Tag Archives: FSA

Media Regulation? No point!

What is the POINT of Regulation?  IT DOESN’T ALWAYS WORK!!!!

Before our politicians scratch each others’ eyes out on Monday, fighting over Royal Commissions and Press Regulation, they should consider what good a similar process did to the Financial Services Industry.

Regulation of any sort never works 100%.

Pre the various Financial Services Acts which spawned the Financial Services Authority, the Financial Services Industry was by no means perfect but is was self-regulated.

There was the occasional mis-selling scandal, life assurance salespeople occasionally confused clients’ money with their own and the standard of technical knowledge was below average. Bankers were boring but well-behaved and Building Societies were firmly rooted in the  nineteenth century.

Then suddenly, products became more complicated, less client friendly, building societies wanted to be like banks, banks wanted to be like building societies AND insurance companies AND stockbrokers!! Shiny-new MBAs were hired!

………and oh yes………financial product design became marginally MORE complicated than Rocket Science.

More training, more technical knowledge and REGULATION were needed.

So what did all that regulation achieve – apart from creating a self-perpetuating multi-million pound regulation industry?

Well, since the financial regulator arrived on the scene, we’ve been subjected to many new experiences. For starters, there was the 2008 banking meltdown. Then we had PPI mis-selling by the Retail Banks, followed by LIBOR rigging by the Investment Banks. Then of course we had those VERY naughty Interest Rate Swaps which so many SMEs signed up to. There are still many major issues which will have to be dealt with by the regulators, the hugest one being the continued use of Off-Balance Sheet Accounting by the banks.

Regulation? Code of Conduct? Snooping through Filing Cabinets? Reporting Systems? Yet another Quango?

A fat lot of good they all did in financial services!

A basic Media Code of Conduct and SELF-regulation is the ONLY way forward.

Royal Charter or no Royal Charter, self-regulation of the media or a Regulator supported by law and a Bible full of Rules and Regulations will make absolutely NO difference, either to the conduct of individuals or the behaviour of privately-owned media corporations.

Yes, it is an important issue and Lord Justice Leveson has highlighted ALL the right issues but whichever approach is taken, it will make little difference.

The only thing which is important is that the media is NEVER controlled by the State plus that the legislators learn the lesson of the car-crash that is the regulated financial services industry

Barclays Bob

Some may be wondering about the timing of Bob Diamond’s decision to “walk” from what is the best-paid and most high-profile banking job in the UK. Some may believe that he was hounded out by the banking establishment.

I reckon that he walked in order to free himself-up ahead of the ridiculous inquisition by the Treasury Select Committee. I sincerely hope that they leave their briefcases on the table in front of them and remember to wear tin hats – because Barclays Bob is going to give them hell. They will be forced to listen to a few home truths about the conduct of not-only Barclays but the entire politico-banking establishment.

Believe me, Bob knows where ALL the bodies are buried and he’s the first guest at the Wake.

As usual, we’ve had the puerile Punch and Judy exchange between the Prime Minister and the Leader of the Opposition. Both have diminished themselves through their conduct over the last wee. (If that was at all possible)

Meanwhile, the media (and I include the Social Media) have seen an outpouring of hysteria by individuals who hadn’t heard of Libor before last Wednesday. Mob hysteria at its worst.

Mind you, that is so typical here in the UK. First we “denounce”, then the Inquisition, followed by the Inquiry and then it’s back to normal as we look for the next victim.

If there have been transactions which have inflated profits, I hope that in their haste, government Ministers have not forgotten that there may be billions in the Exchequer which will have to be repaid if tax has been generated on illicit transactions.  Inflated bonuses have also been subject to millions in taxation.

It’s not only the banks who are going to have a lot to unravel – but of course, these days no-one thinks before they act.

Starting with the baying politicians and media, a breathtaking lack of understanding of complex banking processes has clearly been demonstrated. The same lack of understanding which was exhibited by the Directors of Banks prior-to, during and certainly after the last bank crisis.

Make no mistake both the Bank of England as well as the Financial Services Authority have been complicit. Those pre-Lehmans LIBOR deals, probably saved the British Government from having to bail out Barclays and as other banks have also doubtless been guilty of the same misdemeanours, the Government will have saved billions on the 2008 bailouts.

(What I mean to say is that the banks were bailed out  – but they weren’t bailed out enough. The last four years of  “rebuilding balance sheets”, non-lending etc have clearly demonstrated that as usual, the government only did half of the job)

It is the Bank of England, the Financial Services Authority and the grubby British Bankers Association which should be standing shoulder-to-shoulder in the dock and hopefully after Bob Diamond has said what he really thinks and knows, they’ll be lined up and taken down.

Today, Mr Diamond, I’m on your side.

Show them Hell!

Goldman Sachs on the run

“Hey wise guy! Wanna buy any synthetic collateralised debt obligations?”

Over the last few years, I have written a great deal about Goldman Sachs and  its Svengali-like hold over successive U.S Governments.  Some of what I’ve written remains on this site. Hopefully, President Obama’s current  initiative, in tandem with the SEC is the dawn of a new relationship between Government and the banking industry.

It seems that the “minders”  Goldman Sachs used to have at U.S. Government level have disappeared.  Obama has, quite rightly finally set his dogs on them.

A few days ago the company was accused of fraud. What at first appeared to be slight financial naughtiness turns out to have been very bad indeed. Goldman Sachs is accused of eliciting investments from clients into financial ” instruments”  which had been designed (by them) to fail. The very same  family of products which precipitated last year’s banking crisis.

Not only that but they knew that yet another client of theirs , a hedge fund manager was “betting” on those products to fail and thus make a profit. The hedge fund manager had even helped Goldman Sachs to design that particular product.

John Paulson (no relation to Henry Paulson, former Treasury Secretary Henry Paulson and former Goldman CEO) is the owner of Paulson & Co, the hedge fund which was betting on the American Housing market to collapse. “

During the American sub-prime lending orgy, “exotic” mortgage-backed products had been designed with only one purpose – to generate a profit not-only for hedge-funds such as Paulson & Co but also for investment houses like Goldman Sachs.

The so-called “exotic trades” were no more than pooled mortgages worth billions. These mortgages had been granted to the so-called American Ninjas (No Income, No Job or Assets).  It was generally accepted that because these people had absolutely no chance of keeping up with any mortgage repayments, any product based on their mortgages would “tank” – and so it proved.

These mortgages were then “securitised”, that is to say, they were lumped together into what can only be described as a quasi-fund. Then, both private and corporate investors were encouraged to invest.

For instance, imagine  1000 Ninjas with  1000 mortgages worth £100,000 each. Lump them all together and you have a fund totalling £100,000,000. This should produce an income (mortgage repayments ) totalling say £5,000,000 per annum (at 5%). On the face of it, that’s quite a good investment – but only if you omit to mention that within a few months none of the mortgagors will have made any payments.

So, whoever “securitised” these  useless mortgages was able to pull-in yet more money which, believe it or not was subsequently  lent to other “Ninjas” and the cycle repeated.

Many investors found these potentially worthless investments very attractive – especially our banks. The rest, as they say is history. The only mildly interesting thing is that the banks didn’t understand what they were investing in and neither did the Financial Services Authority here in the UK or the US  Securities and Exchange Commission.

The Golman Sachs employee (I hesitate to use the word “banker”) at the centre of this potential scandal is Fabrice Tourre. He boasted that he had created the products “without necessarily understanding all of the implications of those monstrosities.”

 He obviously did a good selling job because he managed to lose Goldman Sachs clients who invested in these mortgage-based products over £645 million.  At the time, Mr Tourre was himself earning £1.5 million per year.

He has been accused of lying to investors – among the most gullible being our own Royal Bank of Scotland.

Meanwhile, the hedge fund owner John Paulson,  with whom the investments were placed, made himself a cool £2 billion.

Not so long ago, someone said that  if you put lipstick on a pig, it is still a pig. Mr Tourre and Goldman Sachs put so much lipstick on this pig that it looked like a glamorous dead-cert.

Mr Tourre is no doubt hoping that the Icelandic volcano continues to spew toxic fumes for ever – the last thing that he wants is to fly back to the USA to face the music. The Securities and Exchange Commission is just about to make a formal request to the British Authorities for Tourre to return to the USA to help the authorities with their inquiries and possibly face charges in conjunction with his employers.

Goldman Sachs shares are currently taking a pounding – especially as the SEC has said that it is investigating other financial shenanigans both by Goldman Sachs and other “banks”.

Unsurprisingly, Goldman Sachs has denied all charges and has said that SEC’s charges are unfounded “in law and fact” and that it intends to contest them.

However, as Goldman Sachs knows  a great deal about the US Government’s past financial machinations, there will probably be a “deal” of some sort.  But, as the SEC is also looking to recoup money lost by investors, it is hoped that Obama is strong enough to resist any easy compromises.

