The Enron Domino Lesson: Brown Delusion (3)

Quite slowly, actually

The C@W trio doesn't normally sing in unison, but on the Brown Delusion we are for once very much ad idem.   To wrap up CU's and BQ's points that plenty more could have been done by Brown in the full year or more of precious time at his disposal before Lehmans et al went under in Sept 2008, and in case anyone thinks this is being wise long after the event, here is a 'told-you-so' extract from a C@W piece from 14 Feb of that year, entitled Lesson from Enron: How the Dominos Fall 

"Writing as someone who witnessed the Enron saga from *ahem* very close proximity, I learned an important lesson. Well several actually, but this one is to do with how the dominos fall, and the answer is – surprisingly slowly. 

Enron, the pre-eminent market-maker in the global energy sector, went under in October 2001. This brought down the vast and burgeoning ‘merchant energy’ sector, and after that the project finance sector; and at the time I assumed this would happen in weeks, if not days. Not a bit of it: the big energy merchants crashed at the rather leisurely rate of one per month, until the final bankruptcy (TXU Europe) a full year after Enron. Project finance hit its nadir the year after that. 

There isn’t space here to discuss why this happens in such slow motion. The point is that what we are currently seeing on the vastly greater theatre of world finance, indeed the global economy, needn’t be anything other than protracted agony. We can expect wave upon wave of Bad News, each time emanating from some new and unexpected quarter. IMHO, we’ve only just begun - Happy Valentines ! "

Yes, there's usually time to do something - presuming you know what to do.  But then, Brown was a genius - wasn't he ?

ND

Could the banks have been allowed to fail?

The Brown Delusion II.

CU asked 'what preparations did the government take having been given a full years warning of a possible crash to the banking system?'

The answer was - not many.

The Brown memoirs make clear that the government was completely surprised by all the banks debts..far in excess any prudent lender would have risked. The Daily Mail's McBride serialisation has Brown telling cowering bankers the state of their finances, what has gone wrong, where it went wrong, inaccuracies in their balance sheets and that he was the only man in the UK, probably the only man in the world, who could save the banking system. Without his powerful intervention the cash points would have failed and the mobs taken to the streets and looted their way to anarchy and revolution.

And there may even be a very large amount of truth in that. I agree with government intervention in the banks. The idea that the banks could have just been left to fail is supremely risky. 
If we recall Northern Rock only went from a banking failure to a banking crisis and panic because the government did not act swiftly enough. Early on in that train wreck the Brown government had refused to guarantee savers deposits properly so the inadequate £30k deposit guarantee scheme was in place. It was only after the £85,000 amount was agreed, with an implied, if not confirmed, 'unlimited' did the panic slow.

And as the 2008 banking crisis hit the government billions in bailouts did turn a potential Wall Street Crash and the possible end of capitalism into simply a long, long recession. Better that than the sort of riots Britain saw recently, and the vigilante response to lawbreakers. So the Brown government's immediate spend of some £500bn did save us from anarchy and only landed the nation with zombie banks that could continue on life support and a century worth of additional national debt.
A good result really. Better a 10%-20% reduction in living standards and house prices than mob rule and the guillotines. 

Ok..so that may not have happened. It didn't in Cyprus. There the banks were shut for a fortnight and the riots never began.  But who wants to take the risk? And HMG only had hours to sort out a rescue, according to Brown.

BUT - if as CU said, it wasn't hours, but months to plan something, why were there not better contingencies in place?

On a micro level, if the banks closed their doors, how could the government ensure the operation of the nation? The people aren't concerned with hedge funds. They want their money. 
The Cyprus situation showed that with EU consent, limited funds were made available. A daily withdraw limit, set very low - £100. Not great, but enough to prevent riots and enough to prevent bank runs. Not enough for an industrial nation to run its businesses and pay its bills, but enough to get by for a few weeks.

And in the UK there was even an alternative methods to the banks. For example, up until the Blair government the Post Office handled payments of most pensions and benefits. There were some 6 million customers. And it was largely a paper based system. A pension/benefits book. With the switch to a complicated application process for a payment card system DWP deliberately closed about 5 million Post Office accounts. But, with a bit of contingency planning there could have been a system in place to simply issue a card, open an account and receive benefits  that way. The government could have pumped their money through the 12,000 {2008} post office branches. A total of branches greater than all the banks combined. That sorts out mums, and pensioners and the disabled. Online would be dodgy. PO had no current or business bank accounts. But with a year to think about it, it could have been set up.

