Greensill - and Other Goings-On in the City

It is much to be regretted that CU finds himself unable to write more about Greensill** because it is a story rather up our street.  The DTel has a fairly good piece here, offering the common-sense approach to risk management in circumstances where some newcomer seems to be claiming to have discovered the philosopher's stone in a basic area like supply-chain finance.  Is this likely?  No, it isn't - even if he is fronted by Call-Me-Dave.  (Blair doesn't have the monopoly on ex-PM avarice: and let's see how the financial exploits of Boy Genius stack up ten years from now.)   Not rocket-science at all.

Just once in a while, something new(ish) really does crop up.  Securitisation was one helluva smart innovation in its time, and those quickest onboard the train (Guy Hands / Nomura / Terra Firma and, errrr, Enron) did some very good, sound business in the early days.  By the time we get to sub-prime mortgages however, the whole thing has spiralled right out of control, all rigour and discipline gone.

Which bring me to the next puzzle: the remarkable rise of the brothers Issa and their petrol forecourt 'revolution'.  I understand clearly enough how high-throughput, well-located petrol stations might have an eminently financeable profile - better even than Guy Hands' pubs, maybe.  (I say "maybe" because the margins are notoriously tight, too.) 

What I don't understand is how this rather obvious attraction could have been missed by the pretty sharp operators of big supermarkets, oil companies etc.  "Retail is detail", and they don't miss much.  So if these assets were already sitting on the balance sheets of big, smart players, (a) they would (surely?) already have been effectively leveraged to the full already, even if as part of overall corporate finance; and (b) couldn't be prised away into new ownership at anything other than a full price. 

So who've been the suckers here?  All insights gladly received.

ND

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** "I can't write at length about Greensill unfortunately, too much real life conflict. Suffice to say, he is a right twat who has met a fair ending. How people decided such an arrogant bore was worth backing to the tune of billions is beyond me"  - CU, here (BTL)

"Zero Carbon" and Finance

Anything as big as the "zero carbon" thing is going to have impacts on all fronts - which is rather the point, of course.  And while some firms and banks are revelling in the Keynsian decarbonisation / adaptation bonanza (as we've discussed here several times) there are plenty of negatives to be considered - and not just for German diesel manufacturers.  If we take the underlying phenomenon at face value, this rather odd article reckons climate change itself will bring about a major recession, or maybe even "the next financial meltdown".  Its reasoning isn't too subtle however ("natural disasters pose a threat to businesses"): and being RT it may well have misunderstood the publication it is summarising.  

I would, however, be interested to hear from the insurance industry - or maybe I've missed it (anyone got a good link?) - about how 2019-2020 weather etc ranks in their scale of problematic pay-outs, and how many more such years they can handle before rates really start to rise.  That could be an effective brake on business development, and once again will cause governments to be leaned upon to socialise the risks, which is becoming a habit - often a lazy habit - across several sectors of late.

My main interest in this area is rather different, however.  When engaging with financiers on big projects, I've always been struck by how much weight they put on the tail-end of a projected cashflow stream.  In my industry, 15-year finance is pretty much the norm for many classes of big asset, with payback targetted anywhere between 5-10 years.  When I first became involved, I was gobsmacked to find the banks demanding projections of project revenues out 40 years!  which only makes sense at all for a few assets - most will be finished at around the 25-year mark.  OK, a very long-lived asset might be seeking the very cheapest finance, and hence the discount rates being used will be very low ... but 40 years?!

And now, most western governments are positively targetting, and usually "legislating" (FWIW) for epic structural transformations a mere 10-15 years into the future, with further disruptions all the way to 2050.  Safe to say, there's virtually no asset, even a nuke or a pipeline with a putative 60 year life, for which serious projections could be made even as far as the magical year 2050.  And we don't even need to opine on whether this makes sense, or will succeeed.  They're doing it: that's all we need to know.

There are only so may ways this can go.

(1) the banks can admit their prior interest in the tail-years' cashflow was primarily academic, or just for icing the cake, either of which they can forgo if push comes to shove.

(2) with bugger-all visibility of business dynamics beyond 2035, a whole heap of potential projects (particularly "conventional energy") will find their cost of capital rising noticeably, all the way up to prohibitive; and a raft of these projects will simply not fly any more (just as many existing assets will become stranded by related phenomena).