If money is, in effect stolen, then the mere act of returning it to its rightful owners does not usually put things right, although it can be interpreted as an admission of guilt.

It all depends on whether Goldman Sachs want to fight the action and whether it has the appetite for a lengthy trial.

Currently, it seems that Goldman Sachs does not have a leg to stand on, especially as it was paid £10 million by John Paulson to put together the mortgage-related product which was bound to fail.

Paulson took money from investors but at the same time “hedged” his bets by laying-off the risk through taking out a form of “insurance” which paid him vast amounts of cash when the investments failed ( and which he knew would fail in the first place).

These “pooled” mortgages which Goldman’s were selling were given the very impressive name of “synthetic collateralised debt obligations” – which is no more than sales talk for  “a load of potentially bad mortgages which have been lumped together for the gullible and feeble-minded to invest in”. For example, the entire banking industry.

The pill was further sweetened by Goldman Sachs through their claim that an independent third party called ACA Management Ltd had selected the pools of sub-prime mortgages. In fact a lot of the input into these potentially bad investments came from  John Paulson himself.

 This is what SEC Enforcement Director Robert Khuzami said:  “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party”

Tourre cobbled together the alleged fraud in 2007, just when the U.S mortgage market was  beginning to unravel. As a reward, he was promoted to Executive Director of Goldman Sachs in London.

John Paulson is not being pursued by the SEC  because in spite of the fact that he may have been complicit in the alleged fraud , he did not make any representations to investing clients. That was done by Goldman’s. 

Goldman’s has been an advisor to investment banking clients for many years and is also well-known for filling  high-level U.S Government posts with its directors and senior executives. Those days appear to be at an end because , as Simon Johnson, professor at MIT recently said ” I don’t think that anybody really values being connected to Goldman at this point.”

Because the SEC has indicated that it is on a financial witch-hunt, financial shares have fallen heavily in the last few days with Goldman Sachs itself losing about £10 billion in market capitalisation.

It seems that the SEC is retuning to its original role; the one in which it has so manifestly failed and that is protection of the investor. Hopefully, other financial regulators such as the UK’s Financial Services Authority will also have the courage to bare their teeth and not continue to be bullied by the banking industry, its white-collar bandits and their excesses.

Eliot’s Mess

Financial Services Authority

So the toothless old tiger that is the Financial Services Authority is going to be ripping up the contracts of those investment bankers who are taking unacceptable risks.

More empty gesture politics from Gordon Brown and his band of drowning funsters.

Not so many years ago, professional investors, fund managers, hedge funds and even those City screen monkeys who are now being targeted were investing in a series of investment “instruments” which “spread risk”. Imagine parcelling-up lots of mortgages thus creating a quasi-fund and selling shares in it. Mortgages produce a steady income for a bank or building society so it had to follow that if several individuals “owned” those mortgages, then any risk would be “spread”.

The point is that most investments are not a risk – except in retrospect.

Those investments derived from credit were good for a few years before they began to unravel – so there was plenty of time for the risks attached to those investments to be calculated. Some individuals did regard Credit Derivatives as unacceptably risky  but those individuals were either suppressed or their professional and/or personal reputations were destroyed.

Remember Eliot Spitzer? He used to be New York’s Attorney General and then Governor of New York.  When he was Attorney General, he  dedicated much of his effort into pursuing white collar crime and  had investigated many of the investment banks that were subsequently  the main players in the 2008 banking crisis. He was  elected Mayor of New York but subsequently disgraced when he was implicated in the “Client No. 9 scandal”.

So here was a very public figure who two years previously had stated that financial institutions were exaggerating their worth by falsely inflating the value of their assets. As far back as 2003, he was prosecuting companies for “predatory mortgage lending”.He foresaw the problems which would result from irresponsible mortgage lending. Generally accepted practices at the time involved  hidden charges, little regard to an individual’s ability to repay and a system floating on a morass of bribes and kickbacks. This was the time when the Bush administration had aligned itself  with the banking industry. Spitzer was chasing investment houses for inflating stock-values and he also pursued AIG for fraud. Then he sued Richard Grasso, a former Chairman of the New York Stock Exchange. That was for Russo’s non-disclosure of his deferred $140 million compensation package. He attacked all of the issues which floated to the top of the cesspit that was (and still is) the global banking scandal.

In February 2008, Spitzer published an article in the Washington Post in which he criticised the Bush Administration for inhibiting State legislatures from prosecuting predatory mortgage lenders. On March 17 2008, Spitzer resigned as Mayor as a result of the “Client No 9” prostitution scandal.

He had rattled the Establishment and the Establishment destroyed him. He had taken a massive professional risk and lost.

So what is acceptable risk? If I invest in British Airways – is that a risk? Is it acceptable or unacceptable? BA has major cash-flow issues, a staff crisis and it looks as if they might merge with Spanish Airline Iberia. Should I take a risk?

Not so long ago I invested in a small company whose shares began a vertical descent two days after I had acquired them. I telephoned the company’s CEO who told me that the company’s long-term prognosis was good so I took a risk and bought a load more shares. Three weeks later, the share-value soared to three time the price that I had paid – because the company had announced that it had secure additional finance. I got out immediately. Three more weeks later, the company’s share were suspended by the Stock Exchange and they went bust.

I had taken an unacceptable risk but had made a huge profit. Would the FSA pick that up and rip up my contract (if I had one)? Or does the Government REALLY mean that the FSA will be allowed to tear up a contract but only if the investment banker takes an unacceptable risk which subsequently loses money.

This latest announcement at least shows that the Government and its advisers DO have something in common with bank executives. They do not understand the nature of risk. They proved it during the “mortgage years of plenty” and they’re still proving it through their intransigence.

As far as “unacceptable” risk is concerned – unacceptable to whom? How did the FSA’s Chief Executive and ex-investment banker Hector Sants become a multi-millionaire during his stints at  UBS , Warburg Dillion Read, Donaldson, Lufkin & Jenrette and Credit Suisse First Boston?

The government says that is is encouraging business and entrepreneurship. Again, they do have that in common with the banks. A total lack of appreciation of what entrepreneurship is all about. Risk.

It is the entrepreneur who puts his house, factory, cash and family on the line. The indulgence in unacceptable risk is what an entrepreneur does for a living. The banks don’t understand and do not want to be bothered by the small-to-medium entrepreneur because business-risk does not have the gilt-edged backing of a dazed Treasury and a “still-in-shock” Bank of England.

The “feast or famine” life of the small entrepreneur is an anathema to those working within the  banking system because their own particular brand of feast or famine comes with salaries and bonuses. They have responsibility without accountability, whereas the entrepreneur has both and unfortunately, on many occasions, the accountability is to a bank.

There are those within government and the banking industry who do  know where the bodies are buried  and where the risks are –  but the Spitzer affair tells them that dissidence is not worth the risk.

Conservative Party Conference week.

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      • Boris Johnson once again has showed his leadership credentials by being approachable, witty and engaging. He does make the rest of them look a little bit pedestrian. In spite of his shambolic image, you can sense a rod of steel running through both his speech and personality. One to watch for the future. Imagine   a TV debate between Boris and Gordon Brown. It will never happen – but what a prospect.

 

  • Boris Johnson and friend

 

  • George Osborne’s department lined up like a row of fairground ducks was quite diverting. George Osborne is gradually shaking-off his Tim Nice-but-Dim image.

 

  • It’s very brave of David Cameron to allow Ken Clarke a voice – bearing in mind his strong Euro-sceptic stance. The Conservative Euro-sceptics should not attempt to embarrass David Cameron at Conference. They all seem to think that the next election is already won.

 

  • Custom dictates that when any Party is in the middle of its Conference, the other Parties keep quiet and do not make any pronouncements. So, Alistair Darling’s crudely populist announcement of cutting the incomes  of GPs and other high earners leaves us in no doubt that the Election campaign is now in full swing.

 

  • Retirement at 66? Purleeeze George – you can do better than that! Many will still retire at 65 and most of those who have not retired will be out of work – unless there is a local B&Q. The ACTUAL money saved will be negligible and it was hardly worth the leak.

 

  • It appears that as far as cutting Public Expenditure, the main Parties are now engaged in what can only be described as a peeing contest.

 

  • It was good to see that old duffer Kenneth Brown. So there is life after death!

 

  • The Editor of the Sun did not have to buy a single drink in the Conference bar last night. Hardly surprising but the Sun’s move to withdraw support from the Labour Party caused some disappointment among Conservatives. About as much disappointment as finding out that Gary Glitter can’t babysit tonight.