And, with some planning, the rest of us could have been sorted too. There were around 8,000 large Supermarkets in the UK in 2008. The biggest chains had top notch IT systems. They had lots of cash. They wanted to be banks anyway.
Governments could have guaranteed all our the savings, as they did. Then, over a short period, allowed the transfer of funds into either the new supermarket banks or the post office government owned bank.
{Post Office using the Northern Rock banking licence re-branded as National Bank Of UK or something. It was on the cards. Only Post offices involvement with Bank of Ireland on a 25 year agreement scuppered it in 2010. But if you're going to collapse banks..well..'BOI..here's an offer for your share...Take it or be nationalised, capiche?' } 

Paystation & Paypoint had around 10,000 outlets too. And would have been able to issue 'daily' use amounts of money as long as the government pumped some of that £500bn their way.

IF the government had set up, ready to go in emergency, quick transfer bank accounts. Business accounts Loan and deposit guarantees. Electronic money injected into the new banks,they may...may..just have been able to let the big banks fail, the shareholders take the hit and keep the revolution from Downing Street.
It would no way be easy. Certainly chaotic and panicky and fraught with great danger. But it may well have been cheaper, and possibly better for Brown once he had rescued the old banks not to continue with the business as usual model.

And all our mortgages ? - Hell..write them off! 
Recession over before its even begun!

Capitalism Works - Well Of Course! Up To A Point ...

Some good weekend reading here, from the DTel's Jeremy Warner.

This crisis has proved that capitalism works. The G8 protesters have little support – there’s no public appetite to blame the free market... on the whole they don’t seem to be fulminating about the free market system as such. It’s financial excess that is blamed for our travails, not market failure.

Discuss, as the exam rubric goes.  I'll chuck in a couple of thoughts.  First of all, I strongly agree with Warner's pivotal statement: "Capitalism is nothing if not supremely adaptable" - which trumps all your leftists and euro-dirigistes every time.  But actually, it isn't really just capitalism: it's the whole ruthless 'Anglo-Saxon' policy-making complex that au fond has a stronger grip on how markets actually work, and what the tools and levers are - and isn't afraid to use them.  (Bailing out banks isn't intrinsically capitalist at all).  Again, these are advantages often not shared by your lefties and dirigistas (although that Mario Draghi seems to know a thing or two).

Secondly, he has some sensible things to say about Anglo-Saxon labour-market flexibility - particularly his observation that this has virtually nothing to do with government intervention. At least, not direct intervention in the crisis: there were certainly interventions in the 1980's to diminish the powers of UK unions, for example.

The final point though, surely, is that it's not over yet - despite the recent rash of upbeat pronouncements, which seem to me to be premature in the extreme.  As Warner says, bailing out banks and printing money  "are creating massive distortions that may be piling up problems for the future." Oh yes indeed. 

ND

RBS: Still Shocking After All These Years

Now here's a thing. Jeff Skilling (Enron) is doing 24 years, with a $45 million fine, for the crime of making misleading statements about the company's activities and financial well-being.

And did you watch the Beeb programme on RBS tonight ? (if not, it's worth it - unless you lost a packet on the bastards and you value your TV screen.) We've known it all for years, of course, but the culpable stupidity is still quite a shocker.
The film relies heavily on actual recordings of shareholder meetings, analyst calls etc, so we can all form our own views. Just how many of those softly-spoken senior Scottish banking types made misleading statements that you heard ? On sub-prime, ABN-Amro ... right up until the crash, and then some - condemned out of their own mouths.

Just sayin' ...

ND

The Banks are Lobbying Again

The Telegraph makes me laugh. Just when it looks as though it has become a wholly-owned subsidiary of big interests like Centrica or EDF they publish something like this, having a good old prod at the banks.

Yes folks, the banks are at it - again - this time briefing against Mervyn King, who'd ever have thought it eh ?

