northern Rock just like every other bank, despite the fact that they are running off the loan book. This extra capital will protect against future lending decisions (which Northern Rock are not going to take) and give depositors extra security from future losses, although of course the depositors don't need that protection because they have government guarantees.

So don't worry about the £3 billion of government money, because they are almost certain to pay it back. If you look at the last six months they managed to pay back over £9 billion, by reducing their loan book by £14 billion through loan repayments. They had to pay quite a lot of that £14 billion to fleeing depositors, but I am sure they aren't short of cash. Probably.

Have you ever been spun a line?

Moody’s to check on accuracy

According to the FT, "Moody’s is moving to re-examine the accuracy of all its computer models and place them under a centralised monitoring system after it formally acknowledged earlier this week that a glitch had appeared in one such mathematical model used to rate complex products.
Moody’s will also introduce a standardised protocol for fixing computer errors in the future – rather than letting individual units deal with problems, as at present, officials say."

It says a lot about today's financial markets that bonds could have been issued AAA ratings by mistake and nobody batted an eyelid. A good banker or credit officer can tell whether an asset should have a gold-plated rating just by it's "smell".

OK, I will say it. The rating agencies have been given far too much credence in the past. I remember a Swiss rolling stock leasing company being given a AA rating and the basis of its lease portfolio, all good credits. The trouble was, the bond term was for 15 years and the leases ran for a maximum of 3. The agencies expected they would be renewed because that was what had happened in the past. A bit of a big ask if you ask me. You can run all the models you like but this sort of rating is just hocus pocus.

Too ironic for words

A few months ago, the government could have shovelled all of Northern Rock into Lloyds for a few billion

http://www.independent.co.uk/news/business/news/northern-rock-to-funnel-remortgage-business-to-lloyds-841417.html

Now they are letting them pick the best bits and leaving the dross.

Well he would say that, wouldn't he?

Asked if he was considering his position, Fred Goodwin said: "There are more important issues here."

So let's get this straight. RBS is a well run institution, which is why it has found iself short of capital. It is not in financial difficulties, which is why it is looking to sell all or part of its insurance business (as a financial measure not a strategic change).

Belgian binge drinking puts us to shame

"Last year the average Belgian consumed 35 litres of claret and 6 million litres of white Bordeaux."

Allegedly.

Brown wants to reform the IMF

... to act as an early warning system.

Wasn't he listening to these warnings:

December 2003 IMF gives Brown borrowing warning
September 2005 IMF report Warning over £1 trillion mountain of debt
September 2005 Brown besieged over growth and borrowing plans
December 2005 IMF fires new warning over Britain's finances
September 2006 IMF warns over UK property crash
October 2007 IMF report UK house market is 'heading for crash'
April 2008 IMF: UK vulnerable to US-style housing slump