 

  • On a completely separate subject, the annual yakfest that is the 11th Pride of Britain Awards took place last night. One is never sure why only some kids with cancer attend the show, why only the kids whose parents managed to inform the media of how their brave 2year-old “dialled 999 whilst motherwas having a seizure in the bath” receive bravery awards and why Gordon Brown has to make a “surprise” appearance. We all like proper heroes but nowadays it seems that we have developed a real “need” to worship – as long as it involves lots of celebrities. If Michael Caine is made to feel any more ” ‘umble” I shall throw up. Having said all that, I’ve never managed to watch the show. This year there is a teacher whose Maths lessons contain RAP (one presumes that the “C” is silent). Then there’s the lady who stood between a small child and a Rottweiler. The best one is an ex-heroin addict with 176 convictions who now helps “young people to change their lives”.. As long as Simon Cowell, Tess Daly and Davina are there plus a room-full of tear-wracked luvvies we can rest assured that all’s well. Now where can I buy a Rottweiler? I’ve just noticed something and it is the final piece of jigsaw in a theory that I have been working on for some time. Here goes. I believe that Christopher Biggins is God. Why? because God is everywhere.

 

  • Safety campaigners are saying that if the Conservatives axe speed cameras, the accident-rate will increase. Here’s a compromise – and it will be comparatively cheap to implement. How about a sign that says “SPEED CAMERA IN 50 YARDS” on either side of every single speed camera in the country.  Not a good idea, I hear you say. Why not? Oh I see. What you really want is speeding motorists that produce a revenue and not necessarily slow motorists who do not.

 

  • Sir James Dyson managed to look like a prat when his autocue failed. A Dyson Vacuous.

 

  • Liked the announcement today that the Conservatives will begin a process of ridding us of Government forms and red tape. THAT’S the sort of thing we like to hear.

 

  • Conservatism SHOULD be the politics of giving everyone in Britain the ability, opportunity and tools to look after themselves and their families – without the smothering State intervention that is the hallmark of Socialism – even when it is wearing the thin veneer of New Labour. That should ALWAYS be, of course, coupled to the State taking care of its weakest citizens. Call it benevolent Conservatism if you like. Simple.  THAT is  the message that David Cameron and his rejuvenated Parliamentary Party should be promulgating. Needless posturing and name-calling should have no place in the modern Conservative political toolbox. David Cameron should look straight down a camera lens and explain what modern Conservatism is. Unsurprisingly, there are those who have never heard exactly what modern Conservatism represents because their views and opinions are still being distorted  and influenced by New Labour spin.

 

  • George Osborne is looking very promising.

 

  • So why DOES Jordan look as if she’s wearing a gumshield? Is in “hommage” to her cross-dressing new beau and professional thug Alex (Max – you’re running out of crap copy!) or has she been “done”. I think that we all know the answer to that one.

 

  • David Cameron has been photographed with a glass of champagne. Big deal! I shall simply repeat a previous report: The biggest consumption of champagne at  Conference time is by Labour. That was told to me by a former Chief Barman at the Grand Hotel in Brighton. Hypocrites.

 

  • Today, all the Socialist rags are laying-into  George Osborne who has introduced a bit of realism into our understanding of the economy. One suspects that once the Conservatives are in power and manage to have a good look at the books, they will see that things are far worse than has so far been admitted by ther present incumbents.

 

  • We are still living in cloud-cuckoo land as far as the economy is concerned. The FTSE is UP. House prices are UP, Gold is UP, Tesco shares are UP. In fact – everything is UP. Sounds great doesn’t it? So why aren’t we all feeling more positive. The fact is that the FTSE is up because  money is being invested on the Stock Exchange as a result of bank savings rates being so derisory plus, much of the money currently being invested is foreign so it could leave us at any time. The money that is being invested by British banks is not all real money. Some of it is the stuff that has been printed by the Bank of England and handed to the banking system. Mr Quantitative Easing strikes again. Gold has been creeping up for months. It is normally viewed as a “hedge” – somewhere to run when equities and commodities are down in price. That is not the case at present.  Something that has gradually been creeping into our collective peripheral vision is the slow-collapse of the dollar. There are strong rumours that very soon, oil will no longer be traded in dollars – there is foreign plotting afoot! Once the dollar really does go into freefall, share and commodity prices will tumble very quickly. The British economy has much to fear because the factors that it has traditionally relied-upon to buttress the economy have all but gone. The City of London USED to be the world’s financial centre. That is no longer the case. WE used to MAKE things and export them. Nowadays, that is down to about 17% of the country’s total economic output. Finally, the British economy and Governmemt are “over-borrowed” with little realistic prospect of repaying much of what was borrowed. If George Osborne had been in possession of ALL the facts, I don’t believe that he would have wished to even beigin his speech yesterday. He did very well and reminded us that we need to take a more collective and inclusive approach to heal the economy.

 

  • Yesterday I said that I would probably throw -up if Michael Caine was once-again “umbled” at the Pride of Britiain Awards. Apologies to Michael as it was Joanna Lumley’s turn to be “humbled and overcome”. Please make it stop.

 

  • So Boris and Dave are ex-Bullingdon boys and used to piss it up, throw bread rolls about, get toffed-up  and pose for silly photos. Go to any Comprehensive School on Prom Night (American import, I’m afraid) and watch scores of youngsters, toffed-up, arriving in ridiculous stretch limos and being encouraged to be extremely silly. So where’s the difference between our Grease wannabees and the Bullingdon Boys. Apparently, it’s only OK to dress like a posh prat and behave outrageously if you’re NOT a posh prat. It seems that those aspirational working classes are being herded by the Labour media back towards a concept which one hoped had been left behind – The Politics of Envy.

 

  • There was a great photograph of the Pride of Britain winners outside No 10 Downing Street. Sarah Brown looked very vivacious – so why did Gordon Brown look as if someone had inserted a six-inch ruler between his cheeks? Oh I see. Smile, eh? Wow.

 

  • Are we, as a nation, losing our sense of humour? We all remember Boris Johnson insulting Liverpool, Portsmouth and rather bizarrely – Papua New Guinea. He acknowledged all that in the introduction to his speech at Conference this week. Whatever you think of Boris, you have to admit that he carries a very mischievous sense of humour. That reminds me of a pilot who was censured by his bosses for the following Tannoy announcement: “Ladies and gentlemen, we are about to fly over Liverpool. Would you please ensure that you have placed your hands over your wallets.”

 

  • This woman’s husband, Andrew George was taken ill but has now been discharged and is being comforted by his family: 

  • She used to work at Little Ted’s Nursery and is a pervert. Although her husband does have our sympathy, one cannot help but think that at some stage during the marriage, he would have benefited from a visit to Specsavers.

 

  • The Conservatives have announced that they will deal with binge-drinking and teenage violence through the medium of taxation. Surprisingly, this is the first Conservative initiative that I disagree with. Remember that some drugs are far more expensive than alcohol, yet, money is still found for them. The alcohol genie is so far out of the bottle that there are no initiatives that will ever change the Brits’ uneasy relationship with alcohol. Social Engineering through taxation does not work. Let’s face it, Brits drink to get drunk – and then they drink some more. A few more pence on booze will make no difference whatsoever. Practical tip: The increased tax will be on cider and strong lager so do what kids do already, buy normal lager and tip cheap vodka into it. Now what?

 

  • Could it be true? Avram Grant is returning to Portsmouth as Director of Football? That should cheer the place up. Here is a photo of Avram practicing his Gordon Brown smile.

 

  • Sharon Shoesmith has  launched judicial review proceedings against Haringey Council, Ofsted and the Children’s Secretary Ed Balls. She was in charge of Haringey Social Services during the Baby P murder. One of the great British traditions is that if there is a screw-up on your watch then you fall on your sword. Ms SHOESMITH DID HERSELF NO FAVOURS during her few TV appearances when the Baby P affair was at its peak. She seemed aloof, smug, unrepentant and unapologetic. ” I was following orders” is the usual excuse. Hers was “We followed all procedures”. That neither exonerated her, nor did it go down well with the public.  Had she cried, begged forgiveness and made some sort of admission, the public would have been a little more sympathetic. As it was, Ed Balls did exactly the right thing in instructing Haringey to sack her without compensation.

 

  • Labour bleating noises have been heard again today. General Sir Francis Richard Dannatt, GCB, CBE, MC is our most distinguished soldier and tomorrow (Thursday) he will be officially announced as a Conservative Life Peer who will be advising the Conservatives on defence. General Dannatt was our highest-ranking  soldier and Chief of General Staff. He was going to be promoted to Chief of Defence Staff , which means that he would have become head of all of our armed forces – not just the Army. However, Gordon Brown personally blocked the promotion and General Dannatt was instead given the consolation prize of Constable of the Tower of London. Traditionally the Chief of Defence Staff is principal military adviser to the British Government. Gordon Brown was miffed because of General Dannatt’s “repeated calls for better pay and conditions for servicemen”. So General Dannatt’s sins? Speaking his mind, not being a Brown “yes man” and caring about his soldiers’ safety and welfare. Gordon Brown really has no idea whatsoever – probably because he was dealing with a proper  leader. It’s patently obvious that Brown does not recognise the species. He should learn that leadership is much more than Benito Mussolini-type posturing with overworked, overtired, adjective-free, moribund speeches.