Seems they don't wish to be split up, but Liam Halligan disagrees ! Blimey: let's hope he cleared his piece of lèse majesté with the Telegraph's marketing people first. It's gonna get interesting when the Independent Commission on Banking gets into its stride.

ND

Fun and Games at the Banking Commission

There were early signs that the Independent Commission on Banking has great potential, when Clare Spottiswoode mouthed off before Xmas. And yesterday, this from the ICB Chairman Sir John Vickers

"Systemically important institutions now have an implicit state guarantee for risk taking activities, particularly those related to and/or inseparable from retail banking. This distortion, which is also a distortion to competition with other institutions, should be neutralized or contained."

Go, Vickers ! By the lights of the usual weasel-wording we are accustomed to, this is plain speaking of the highest order and, in theory, just what Osborne set them on for. Likely to prove a hot potato, though, as the months roll on. Can Sir John and his gang be 'encouraged' to be a bit more flexible and diplomatic ?

Hopefully not. Public life does not have many honours left to dangle in front of a man who is already Warden of All Souls. He is also delightfully academic: here's another extract from yesterday's speech -

"Then a necessary condition for U to fail is that R or I fails, but this is not a sufficient condition unless R and I both fail if either does"

What a man ! Now academics as a breed are hardly incorruptible, but the better of them are pretty damned obdurate. I look forward to many months of fun while Sir John, La Spotti, Martin Wolf et al go about their vital business. Let's see what neutralized or contained really means.

ND

Banks' Argument Cuts Both Ways

A couple of weeks ago we spotted some fairly concerted bank lobbying, which gives the appearance they feel that with a bit of luck they may get away scot-free. Pesto reckons developments on Basel III gives credence to this, and the soi-disant stress tests didn't exactly prove stressful. Osborne heckles a bit from the sidelines on lending and bonuses, but his Bank Levy didn't cause them much distress.

The banks have come up with a one-liner that serves for several purposes: don't make us hold more capital against risk, because then we won't be able to - indeed we can't - provide the lending you want, to get the economy going. Woe, and thrice woe to your recovery !

They and their proxies need to tread carefully on this because, instead of being taken as an argument for backing down on higher risk-capitalisation requirements, it can be flipped on its head and given as a reason for breaking up the banks; so that retail banks would no longer be allowed to run speculative trading operations. CU’s insider told him this was to be Coalition policy, and the Government's Programme states:

“we will establish an independent commission to investigate the complex issue of separating retail and investment banking”

Pure trading-houses can be allowed to be as under-capitalised as they (or their stakeholders and counterparties) feel they can get away with - caveat emptor. And the debate on capitalisation for retail banks boils down primarily (though not entirely) to credit risk, an altogether narrower issue than when speculative exposure to general market risk is part of the mix.

All the lobbying on this strongly suggests there is cross-subsidy going on between retail and spec operations, the prop-trading getting a free ride on the capital of the retail ops. Too much hubris and this particular free lunch may be taken away when the commission reports next year. If there is one thing that will keep the less-than-ebullient Vince Cable in his post, it is to have the chance to be the one to do just this.

ND

The new Government asset bubble

A keen eyed commenter on the previous thread has pointed out this article in the Telegraph.

All the comment in the article is that this is a positive thing to help people out, as if mortgage lending were some kind of social service rather than a straight commercial agreement.

We may feel for people stuck in negative equity, but they were all warned not to buy houses at the top of the market on unsustainable borrowing rates. Caveat Emptor.

What this is proof of is the theme I have run since last weeks scoop (I notice none of the MSM have taken it up, Guido has stolen all their focus). The Banks are being told to lend by the Government. They have targets to hit. This is one way of doing it, not only by getting more money into the market but also pleasing the socialist government by keeping the unable to pay in their homes.

The second huge issue here is that this sort of behaviour will affect property prices again. It will contribute to prices stabilising at too higher rate...if it works. If it does not then these 120% LTV's will soon be 150%+ LTV's - at that rate why would you not just had back the keys, what is the point after all.

We all need to keep a look out for how the mendacious government interference is going to affect us all and the markets they are interfering with. The law of unintended consequences is the clear here in the statue book of UK plc.

I can't wait to see what Alice thinks of it....