Tuesday 4 December 2007

Easy credit come, Easy credit go


My attention was drawn today to some statement's issued in a polemic to lenders by Clive Briault of the Financial Services Authority, no less;

"It is clear that some business models are no longer as economically viable as they used to be"

and re Banks trying to cash-in (err..I mean solve the crisis, eh, Goldman Sachs)

"whether now is the right time to be exchanging liquid cash for illiquid mortgage assets"

So in a nutshell Mr. Briault here is saying that the model of lending indulged upon by Northern Rock is no longer feasible. This will go down very well with his fellow quasi-state employees at the Bank of England currently trying to get an auction going to sell this lemon and save the taxpayer.....joined-up or what?

A deeper question might be to understand whether these business models (which Bradford and Bingley and Alliance & Leicester, have engaged with to a lesser extent than Northern Rock, but still are in difficulties nonetheless) were ever sensible. And whose job was it to monitor this kind of situation at taxpayer expense to make sure that markets ran smoothly, eh Mr. Briault?

Also, although it may seem rational to tell institutions to prepare their balance sheets for rough times ahead, that does not really square with the Treasury's assurances of growth of 2.5% next year.... I can't really see how a credit crunch on the consumer next year is at all concomitant with a nice plain sailing year of growth. Perhaps he can have lunch with the Mandarins tomorrow and perhaps be persuaded to change his mind, as others have done recently...

Finally, on a subject close to ND heart Briault also had this to say:

"(You) should consider what liquidity and credit stresses would take you to the point of destruction, so that you can decide whether you are comfortable with what that implies about how you are currently positioning your business"

Having hit the iceberg, suggesting to the crew to look out for ice-bergs in the future is a somewhat redundant exercise.


21 comments:

hatfield girl said...

It won't matter what Mr Briault thinks soon as the EU fully intends to make operational machinery for 'integral supervision over cross-border market players'.
The Leader won't like that.

Nick Drew said...

And where were Mr "retail managing director" Briault's stress-testing scenarios 12 months ago then, eh ?

We can sell him some.

Old BE said...

Was it ever a good idea? Well surely that's up to the shareholders and Directors to decide, not the central bank and the Treasury. Oops sorry this is New Britain.

Robert Peston says that NR is unsellable because of inter-bank interest rates being so high. What a mess. What a mess.

CityUnslicker said...

HG, quite.

Although it is quite funny to see our previously supercillious rulers having to keep schtum in the face of Merkel et al as they currently have so much egg on their faces.

CityUnslicker said...

ND - I thought you would appreciate that bit!

CityUnslicker said...

Ed,

Markets need regulations to stop abuse; to this extent their is no such thing as a free market.

As mcuh as I want the directors and shareholders to pay, the recekless activity of one company can ruin a market.

Imagine if an airline thought it could cut prices by underspending on safety. You could say well a crash will occur and then the company will go bust etc.

But the point is people would have died. Also other airlines in an effort to compete might have followed the same route....

Light touch regulation of the more outlandish business models I think is a good thing. We have the regs here well enough in place; we need not more regs but the capacity of those who enforce to understand what they are doing.

Old BE said...

For sure, but what I meant was that the interference of HMG after the run seems to have made things worse - people are still removing their cash but the taxpayer is footing the bill. Has the bail-out improved other banks' standings?

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Wolfie said...

I have been ranting about this problem for years, naturally with my wisdom falling on deaf ears. If however you think this has been caused by faulty "business models" alone you would not be entirely correct. The model was not so wayward if everyone had been telling the truth or compliance procedures had been followed to the letter. I call this corruption.

CityUnslicker said...

Ed - Did the government make things worse by not letting it go to the wall?

probably, the best thing to have done would have been to support the LLoyds TSB take-over that was offered.

However, it was a set of very poor choices by that stage as the game had run too far.

NR's share price started dropping a long time before the credit crunch. That was the time for the regulator to get involved.

CityUnslicker said...

Wolfie - your link does not work to your site.

I agree that if all rules had been followed then maybe this turn of events would not have happened.

Is there political intrigue one of the central issues here, yes. Actual corruption, possibly. I see more issue with the awkward nature of regulation between the FSA and BoE and also in the blind eye turned to complex financial machinations whenthe good times were rolling.

CityUnslicker said...

Ed - Did the government make things worse by not letting it go to the wall?

probably, the best thing to have done would have been to support the LLoyds TSB take-over that was offered.

However, it was a set of very poor choices by that stage as the game had run too far.

NR's share price started dropping a long time before the credit crunch. That was the time for the regulator to get involved.

CityUnslicker said...

Ed - Did the government make things worse by not letting it go to the wall?

probably, the best thing to have done would have been to support the LLoyds TSB take-over that was offered.

However, it was a set of very poor choices by that stage as the game had run too far.

NR's share price started dropping a long time before the credit crunch. That was the time for the regulator to get involved.

Anonymous said...

"Was it ever a good idea?"

Well clearly it was a splendid idea! NR has made good money over the last 10 years, returned healthy dividends, massive growth and then when all went pear-shaped the government stepped in to bail the company out. Now you can see why Branson is keen to get in on the act - he has realised the current government just won't let this bank fail, so it has become a "no risk" investment if he can get it at the right price.

Nick Drew said...

Wolfie, I agree this was not prima facie a dumb business model, let alone suicidal: everything lay in the execution (+ risk-management) of it, as you suggest.

Heaven forfend that every viable company must of necessity be fully vertically integrated. That's one model, for sure, but it's often inefficient and there are ways of operating different models.

Wolfie said...

I see more issue with the awkward nature of regulation between the FSA and BoE and also in the blind eye turned to complex financial machinations when the good times were rolling.

The worst abuses came outside UK jurisdiction and filtered down into our balance sheet due to the global nature of finance. Agreed there were deliberate efforts to ignore that.

Complex? A point of view relative to one's intrinsic intelligence. I meet far fewer really intelligent people in the City than I used to, most have bailed due to bullying and the work-yourself-to-death culture.

Anonymous said...

"most have bailed due to bullying and the work-yourself-to-death culture": that's interesting, Wolfie. Where have they gone to?

Anonymous said...

off topic but guido worthy of a read at the monemt.New cash for access scandal?

CityUnslicker said...

Re where have they gone...Mayfair??

as for Guido - agree good spot by him. I have commented there and helpfully pointed out the treasury's own procurement guidelines on risk management.

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