 

  • Obama wins the Nobel Peace Prize. Quite right too. Climate, Democracy, Nuclear Disarmament – in fact, everything that he has touched so far. It looks as if Zimbabwe’s Morgan Chanderai was the runner-up. There is already talk  and discussion of whether Barack Obama deserves the Nobel Peace Prize with only nine months in office. The fact is that the Nobel committee can see that in spite of the fact that Obama’s actual achievements so far  are comparatively modest – he is by far the most influential individual on the planet as far as the short and medium term futures of the Earth are concerned. The progress that he has made in the last nine months is nothing short of remarkable.

 

  • It appears that today is probably the last posting day for Christmas. If you  want to send cards abroad, you’re too late. Christmas parcels should have been posted by March 31st. Why didn’t Crozier stick to football. This is yet another case of a Business Model triumphing over the Customer. Perhaps Royal Mail should be renamed Royal Lemming.

Friday October 2nd 2009

  • Ethiopia has suddenly become the focus for all anthropologists. An ancient  skeleton was found in 1992 and it has taken 17 years for the research team to rebuild it. Why all the excitement? The skeleton belongs to an in-between species of humanoid about 4.4 million years old. It has been designated Ardipithecus Ramidus. It is not “the missing link” but by extrapolation, it appears that it is probably about 9 million years since the division between apes and humans. So where was John Prescott this week?
  • The East of England Minister Barbara Follett is to stand-down from Parliament. She is (was) Minister for Culture, Creative Industries and Tourism. Her reasons for leaving? Yes, it’s the old chestnut: “For family reasons – to spend more time with my family”. Heard her name before? She’s the MP who claimed £500 to repair a Chinese rug ( don’t we all?) and she also claimed £25,000 “for security reasons”. She has since repaid all of the money. So how could she afford to sign such a large cheque? Her husband is millionaire pulp fiction writer, Ken Follett. Barbara and Ken epitomise the “champagne socialist” and are chums of Tony and Cherie Blair.
  • Jobs for the boys. Former Northern Rock boss, Adam Applegarth is now an advisor to Apollo Management. They are an American Equity firm. Adam is advising them on the purchase of bad loans, including parts of Northern Rock bank, the former Building Society he brought to its knees. Perhaps a touch ironic but perfectly legal. He will earn about 200,000 per year which is a lot more than the thousands of people who lost their jobs at Northern Rock. It’s all very worrying.
  • Today, Ireland will vote in favour of the Treaty of Lisbon. It’s their second attempt. The Irish economy is currently in such an appalling state that they appear to have little choice. However, if they do not support the Treaty, then it’s curtains for the Treaty.
  • The International Monetary Fund (IMF) is predicting that the British economy will grow by 0.9% next year. That’s about four times the current politicians’ prediction. House prices have returned to their pre-crunch 2008 levels, the FTSE 100 index is UP. As one of the few people who predicted nationalisation of the banks, I am still not sure whether to put the Bolly on ice just yet.
  • Vanessa George, Colin Blanchard and Angela Allen. They are the three baby-abusing perverts who are spread all over the newspapers today. Angela Allen is the one from Little Ted’s Day Nursery in Plymouth. She photographed herself sexually abusing babies as young as 12 months. Whichever prison they end up in, they are guaranteed some very close attention from other inmates. The burglars, drug dealers, fraudsters etc look almost honourable professionals next to these degenerates. I do hope that the other prisoners are not too gentle with them.

Thursday October 1st 2009

  • A survey has just been published of the world’s top  Broadband Countries – taking into account speed etc. The United Kingdom is languishing in 25th place. The top country? South Korea. Is this another indicator of the rise of the East and the slow eclipse of the West?. 

  • The Daily Mirror has adjusted its reportage of the Tories today – presumably in response to the Sun’s decision to back the Tories. It’s going to be a right mess leading up to the election. The gloves are off

  • BAE systems is about to be prosecuted for dishing out hundreds of millions in bribes. You may recall that when Tony Blair was in charge , there was a bit of a bribery scandal  involving Saudi Arabia, but as they say – all charges were dropped. There is one thing that both our Government and Judicial System would do well to remember and that is that greasing the cogs of commerce through the medium of bribery is normal in many countries – especially hot ones. Many years ago, I sold a yacht for a $1million to an Arab Prince and we shook hands on the deal and arranged to complete the paperwork the following day. That night , my phone rang. It was the Prince’s “Private secretary and advisor”. This is what he said: “Although the Prince is a very rich man, alas he is not a generous man. You will also understand that he always seeks my counsel and almost always heeds my advice. I have yet to advise him as to whether he should complete this purchase – but I am sure that we can come to some sort of arrangement.”  I was outraged! I told him that I did not make a practice of dishing out bribes and that I would report our conversation to the Prince. I never saw the Prince again. Some time later I realised that the Prince had probably been sitting next to his Secretary when he had made the call and it was probably his way of getting a few thousand off the price. I also recall another yacht-owning Middle Eastern client. Whenever we presented him with an invoice, I would ask the staff to make sure that it was itemised and added-up wrongly, but in his favour. Usually by either £50 or £100. Before handing over a wad of cash, he would add-up the bill himself, realise that it was incorrect , say ” Yes, that appears to be in order”  and pay. He was happy and I was happy but more importantly, honour had been satisfied, he had won a little victory and he always came back to us because he enjoyed our little game. We should NOT always be so po-faced about the way that other nationals  do business. It may not be pretty but it works.
  • Is it really the end of the Labour Party Conference? Thank You, God. Harriett Harman is not too chuffed about the Sun’s decision to support the Tories. She said: “Let’s face it, the nearest their political analysis gets to women’s rights is Page 3’s news in briefs.”  It’s only a matter of time before Harriet gets the call from Hugh Hefner.
  • At the Labour Conference yesterday, the jurassic Tony Woodley, leader of UNITE, was cheered when he tore up a copy of the Sun. One presumes that he had looked at the pictures first. He said: “I suggest the rest of the country should do exactly the same thing”. Labour should persuade more progressives such as Tony Woodley to give voice to their views – that way they’re absolutely GUARANTEED to lose not only the next election but several after that. During Tony Blair’s tenure these Brylcreemed 50s throwbacks used to be kept in a darkened room or padded box until after Conference. A dignified silence without even a platform-mention of the Sun would have been far more powerful.

  • Financial Analysts seem to be confusing the state of the FTSE 100 with the British Economy. The fact is that many of the billions invested in the Stock Exchange consists of foreign money. That’s where many of the profits are going – abroad. Instead of flying to Monaco to play the tables at the Casino, many foreigner “investors” are winning lots in the Casino that is the London Stock Exchange.

  • The FTSE 100 has experienced its biggest quarterly rise in 25 years. Once again, this  is being hailed as some sort of success. It simply means that lots of bets have been placed. The punters will be taking their profits soon. Then the Government can once again blame the bankers. Let’s hope that they don’t break the bank again.

  • Politicians are always saying that it is the Pension Funds and Insurance Companies  own most of the assets traded on the Stock Exchange. In fact, between them, they only own about 25%

  • Today the national minimum wage rises by 7p an hour to £5.80 and for 18 to 21-year-olds, the minimum wage increases by 6p to £4.83 per hour. This is also the day when the government legislation on “tips” has changed. From today it illegal for bars, restaurants and hotels to use tips or service charges to make up a minimum salary. That is all very well but in the grand scheme of things, it is a comparatively trivial matter and possibly not a terribly cost-efficient move by the Government. Especially as the Government has already conceded that the changes governing tips will lead to an estimated £60m in extra costs to ensure the legislation is implemented properly. The new code will also lead to higher National Insurance payments. This is an inflationarymove because bars , restaurants etc will simply “up” their prices to maintain their margins. The British Hospitality Association (BHA) estimates the new rules could lead to an additional £130m in costs and up to  5,000 job losses. There are those of course who feel that a tip should be a customer’s expression of appreciation for good service and should not be used by an employer to bring wages up to the minimum. Mind you, both the Federation of Small Businesses and UNITE are both in favour of the changes. The only people who will be really affected are the tippers and the tipees. The customer tippers will experience increased prices and the waiter tippees may suffer up to an estimated 5000 job losses. There is a saying: ” If it ain’t broken – don’t fix it.” Needless to say, one of the few groups who will not be affected is Politicians. You may have heard that when they eat out or stay in hotels – it tends to be on expenses. 

