Saturday 11 July 2009

Gordon's Strategy Captured: "Extend & Pretend"

Americans are so good at coining really excellent phrases and here’s a cracker, perfectly capturing Brown’s strategy for dealing with the financial crisis ...

Extend and Pretend

... meaning, to push a problem out into the future, close your eyes to the inevitable, and kid yourself everything will be all right.

This being a financial blog, and writing as an old deal-structurer, there’s extra resonance to this: one of the most venerable tools of the trade is known as Blend & Extend. This is where the client has a short-term problem with a deal. As a short-term fix, you sell them a swap or something that extends further forward in time than the original deal, and which is in-the-money in the near term (enabling them to ‘blend’, or dilute their immediate difficulties) but at the cost of being out-of-the-money in a later period. Difference being, that with proper mark-to-market accounting there’s not much chance of pretence about what’s going on.

Hat-tip for this to Bryan Marsal of the restructuring firm Alvarez & Marsal, currently unwinding Lehman’s (good luck mate!). He was being interviewed on CNBC here – why don’t we have TV like that, BTW ? The neologism arises in the context of bankers doing short-termist stuff like Gordon: and of course mark-to-market accounting has conveniently been suspended just now … so pretend away gentlemen !

For a government with an AAA rating, almost any problem can be postponed. But, like Nixon's deal for quitting IndoChina leaving South Vietnam apparently intact, Brown's QE is merely delaying the day of reckoning.

Extend and Pretend. Love it.



Houdini said...

I think you give him far too much credit and the problem he has is only 50% of what you think, i.e. pretend.

Demetrius said...

Or as grannie used to say, you always tell the rent man you are getting a big postal order next week, or the week after, when it will never happen. All you can hope for is that the pawnbroker will up his offer for your wedding ring.

James Higham said...

When will the bubble burst?

Nick Drew said...

In theory, James, there is endless mileage in Extend, while the AAA rating holds ! ...

which pretty much answers the question

(it is in fact the Enron question writ large)

& when the rest of the world calls time on us, that's when Demetrius' granny's rent-man calls an end to the credit, and Houdini's 50% is increasingly hard to sustain !

timing ? I can't call that one - what do others think ?

Bill Quango MP said...

well, safety in numbers for now. The rent man can't collect from anyone.
But if the Germans and French and even the Americans start experiencing real, rather that green shoot, growth and we in the UK don't.. well Demetrius' granny's repo man might decide to take what he can get before the rush starts.

Measured said...

Of course we will lose our AAA rating eventually. They are putting the writing on the wall for that. Even though Obama is being nice to us in the G8, do the US owe us a duty for legging us over? Still they have the silly Chinese to contend with.
Gordon's monetary injections will mean increasingly less in real terms. The outlook is grim, guys. Still only wallies listen to credit agencies, eh? :-)
What I wanted to point out is that Gordon will be long gone when it really hits the fan.

banned said...

That sounds like how I used to deal with my bank overdraft and sundry begging letters from financial institutions.

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