(3) everyone will gang up on governments, demanding (yes, you guessed) the problem be socialised, probably with governments standing directly behind the debt servicing (as the nuke boys have been demanding for years).  Everyone will be wanting this privilege for everything that moves, most particularly the ever-widening category of what counts as "green" investment which, as we've pointed out several times in recent months, now encompasses "adaptation" projects (and for leftists, of course, includes projects that are part of the "just transition", = anything they fancy with plenty of unionised jobs involved, see the Labour 2019 manifesto passim).

This whole thing is of course entirely a self-fulfilling problem.  Doesn't make it any the less real.  You can see why the leftists and nationalisers have their tails up, just as do the putative "war profiteers" among the banks and the engineering companies for slightly different reasons.  (And the NGOs, the con artists, the kleptocrats, and doubtless organised criminals too.)  They can't all be right.  Indeed, as we've said before, they will be fighting it out in the trenches for the rightness of their own, very partial vision of this future.  And their hands on the pension funds ...

ND

A Whole New Field of Wicked Capitalism

Investing in lawsuits !  Here's a great piece in the NY Times on the subject:

This new form of lawsuit funding is called litigation finance. It lies at the crossroads of two Anglo-American tendencies. The first is our litigious side, in which we celebrate our equality before the law by dragging those who have wronged us before a judge. The second is our ingenious mercantilism, as demonstrated by our penchant for turning everything from church raffles to mortgages into marketable securities to be chopped up, bundled and resold. Like the celebrity bonds backed by royalties and popularized by David Bowie during the 1990s, litigation finance represents the expansion of securitization into hitherto virgin territory.

It caught my eye because a mate of mine, the excellent John Sherriff, was a pioneer in this field.  ('Was', because he died earlier this year, an untimely loss.  You can still get his fine book Lucky and Good, which covers this and many other entertaining, intelligent and useful things besides.)

OK, so relatively new, then; except that (apparently)

litigation finance actually has its roots in antiquity. According to Max Radin, a historian of ancient city-states, members of Athenian political clubs would back each other in lawsuits against their rivals. Apollodorus, a wealthy banker’s son, bought shares of lawsuits and hired professional orators — some of the earliest lawyers in Western history — to write his court speeches ... In medieval England, litigants could hire ‘‘champions’’ to represent them in ‘‘trial by battle.’’ By the late 13th century, these strongmen were being compared to prostitutes, and their prevalence hastened the movement of dispute resolution to the courtroom. During the Middle Ages, this concept of ‘‘champerty’’ — assisting another person’s lawsuit in exchange for a share of the proceeds — emerged as part of the larger ecclesiastical taboo against usury.

Yup, nothing new under the sun.

ND

UK Sharia Bonds - What's That All About?

As part of the government's blitz of 'look what we're doing' announcements, we now have "Britain to become first non-Muslim country to launch sharia bond: David Cameron to unveil £200m Sukuk".  So what's going on here ?


a.  Political Significance

A couple of weeks ago I posted about how the UK is kow-towing to the Chinese as part of our economic escape plan.

This is a particularly acute risk for the UK ... In our semi-detatched euro-positioning, our vulnerability to having the City isolated by jealous continental and American financial authorities, and our commendable centuries-old willingness to roam the high seas, we will always be inclined to 'trade our way out of trouble'. Now true commercial trade is a great thing and would indeed be the ideal way forward. But increasingly what we see is a baser trade: the prostituting of our institutions to the whim of Russian and Chinese wealth. If they want to lavish their money on our libel courts or Mayfair shops, that's one thing. But it won't be ending there. Today we see the first of the mega-bargains our desperate UK politicians will enter in order to engineer short- and medium-term relief from our woes. Faustian is just one way to describe it.

There, I was writing about the nuclear deal, but of course that was part of Osborne's Sino-package that included a putatively huge and strategic banking 'n' finance deal.  These are the kind of moves that can leave green-eyed Frankfurt and New York grasping vainly at thin air, reinforcing London as "the undisputed capital of the world".  At least, that's how the dream story-line runs.  Brown hoped to do the same, but Osborne is acting more decisively.