  •  

Monday September 7th 2009-Friday September 18th 2009

Friday September 18th 2009 

  • There has been some concern that Romell Broom may have suffered mental anguish when two Ohio State officials failed to find a vein in order to deliver a fatal injection. According to Broom’s lawyer, Broom had suffered both “mental and physical injuries” and apparently became distressed and appeared to cry. Broom was convicted of raping and then killing a 14 year-old girl.
  • We’re too fat, we drink too much alcohol, we’re unfit, we ingest female hormones in our meat  and weedkillers from our vegetables and we’re too stressed. Paradoxically, our life expectancy is increasing.
  • Alistair Darling is engaged in a series of meetings in order to decide where spending cuts can be made. If you’re expecting decisions within the next few months – stop being so silly. Although professional pundits do now have the opportunity to make pointless predictions.

  • Andy Burnham is suggesting yet more NHS changes. The God of Change strikes again! This month’s idea is that we will all be able to choose our GP. I would like one that’s qualified, understands human anatomy and is sober.

  • Baroness Scotland should know that in a Court of Law, ignorance is no defence. Mind you, the Baroness is the Attorney General. Hopefully, hiring someone called Loloahi Tapui(clue!) with out-of-date papers was just an oversight and as such, does not generate a witch-hunt. Oh yes – there’s an enquiry. There’s always a feckin’ enquiry.

  • Suddenly, Jordan doesn’t want to talk about “the rape”. It seems that her PR people are running out of interesting stories. The only remaining possbilities are either  ” I was abused as a child” or “I was abducted by aliens”.

  • Bit of a “to-do” about  unofficial sperm donors. Apparently, ladies can contact a sperm donor  on-line, arrange a meeting and either be handed a container-full of the stuff or on occasion have it delivered direct through the medium of sex. Hence the phrase : “”Bottled or draught?”  Sounds like an excellent service as well as an interesting career move, although it could mess-up the old CV, especially if the CV is printed on a sheet of Kleenex. Just realised that if this type of work is a career, the phrase “hand job” begins to make sense.

  • How would the management at Student Loans UK feel if they were told that because of administrative incompetence, their September salaries will be paid at the end of October. They would probably be quite upset. Next question: How do young kids with the incredible stress associated with leaving home feel-when they’re told by Student Loans UK that their University grants will be paid “about” four weeks late? Why is the beginning of the academic year ALWAYS a surprise? For the record and to help Student Loans UK: The next academic year will be starting in October 2010. Hopefully, that’s enough notice.

  • Scientists at Newcastle University have produced human sperm in the laboratory. Didn’t know that there was a shortage. Just take a chipping hammer to any Confessional carpet.

  • Gordon Brown said today “Cooperation between nations at the G20 summit will be crucial to ensure global economic recovery”  That is probably the twentieth version of the same sentence . It is a truism and it’s boring. Here’s another sentence which I hope Gordon finds as interesting as his own deep thoughts: ” The sun is in the sky”

  • Here is a quote from this evening’s No 10 bulletin: “The Prime Minister is launching a brand new podcast series this week talking directly to you about the big issues of the day. The podcasts, which will be available on our iTunes channel andonYouTube, will be recorded at Downing Street or around the world when the Prime Minister is travelling.”  Wow! That Gordon Brown is so “street”  -using that Interwebthingytoconnectwith the YouTube dudes. Way to go, MC Gordo! Soon,  he’ll be buying a pair of those really cool Levi Strauss blue denim casual trousers with the turn-ups, copper rivets and the little red label. Sound! Should go well with the black brogues.

  • Remember what I told you about the American dollar going into freefall. Soon. Continue reading Monday September 7th 2009-Friday September 18th 2009

Where’s the New World Order?

A twisted  fusion of capitalism and socialism is being forged in the white-hot heat of political panic.

 

No-one should  complain because we  are all being forced to run  blindfold towards  a world where profits are privatised and losses are nationalised. We cannot lose.

 

Competition within financial services will be a quaint throwback to the last century because both the US and UK governments have now demonstrated that if a company is big enough, it will have Federal and Treasury support. It is the smaller companies who will be allowed to go to the wall because it is only then that they can become financial fodder for their fat hungry cousins.

 

The new financial conglomerates now know that they cannot fail because the State will bail them out.

 

The lesson that has not been learned  is that the sheer size of companies is what  makes them difficult to govern. The only way to manage these fiscal behemoths is to impose rules that are so draconian that eventually, the spirit of capitalism will be totally expunged. The State will be calling all the shots.

 

There has been debate as to who is to blame for the current chaos. The bankers know very well what has happened but  they mutter vague generalisations, citing worthless  sub-prime bonds and a general lack of confidence.

 

There is no way that sub-prime (the greatest euphemism ever?) lending is to blame for the entire financial house of cards tumbling down. The real issue is that  the banks DID NOT HAVE THE MONEY that they were lending. They have behaved like a banana republic which prints more money in order to pull itself out of  the financial quicksand.

 

Yes, they have been using “pretend” money. Mugabe is doing it now, the Wiemar republic did it  70 years ago and  the entire banking system is still doing it.

 

The banking system has relied on “electronic money” for years. It was not real money and they have probably known for years that they were sprinting towards meltdown. George Soros knew.

 

The regulators are not to blame because 90% of their efforts are designed to control the “little man”.  The big picture eludes them . Last September, the FSA was still issuing statements as to the solidity of HBOS – that’s in spite of the “investigation” that it carried our six months previously on the possible manipulation of HBOS shares.

 

Now that the financial chaos has moved  from “boil” to “simmer”, the Government must take the opportunity not only to take a close look at the regulatory regime but also think about a complete restructure of the financial services industry.

 

The FSA grew out of a need to control mis-selling in the Pensions and Life Assurance industry. That is still its main thrust.

 

In spite of the increasingly bureaucratic Pensions and Life industry, the bandits are still out there and always one step ahead – they can never be eradicated.

 

One hates to agree with Sarkozy but a new global authority must be formed that specifically carries out high-level audits and ensures the implementation of  proper business controls within the banking sector.

 

However, we do have to accept that the ratcatcher can never catch all the rats.

Bear necessity.

 

 

We have entered a long-term bear market and equity prices are heading towards Ground Zero. All that Governments have managed to achieve so far, is to delay the decline.

The currently established pattern is very simple – investors wait and see what the government is going to do. Then there’s a short Stock Market rally.  That is usually followed by another business admitting losses, bad debts or a cash shortage and shares move down again. Then the cycle is repeated.

The whole thing is being dealt-with “piece-meal” because decisions are being made “on the hoof”  by politicians who always have one eye on opinion polls. The current economic woes are not a function of votes and governments should have taken a deep breath , sat back for two or three months and waited.

That comparatively short wait would have resulted in the bankers emerging with their hands up and coming clean. Plus  there would have been time to properly audit the investment and commercial banks (that is where most of the so-called”toxic” debts reside).

Instead, Governments and Treasuries all over the world allowed themselves to be spooked not for good business reasons but for political reasons. This over-protracted game of “pin the tail on the donkey” now looks as if it will never end.

The initial funds that were gifted (yes!) to the banks represented a knee-jerk reaction by amateurs such as Gordon Brown and Alistair Darling. Their panic-fuelled decision had absolutely no basis in good business practice. The term “due diligence” did not come into general use until after five months of chaos. Due diligence was not practiced by the banks when they were lending or acquiring bad investments. That tradition was propagated by  this and other governments who handed cash to the banks as irresponsibly as the banks had handed money to the NINJAS (No Income, No Job or Assets) and dodgy businessmen.

The amounts handed to the banks were based on a formula created in conjunction with the Financial Services Authority (FSA) – an organisation which itself is taking over £300 million out of the industry so that it can make sure that small-time brokers are completing their clients’ forms correctly, whilst at the other end of ther financial food chain, the big boys are still happily stripping money from investors and borrowers.

The amount of money handed to the banks was calculated as follows: The FSA established what a bank’s safe capital level should have been, in excess of the Basel Accord ( a formula based on assets, capital and risk which establishes a capital asset ratio).  That was the simple subtraction that was carried out : the difference  between the Basel Accord calculation and what the FSA  had established as the safe capital level.  Due diligence which really means “Let’s have a proper look at your books”   was nowhere to be seen or experienced. Why? Because the FSA does not have the in-house experience to carry out a full bank audit.

Good management practice should mean “no surprises”. The Government is being surprised at least once a week. It wouldn’t be so bad if it wasn’t costing us billions.

Adair the God.

“Listen Big G – there can’t be two of us.”

Lord Turner of Ecchinswell is in an expansionist frame of mind. The FSA will expand with even more highly-paid Civil Servants being hired for a proper Blitzkreig through the financial services industry.

The FSA was originally designed to protect the “little people” It has now grown into a monster  which munches its way through a mind-numbing £300 million per year – and it wants more! Incidentally, the £300 million is raised from the financial services industry by way of fees and fines and most of it is spent on salaries of the 4000 or-so FSA employees.  

They  are the traffic wardens of the FS industry and they rule by fear.

They have made the industry far more bureaucratic, they are responsible for more paper production than the Indian Civil Service and after their recent performance,  they probably cost more to run than they save the consumer.

In the last two months, there have been mutterings about the inflated salaries of banking Chief Executives. The FSAs Chief Executive is Hector Sants and if you inspect their 2007/08 accounts, you will see that his basic salary is £417,179 with bonuses of £114,000 and “emoluments and benefits” of another £130,769. That amounts to a total of  nearly £662,000! You can inspect the figures HERE .

Lord Turner added “We will pay more than necessary to attract the best people”. They will not attract the best people because the  last thing that the “best” want  or need is to become Civil Servants. The FSA managed to get Hector Sants because he had more-or-less retired after having made his fortune in exactly the same way as those strangely mute bank CEOs who have managed the economy into its present state.

What the FSA should do is to identify the really serious risks and make compliance managers within businesses directly and legally responsible to the FSA. Manage the big risks and do not waste your time chasing provincial brokers who, for instance,  have entered the incorrect date on their KIF or missed a date-of-birth from their Fact FInd. The process is called “Management by Exception” and I commend it to the self-styled “Adair” Turner.

The FSA should also make bank directors and CEOs criminally responsible for the sort of gross negligence that has passed for management in recent years. That may concentrate executives’ minds and encourage them to install proper internal controls and earn their money.

There is no point in having a financial police force if there are no decent laws and controls. The job of the FSA is NOT to provide management and control for the financial services industry – although that DOES appear to be Lord Turner’s ambition. The FSA’s job is to ensure that proper management and appropriate controls are in place.

The FSA needs to spend a lot more of its time chasing the senior boys -although they appear to be more geared up to correct the juniors’ work. The people that they really need to recruit are more experienced individuals with a bit of boardroom credibility – not necessarily expensive ex-stockbrokers.

Lord Turner should not imagine that throwing money at this type of problem will ever be cost-efficient and he should not engage in transparently opportunistic empire-building. The baking-in of unnecessary additional expenses into the current financial system is not the way forward because “guess-who” will once again have to pick up the tab.

In the last 15 years, the FSA has all but wiped-out the large life assurance direct sales forces – because direct distribution of financial services products became non-viable as a result  of the huge additional FSA-induced fees and  management costs. Thes sales forces primarily distributed pensions and life assurance products to Socio-economic groups C2-down. The A-B-C1 groups already belonged to the broker or intermediary market. (You never hear a council house tenant say ” I’ll talk to my broker about it.”)

As a result of the additional FSA-induced expenses, there are hundreds of thousands of under-insured and under-pensioned people in the United Kingdom.

Never mind – “guess who” will pick up that tab as well.

The argument is that many policies were mis-sold. Yes they were but primarily because of bad company policies, low quality senior management and corporate greed. That is exactly what has been allowed to happen within the banking sector.

It happened to the Life Assurance Industry and now it is happening to the rest of the industry – and the FSA  is rubbing its fleshy hands  as it drools over the prospect of MORE.

A regulatory body can never eradicate all crooks and all errors. That is because it can only work with historical data, i.e. by the time that it finds out that there has been wrongdoing, it is too late.

The FSA did not spot any of the issues which culminated in the nationilisations of Northern Rock, Bradford and Bingley et al.  It was not because they were looking in the wrong places – it is because they did not know where to look and consequently, did not look at all.

Recently,  Hector Sants tightenened his FSA “cilice” another notch as he practiced his own personal brand of self-mortification by admitting that they had screwed-up. Yes they had screwed-up and Mr Sants had no choice but to own up because it was so  blindingly obvious that the gross incompetence of the bank boardrooms had been compounded by the headless-chicken negligence of the FSA.

This is from the FSA website: “One of our main aims is to protect customers of financial services – such as you.”

The FSA is very good at fining small Brokers when bad advice is given or when there has been negligence or incompetence.

So who fines the FSA?

 

 

 

Capitalism Jim – but not as we know it.

 

 

 

 

 

Liquidity – the City way

 

 

 

 

 

 

 

Gearing – the City way

 

 

The flush-cheeked silk-suits who used to talk loudly in London bars are quiet today.

They are awaiting the result of the Congress vote which may ratify the  U.S. $700 billion rescue package.

When (and if) the package is agreed, the politicians should take an immediate step back and the US Treasury Secretary, Henry Paulson should announce the hire of a money-man to administer the funds. He should find someone without any  vested interests or someone who cannot be accused of profiting from the distribution of the rescue package. That will not be as simple as it sounds.

Many (if not most) of the big-hitters in finance own share portfolios, so finding a financial Elliot Ness who knows what he’s doing may be difficult.

The reason that the politicians should distance themselves from the scheme is because it is very likely that the markets will not reawaken if the dealers feel that they have a politician’s boot looming over them.

Politicians have a tendency to meddle and over-analyse so there may be a danger of every single transaction being scrutinised and further costs being “baked” into the system as a result of another tier of beaurocrats being introduced.

It’ll be “Capitalism Jim – but not as we know it.”

It is generally accepted that the financial system will now be experiencing a bit of a quantum leap but unless the leap is a positive one, the markets may be stifled by administrators and legislation.

The current mess does not stem from day-to-day procedures but from year-to-year policies and lack of active supervision.

This is definitely an occasion when the monkey should be left alone. It is  the organ grinder who should have the benefit of a severe talking-to (and maybe reminders on gearing and liquidity ratios).

Bradford and Bungley?

Bradford and Bingley’s shares are continuing to travel in the wrong direction and we are still not hearing any positive noises from the board.

They have an excellent management team, they are product innovators, they are responsible lenders  and the only major mistake that they have made is the purchase of the GMAC mortgage book. They signed up to purchase £12 billions-worth of mortgages. The purchase  looks increasingly like the sort of idea that materialises in the pub just before closing time.

They were to buy the GMAC mortgages in quarterly tranches but are renegotiating the deal because the GMAC mortgages are in arrears by a factor of nearly 5, compared to Bradford and Bingley’s self-sourced mortgages.

Two further factors are making things difficult. The first is the fact that they have a higher-than-average number of buy-to-let and self-certified mortgages. These mortgages are known to have a higher attrition rate but that is already reflected in the share price.

Moody’s have downgraded the BBG within the last week and that together with excessive media attention is putting additional pressure on the share price.

Nowadays, credit rating agencies such as Moody’s and Standard & Poors are  downgrading companies with almost indecent haste. They have become part of the problem and not of the solution.

The proposed redundancies at the BBG have not been announced or reported carefully enough. The initial impression given by the media is that they are to lose nearly 400 people immediately. That is not the case. There will not be a Lehman-type scenario.

We will not be seeing tearful box-clutching junior staff being interviewed on the 6 o’clock news.

The announcement that the sacking of 370 staff will produce a per-annuum saving of £15 million suggests high wages, so all-in-all, BBG is continuing to handle the whole thing very badly.

They seem to forget that much of what is happening is about PERCEPTION. 

The BBG board is probably now thinking that demutualisation was possibly not all that it was cracked up to be. Ask the shareholders.

However, the Chairman Rod Kent and Chief Executive Rod Pym need to get their fingers out of their backsides and come out fighting. They should not leave it to the FSA to flip-flop from company to company hoping for a sale. 

Has the board lapsed into “analysis paralysis”?

“B&B was an old Building society and therefore is not organised for the speed and change in the mortgage market,” is a two-month-old quote from Rod Kent.

That may be true but is not the sort of sentiment that the market enjoys – and in this business they do not forget and they do shoot the messenger.

*******************************

STOP PRESS:
Bradford & Bingley (the Company) and GMAC-RFC confirm today that they have successfully renegotiated the terms of their mortgage forward sale agreement.
Under the original terms of the agreement, signed in December 2006, the Company agreed to purchase a minimum of £350m of UK mortgage assets per quarter, with £1.75bn remaining to be purchased before the end of 2009.
Both businesses have agreed to revise the terms of this agreement to their mutual benefit whereby £500m of loans will be acquired in Q4 2008 and between £225m and £250m in Q1 2009 after which the agreement will cease. GMAC-RFC will receive in lieu, the equivalent of the premium that would have been paid should the agreement have run the full term.
MORE:
Bradford & Bingley plc are pleased to announce that Barclays Bank PLC have
agreed to act as interest rate swap provider in their Covered Bond programme. 
Bradford & Bingley previously acted in this capacity. This change is effective
as of 22 September 2008. 

Caught short? You’re a banker.

Banking : American-style

Collective noun for bankers – a Wunch?

 

The banking system has managed to avoid wholesale carnage – just some comparatively minor but well-earned blood-letting.

Commentators are currently busy constructing ever more grandiose metaphors to describe the last week’s events (was it only a week?) but it is now time to take a dispassionate look at the “post-blast” financial landscape.

There has been a lot of name-calling and media hysterics but here appears to be little discussion of actual numbers.   

For instance, the total amount of sub-prime mortgage-backed securities was (and still is) only about $1.2 trillion (American). That’s $1.2 billion (everywhere else) or only (!) about £0.6 billion .