The sharia leg of this burgeoning development causes nervous murmurs on the home political front - see this piece at ConHome.  Should it ?  Given that in technical terms the distinguishing  features of sharia finance are, to the unbeliever, quirky to the point of quaint (see below), objectively the whole thing is a bit like the 'ethical investment' industry: why not let anyone who wishes to cut themselves off from the full range products, do so if they choose?

But obviously there is a heavyweight cultural overlay to this, and maybe objectively speaking is not enough.  C@W readers know that I am 'relaxed' about all sorts of 'alien' business influences and ownerships in the UK.  To me it is part and parcel of what I take to be a very traditional British openness to trade and cultural curiosity (which, by the way, is only one strand of British tradition as I know full well).

But I am not remotely relaxed about the rule of UK law and for me there is a simple bottom line.  Provided all this UK sharia stuff is subject to the same banking regs as everything else (and these are enforced with the full force of law, see C@W passim), let's go for the money and leave Frankfurt and New York fuming.  This proviso is not trivial, and not just because enforcement of banking regs had become a sick joke.  It must surely be the case that hawala transfers are routinely used to dodge western banking regulations (not to mention money laundering); and bringing any such system into mainstream scrutiny must be a highly desirable goal of policy - nay, even an imperialistic power-grab!

I am guessing C@W readers will have the usual interesting range of views - so have at it in the comments! 

b.  Financial Aspects

Sharia finance properly analysed is a subset of general Finance-with-a-capital-f, delineated by some strict rules around interest-payments which must not feature in the story of what A pays to B.  Recalling the informal definition of a Swap - the exchange of cash flows between consenting adults - most sharia-compliant deals are what are known in the real world as total return swaps (TRS), and there is nothing scary or alien about them per se. Of course, they are a bit more complicated than plain vanilla loans etc - but so what?  Lots of financial instruments are.

Far from scary, putting aside the political stuff I'd say the whole thing is pretty amusing.  The restrictions that make these deals sharia-compliant remind one of nothing so much as the crazy, tortuous tax regulations which make certain kinds of (e.g.) UK film investments qualify for attractive tax breaks.  In other words, they are an adventure-playground for shyster tax-lawyers, and sharia will be just the same**.  The arguments over what counts as what; the twisted convolutions required to label interest payments as anything but interest, are hair-splitting sophistry - literally theological.  There already is a service industry around this, with "Islamic scholars" getting good money for certifying individual deals.  The People of the Book know all about this stuff, too, and what a gravy-train for the City it promises to be !

ND 
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** Just as with 'ethical investments', one imagines there are disappointments ahead for those who place great store by what they are being sold truly complying with the advertised principles.  I suppose that in some countries, anyone caught playing fast and loose with the sharia interest rules might have their parts cut off  ... a risk that the City boys will need to factor in for themselves, eh? 

Sherlock Holmes and the G20 Adventure

As I entered the Great Detective's rooms at 221B Baker Street I called out "Holmes! Have you heard? The G-20 proclamation. It is a very great triumph for England, Europe and the rest of the civilised world."

Sherlock Holmes's quick eye took in the Daily Mail clasped in my hand. "Thankyou Watson. But your haste was unnecessary. I was aware of the communique, and the celebrated success of the G-20 some time ago." I glanced across to the 42" Plasma screen and Sky Cinema system which I had purchased as a Yuletide gift for Holmes and which in the intervening four months I had rarely seen switched on. Naturally he caught my gaze. He stood hurriedly, placing his breakfast napkin upon the tabletop. "Not on here, dear friend," he smiled, lightly brushing the flat screen. " Although this remarkable device allowed me to deduce certain features of this weeks events."

"Then how did you know of the results of the leaders summit in advance? It was a closely guarded secret. The BBC have only just announced the success of the mission. One trillion dollars of new finance," I asked.
Holmes sat in his favourite chair, smiled his thin smile and puffed his pipe. "Elementary my dear Watson," and he began his tale. "Firstly,there is no more money. Much of the $250bn in trade finance will come from existing programmes of export guarantees in rich countries, with only $50bn for poor countries. Therefore the sums will be a combination of previous amounts, already announced, or smoke and mirrors illusionist tricks. Remember the 'Strange Case of the 10p Tax Fraud?' This is similar. The Japanese, for example, announced their $100Bn in February. The extra $250BN for the IMF is coming from unknown lenders, as is the new so called Special Drawing Rights worth $250BN. That's $600 BN dollars of the $1 Trillion already. I dare say there are some sundry sums available to draw upon to complete the grand sounding communique. However the real reason that I already knew the financial term of the historic agreement was that the Germans announced it last week."