Why therefore is the amount of funding being injected into the system by various governments so far in excess of that figure? Will the governments which are handing out money, carry out  retrospective audits of the banks who need support?

Of these mortgage-backed securities, only about $300 billion (American), which is $3,000,000,000 (everywhere else) or about £1,500,000,000 is held by US banks. The rest of these so-called toxic securities have been sold throughout the world to banks, pension funds and even private investors.

The question is this: Have the banks been too ready to lay the blame on sub-prime mortgages?  The figures just don’t add up – or have most of the banks been technically insolvent for some time?

For instance, many banks have been loaded up with Thirld World debt for many years. Again, they lent money at extremely high rates but these “investments” had to be written down and only worth pennies on the pound : near-worthless.

Technically, these banks must have been insolvent. Yet they were still declaring high profits and paying themselves mega bonuses.

They could argue that the way that banks have to value their assets adds to their problems. The system of valuation is called “to market” valuation. That means” How much is this asset worth if we sold it today?”.This type of valuation is meaningless if there is no market. If no-one is buying,  then  you could argue that your asset has no value.

Share prices are an exact analogy. If no-one wants to buy your shares, they continue to decrease in value until they are near-worthless.

However, even bonds which are backed by sub-prime mortgages have a value. Even if these values had been written-down by as much as say, 25%, there should not have been a problem with solvency.

Therefore, rather paradoxically, we have to blame the accountants. Even more paradoxically, it is they who run companies in times of crisis.

The accounting system in the United States started the avalanche and although the main blame does lie with the accountants, it is they who are running scared and having to value assets on a ” to market” basis as a result of the constraints placed on them by their own statutory accounting system  –  known as Fair Value Accounting.

They are bound to place a “to market” valuation on assets, instead of a true or real economic value. There IS a difference between “valuation” and “value”.

Here in the UK, Hector Sants, Chief Executive of the FSA has announced that “shorting” of financial stock has been suspended until  early 2009. Window dressing? Only a small percentage of  HBOS share were out ol loan and there is no real evidence that “shorting” has has been the cause of the current meltdown. However, at least the FSA has been seen to do something and Gordon Brown will get a Brownie Point by association.

The good thing about shorting is that weak organisations are soon found out. The fact of the matter is that HBOS share were being dumped by normal fund managers because there was no meaningful response from the HBOS board when their solvency was brought into question. They had been found out and there was nowhere to run.

Credit Rating Agencies (CRAs) such as Moody’s and Standard & Poors should also be in the dock and take part of the blame for making things even more difficult for financial institutions to raise cash. They are always in too much of a hurry to “bust” a business down so as to create a self-amplifying problem.

It works something like this:

1. The bank buys some dodgy stock or makes a bad loan.

2. The accountants (quite unnecessarily) go into down-valuation overkill mode on asset revaluation thus creating a hole in the accounts which needs to be filled with an injection of cash. 

3. The bank puts out a profits health warning.

4. The CRA reassesses the bank’s creditworthiness and downgrades it from say a B to a C.

5. No-one will lend the bank any money because of their credit rating.

Hector Sants said a year ago that financial rescues should not be in the gift of just the Bank of England and that emergency funding should be part under the control of the FSA. That is a measure that should be put into place immediately.

After last week’s bank/regulator/government (The Unholy Trinity) lash-up, serious questions should be asked about the future extent of the Bank of England’s involvement. Hector, who is the ultimate poacher-turned gamekeeper has known for some time that most banks and financial institutions have been treading that fine line between Profit and Loss or  Revenue and Misappropriation.

Regrettably, Hector lives in that twilight world in which matters have to be dealt-with by a “quiet word” in a Chairman’s of CEO’s ear – otherwise a careless word could trigger the sort of journey that out financial services industry has undertaken this last week. And it ain’t over.

This morning, many ill-informed commentators are blaming the “spivs” and crooks in the City for the near-downfall of the banking industry. IT IS NOT THEIR FAULT.

They have acted within the rules, within the law and according to the policies of their companies.

Twenty years ago, Life Assurance salesmen were blamed for the mis-selling of pensions and life assurance. THEY WERE NOT TO BLAME EITHER. They were implementing their companies’ policies and were quoting the industry’s figures. They were projecting 10% and sometimes 12% fund growths – sometimes forward for 25 years. Where did they obtain the figures? From their companies.

Nowadays, if a share dealer decides to “short” a stock, then he is perfectly entitled to do so – it is not a new device and incidentally, if you are one of the few people who is not a sudden expert on shorting, CLICK HERE.

However, “naked” dealing is much more exhilarating  – that is when you can (in common with the modern banking industry) REALLY get caught short.

The fires of capitalism

 

A twisted  fusion of capitalism and socialism is being forged in the white-hot heat of political panic.

 

No-one should  complain because we  are all being forced to run  blindfold towards  a world where profits are privatised and losses are nationalised. We cannot lose.

 

Competition will be a quaint throwback to the last century because both the US and UK governments have now demonstrated that if a company is big enough, it will have Federal and Treasury support. It is the smaller companies who will be allowed to go to the wall because it is only then that they can become financial fodder for their fat hungry cousins.

 

The new financial conglomerates now know that they cannot fail because the State will bail them out.

 

The lesson that has not been learned  is that the sheer size of companies is what  makes them difficult to govern. The only way to manage these fiscal behemoths is to impose rules that are so draconian that eventually, the spirit of capitalism will be totally expunged. The State will be calling all the shots.

 

There has been debate as to who is to blame for the current chaos. The bankers know very well what has happened but  they mutter vague generalisations, citing worthless  sub-prime bonds and a general lack of confidence.

 

There is no way that sub-prime (the greatest euphemism ever?) lending is to blame for the entire financial house of cards tumbling down. The real issue is that  the banks DID NOT HAVE THE MONEY that they were lending. They have behaved like a banana republic which prints more money in order to pull itself out of  the financial quicksand.

 

Yes, they have been using “pretend” money. Mugabe is doing it now, the Wiemar republic did it  70 years ago and  the entire banking system is still doing it.

 

The banking system has relied on “electronic money” for years. It was not real money and they have probably known for years that they were sprinting towards meltdown. George Soros knew.

 

The regulators are not to blame because 90% of their efforts are designed to control the “little man”.  The big picture eludes them . A few days ago the FSA was still issuing statements as to the solidity of HBOS – that’s in spite of the “investigation” that it carried our six months ago on the possible manipulation of HBOS shares.

 

If the current chaos eventually does go from “boil” to “simmer”, the Government must take the opportunity not only to take a close look at the regulatory regime but also think about a complete restructure of the financial services industry.

 

The FSA grew out of a need to control mis-selling in the Pensions and Life Assurance industry. That is still its main thrust.

 

In spite of the increasingly bureaucratic Pensions and Life industry, the bandits are still out there and always one step ahead – they can never be eradicated.

 

A new global authority must be formed that specifically carries out high-level audits and ensures the implementation of  proper business controls within the banking sector.

 

However, we do have to accept that the ratcatcher can never catch all the rats.

Money,money, money.

Great fun was had on the various stock exchanges around the world last week. Lots of  yoyo investment activity.  Shares were up and down like a bride’s nightie.

In the US, there was good news from banks such as JP Morgan and Wells Fargo but not so good from Lehman Brothers and Merrill Lynch. Citigroup was keeping its head down.

Fat Fannie Mae and Fulsome Freddie Mac are still sitting there in the corner, quivering and thinking “Feed me”.  Freddie is thinking of raising capital by selling something like 10 billion dollars worth of new shares which will be a good scam if they can pull it off , bearing in mind that in 2008 they managed to lose their investors about three-quarters of their money.

But if they were allowed to go to the wall , property prices would disintegrate and the US housing market would grind to a shuddering halt. Nice.

There is even  more fun and games over in the States  : the US securities regulators are issuing subpoenas for Deutsche bank, Goldman Sachs and Merrill Lynch . They are looking  at suspected manipulation of Lehman Brothers and Bear Stearns shares.

The banking sector has always been institutionally incompetent and now, to add to that wonderful endorsement, they are regarded as irresponsible, cynical and crooked. Gone are the days of the honest banker who had your interests at heart. There has been a  comparatively recent proliferation of sharp-suited self-serving MBAs  and other prats who have overcomplicated a venerable institution  and turned it into a financial all-singing all-dancing circus.

Many of these people do not have a clue how to deal with the sort of crisis that they are now emeshed-in because they have only experienced the “ups”. Many will crash and burn. Sorry – Many will negatively optimise.

There appears to be no good reason why Sovereign funds or anyone else should rush to the aid of these discredited institutions unless there is a substantial change in their governance and competence.

The word on the streets is that the recovery period of the banking sector is going to take much longer than was generally believed. In fact, put two bankers in a studio, ask them about “the downturn” and you will get three opinions – all of them different.

In spite of the fact that they deal in numbers, it is remarkable how much guesswork and conjecture they rely on in their day-to-day activities.

The mechanics and decision-making behind last week’s announcement by the Bank of England to maintain the bank base rate at five percent demonstrate that institutions such as the Bank of England are not adding to the creation of an economy- they are merely myopic observers.

They are like the 1993 Grand National starter who was waving his flag at the horses when they  false-started and were a hundred yards down the course.

The bank’s monetary policy committee consists of both bankers and proper economists. It was very interesting to note that one of the economists suggested that the base rate be raised by 25  basis points and the other wanted it lowered by the same amount.

Whether bank rates  are raised  by a quarter percent or lowered by quarter percent would make absolutely no difference to the economy because the Bank of England  is lagging behind the economy.

The equation should be quite simple. Inflation is a consequence of rising energy and food prices which in turn are a  function of too-rapid economic growth. We NEEDED a slow-down in economic growth because it was  and still is unsustainable.

Interest rates cannot control economic growth. One day, central banks will realise this.

Nevertheless, through habit more than logic or science, inflation is still regarded as enemy No 1 – the Bogeyman.

The United Kingdom budget deficit in the quarter ending June 2008  was £24.4 billion. That is the biggest deficit since just after World War II. House prices are falling at the  fastest rate since the Great Depression of the 1930s and United Kingdom share prices have fallen by 20 percent in the last 12 months.

The general feeling is that things will continue to head south to the end 2008 and possibly beyond. I reckon about 10 years beyond – with of course the occasional rally fired by bouts of illogical euphoria.

The whole scenario is not helped by the fact that currently the City wide boys have not only got themselves themselves into a right old state but have also managed to get themselves into a totally negative mindset.

Traditional thinking has it that in order to solve the problem, more money needs to be thrown at it . Imagine a small businessman on the verge of bankruptcy going to his bank and saying , ” OK, I screwed up. Let me have more money and I’ll see if I can sort it all out.”

Yet, that same small businessman is in the hands of an institution which dishes out business advice whilst losing millions. Takes your breath away! Plus that institution wants more money because it did not take its own advice!

The sad fact is that the banking system is run by incompetents who  in turn are regulated by ineffectuals.

We have a financial system that was a Frankenstein. We now have a financial system which is an ailing Frankenstein.

There is only one solution and that is to dismantle the whole system and start again. Sounds extreme but all that it needs is lots of legislation or possibly the repealing of the legislation which turned Banks into  a combination of Bank, Investment House, Building Society, Insurance Company and anything else to do with cash that you can think of.

The modern “name of the game” is called Client-bank Optimisation. That means that once you have a banking client, he is your prey and you can flog him anything! If you haven’t anything to sell him, invent something! That approach is a time-bomb which WILL eventually go off.

Having said all of that, there are still many in the city who are making money. Unfortunately, they are only making money for themselves and adding nothing to the general flow of the economy- apart, of course when they buy the next Aston Martin or penthouse pad.

Over the next few years, the  dying bodies of financial institutions  will finally float to the top.

There are some who at this moment are covering their losses and holes in the balance sheet thanks to either a fine Finance Director or CEO with a strong self-preservation instinct.

Their grey bloated bellies will finally be visible. They will be twitching in their death throes but as we have seen over the past few weeks, they will still be offering their grasping  fat hands and asking for more money to be inserted by the taxpayer.

Time to stop.

The Stochastic Process and the Delayed Risky Zero.

 a-spiv.jpg“Psst….fancy any Credit Derivatives?…”

iTraxx is a brand-name and it refers to a family of credit swap index products. There is also a US credit index called the CDX.

These types of investments are very technical and speculative. The dealing and computations are carried out by very specialised investment”geeks” who tend to be mathematicians rather than the usual Delboy barrow-boy types who trade stocks.

We mention this because there appears to have been another casualty. This time the home of the casualty is Morgan Stanley in London.

About a month ago, a trader called Matthew Piper was suspended when a routine audit uncovered a $120 million hole in his trading account. The toothless tiger that is the FSA has been called in to investigate (ho! ho!). Let’s hope that they have someone in place who understands the title of this article.

The main clients of the traders who bet on the CDX are the hedge fund managers ( yes, it’s them again) and nothing that the Chancellor says or does will stop these investment bandits from operating. Primarily, because the only people who understand what they are up to is themselves.

Foreign Credit Default swap, martingdales and the Collapsing Numeraire are more of the highly technical and incomprehensible terms that investigators will try and get to grips with. At best, they will be able to suggest another layer of Risk Management to be installed without really having any idea why.

It is far too easy for a trader to hide his cock-ups by simply overstating the value of the securities that he is in charge of hedging.

The really big worry is that traders such as Matthew Piper are probably being “stitched up” by some real wide boys and then being hung out to dry by their companies.

This year, Morgan Stanley ‘s second quarter profits were 60% less than last year – that was in spite of the windfall from the sale of a couple of assets which added about $1billion to the bottom line. Their shares are down about 7% and will fall further. Their income is at 95c per share, whereas last year it was $2.40 per share.

Lehman Brothers – quarterly loss of £2.8billion – and so it continues.

All these negative figures are as a result of huge trading and hedging losses.

Spygun has been involved in many Business Control and Risk management situations – so here is a free lesson to all you CEOs:

There are are only four Business Controls that you need to keep reviewing and appraising. Implement the reviews in a structured way and do them in the following order.

1. Supervision. This is a day-to-day control and the clue is in the title. What is the day-to-day supervision? Is there any?

2. Procedures. Are there any for these traders apart from shouting at each other from 7.00 a.m to 10 a.m and then chatting to their hedge-fund mates? This control is again a short-term day-to-day or week-to-week control. 

3. Organisation. This is about the people who are in charge, their remuneration, qualifications, experience, management, structure. This is a medium to long-term control and needs to be reviewed regularly.

4. Policy. This is a high-level control and is all about what the Board says should be done and how it is implemented by the Senior Management and how it cascades down.

All of the above controls need to be reviewed constantly and not when the FSA blunders into the picture. The control which is usually the Root Cause of this type of problem is the last one and is the responsibility of the Board.

It was the Board that agreed to this type of trading. They can stop it. If they do not want to stop it, they have to form a policy as to how the trading is implemented and continued. If they decide that it is not viable to try and control this type of trading – the answer should be simple.  For instance, they can discourage heavy risk-taking by minimising the associated rewards and/or make the traders’ managers directly responsible and accountable for their charges’ misdemeanours.

Traders such as Matthew Piper are not always at fault. They tend to be non-entrepreneurial  and therefore ripe for a right royal stitch-up by the less scrupulous scum operating in this extremely murky market.

Slow Mervyn – The Traders’ Friend

tortoise_big.jpg  Mervyn King

Mervyn King’s Horlicks has just worn off  and he has  woken up to the fact that City bonuses are high. Breathtaking! He is so on the ball that he makes Ronaldo look like a one-legged tap-dancer.

Mervyn!!!  The outrageously high bonuses, boni or boners are not a new phenomenon. In fact Joseph Stiglitz, the Nobel Prize-winning economist said exactly what you’re saying about a month ago. Mind you, what with one thing and another, I suppose that you’ve only just caught up with your reading.

The primary reason for the outrageously high payments to the designer-labelled barrow-boy City slickers is the  over-simplified reward system.  The City rewards the “ups” but  does  not penalise the “downs”. That encourages risk-taking in a big way.  A trader can make a large bonus from the profit on a deal but when that deal or the share price subsequently falls, there are no sanctions.

Here is an idea from Spygun’s many years experience in Financial Services, illustrated by an example from the life assurance industry:

In the good old days when life was simple, every day was sunny and back doors were left unlocked, a life assurance salesman would be paid what was known as “indemnity commission” on any contracts that he sold. If the salesman sold a £100 per month policy to a client , he earned say £1000 in up-front commission.  Over the next twelve months, the  client paid his £100 per month and at the end of the year, the salesman’s commission had been paid for. However, if the policy lapsed in the meantime, the commission was “clawed back” on a pro-rata basis. That discouraged salesmen from selling policies to high-risk clients.

With the sorts of systems that all banks and financial services companies currently operate , it would be a comparatively simple matter to create a payment system which was more equitable and which took into account the often negative consequences of trading.

The Life Assurance companies employed people who earned millions in commission from unprofitable contracts and eventually, the Financial Services Act helped the industry to rewrite the rules , resulting in a far more sensible pay structure and a much less aggressive culture.

It is now time for those nice people at the Financial Services Authority to loosen their cardigans, bare their teeth and take control.

The argument of having to pay obscene bonuses in order to hire “the best” has been used before. “The best” used to mean the most aggressive and most ambitious salesmen.

We now have the opportunity to enter an era where “the best” means the best-qualified, the most knowledgeable and the most professional.