"Oh, I see," I said somewhat disappointedly. Holmes came to my side.
"But Watson, I did use your visual information device just today.I turned on the screen and received fifteen seconds of intense sensory data. By the exaggerated heave of the young woman announcer's breasts, I knew that either Alan Shearer had been made Manager of Newcastle United Soccer club or that President Obama had arrived in the country. Or, from her breathlessness, possibly both. From the image of an incoherent banner with 'Save Climate not Bankers' I knew that a protest march of disparate Eco-groups would descend upon the heart of the financial district. From a glimpse of Nick Robinson's head, I deduced at once that the Prime Minister had made an important announcement. What with the panic still infecting the markets and the PM's current low standing in the polls he would only make a very positive broadcast. A fleeting view of Her Majesty, led me to concluded the summit had been completed and a new record headline figure of finance had been agreed to save the world."

I looked a little deflated. It had all sounded so magical on Sky News. But Holmes cheered me.
"Come Watson. It could never have been any other way. Now let us turn to more important matters. Chancellor Darling has called upon us to try to find the missing billions from the Treasury accounts. But first, a quick game of Guitar Hero World Tour on this wonderful X Box 360*. Then we must hurry along to 11 Downing Street. The poor man is beside himself . His budget is four days overdue already. ...Turn up the volume and take the Bass Watson! The games a foot!"

$1 trillion bail-out; Badger cheers!

Robert Peston's reaction to the news that the US government is to bail out mortgage companies Fannie Mae and Freddie Mac by saying that our little problems with Northern Rock pale by comparison.

For all the detail and comment you could want on this story see Barry's blog here.

Sadly the NR comparison is not quite true. NR never had oblique Government guarantees, NR has a worse looking portfolio of loans than either of these two companies. The US estimate is that if 10% of mortgages for bad then the US taxpayer could be $100 billion in the hole. However, we have already 'invested' £3 billion in NR and if 10% of the £40 billion loans go bad then we are on the hook for £7 billion loss. Our economy is 10x smaller than the US and we also have a current exchange rate of $1.75 to the pound.

Therefore US losses estimated at $100 billion / 10 (economic capacity) x exchange rate 1.75 = £5.7 billion.

Northern Rock losses estimated at £7 billion.

Great performance by our Chancellor eh?

My two cents: the markets may rise but this bail out surely will cause foreign investors to think twice about the US. The Dollar rally may continue for a bit, but it seems that the US has decided to inflate its way out of the credit crunch for sure this time.

UK Politics: Tory economic policies

Quick take on this today due to work interfering somewhat with blogging. Sadly I am no Dizzy, Croydonian or Iain able to swan off to the conference for a few days...

Five main ideas stick out:



Inheritance tax threshold to £1 million; a good idea and despite what the Labour party say, it is clear that many more people in the future will be hit by this. Particularly in the South East. I don't see how this helps win the midlands and Northern marginals, but than I am no political strategist.

Moving the Stamp duty threshold to £250,000 for first time buyers; This is also a good idea, a few months ago I would have been critical as it would over-heat the housing market further, whereas this idea may now stop a real property price crash in the current challenging circumstances.

Non-Domicile's to pay £25,000; Where do I sign up to only pay £25k a year in tax? It is a good one-off idea but this is one where no one can be sure of the real amount of money this will raise. It won't put the Non-Doms off living here (cough, tested this idea on one already today so I have clearly tested this as fully as the Tories or Labour have...).

Green tax on aircraft; This idea is just a pure revenue grab like Gordon Brown's APD tax rise. People might swallow this but I hate the concept of stealth taxes and it is disappointing to see it from the Conservatives.

Finally, George Osborne announced that Tory spending plans overall would remain the same as Labour plans for the first 3 years. Oh, yeah? The economy will slow down int he next three years and the Government will receive a lot less tax receipts - so on current spending we are heading for massive borrowing or service cuts. This announcement is a hostage to fortune. One radical way to combat the sow down would be huge tax cuts across the board in the manner of George Bush.

That would be a better and braver plan.

What do you think and what one policy would you have suggested