Aaaargh!

Polly\’s just suggested today that Dickie Murphy, Willy Hurron and Larry Elliott should be made directors of the newly nationalised banks. They\’ll sort it out, no problem.

Willy today.

The banks had accumulated trillions of pounds of assets essentially built on "securitisation" – bundling up streams of income, insuring them, and selling them as securities to investors – whose value had been imperilled not only by the crisis in property markets but by recession generally.

Umm, if you\’ve sold the securities to investors then you don\’t actually have an asset, do you?

And this guy is being recommended as a bank director?

18 thoughts on “Aaaargh!”

  1. What gets me is the line”It will also have to stimulate demand for the loans it wants the banks to make”.Why force the banks to make loans when there is no demand for them?Should n’t the above read ” It will have to dampen demand for loans that banks don’t want to make,especially for houses, which are declining rapidly in value.”?

  2. Well this is the essential problem, isn’t it? The spreading of risk required the banks to sell them to non-bank investors, and instead they seem to have sold much of them to each other.

  3. This is exactly the problem, replace the people who did understand the problem but couldn’t or wouldn’t do anything about it with members of the commentariat who don’t even get the basics. There is a reasonable case to be made that the reason Fannie and Freddie ended up so unstable is because of exactly this sort of directed lending

  4. “There is a reasonable case to be made that the reason Fannie and Freddie ended up so unstable is because of exactly this sort of directed lending”

    Well exactly. Cheered on by Obama and his Demotwat cronies. Who now have the chutzpah to blame it on Bush.

  5. after this, surely Polly must be sectioned. Anyone who has even paid the most cursory attention to his blog must have realised that Murphy is barking woof-woof mad.

  6. ” arbitrage, like short-selling is parasitic and damaging to the economic life of nations. Think back to the Asian currency crisis a decade ago, or the periodic attacks on Sterling. It is for this reason that I support a world currency to run alongside national currencies with fixed, periodically upgrabdable exchange rates overseen by a world central bank with operational indepedence. Don’t you think it bizarre that the very instrument for the measure of a nations values, is itself open to reevaluation by individual speculators? No wonder we lurch from bust to boom and back again.”

    http://conservativehome.blogs.com/centreright/2008/10/envy-is-worse-t.html?cid=134728791#comment-134728791

  7. Makara is a genius:

    arbitrage, like short-selling is parasitic and damaging to the economic life of nations.

    The economic life of nations is obviously enhanced by the same good being sold for two different prices in two different places.

    If for example, a hurricane in the Gulf of Mexico leads to gasoline price rises in the USA, a company shipping gasoline from Europe would actually be doing something bad?

  8. There is a reasonable case to be made that the reason Fannie and Freddie ended up so unstable is because of exactly this sort of directed lending

    Er, no, there isn’t.

    “Federal Reserve Board data show that:

    * More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

    * Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

    * Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

    The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday…”

    An utterly risible, fact-free US hard right smear, uncritically reproduced? How am I not surprised?

    BTW, who is “Willy Hurron”?

  9. Further, as pointed out above to resounding silence, if you buy MBS you certainly do have an asset; just not one that’s worth anything like what you paid for it! And the banks did indeed buy them.

    Also, they boasted constantly about the size of their mortgage books, even with securitisation…which implies they thought of them as being something like an asset.

    Further, if it isn’t because of the prospect of a huge writedown on their MBS portfolios, then why do they need to increase tier one capital? You’re essentially assuming the problem doesn’t exist.

  10. @ Alex they boasted constantly about the size of their mortgage books, even with securitisation…which implies they thought of them as being something like an asset.

    Er … from a bank’s point of view, a mortgage advance is an asset. It would be helpful if people actually understood something about banking before letting loose. Or indeed nationalising them.

    I did a nice summary on my blog.

  11. Here’s the boss of Citigroup giving numbers on how crap the MBS on his books are. Still all safely securitised, eh Tim?

    Seriously; if the banks had got rid of all the crap as securities, we wouldn’t be having a BANK crisis. We’d be having a hedge fund crisis, or a sovereign wealth fund crisis, or a SIV crisis or a pension fund crisis or an insurance crisis, because it would have been them who had the crappy assets.

    That it’s specifically *banks* who are in trouble, and the trouble is that they need to write down a lot of crappy assets but need to recapitalise before doing so or go bust en masse, implies….that they’ve got a ton of crappy mortgages on their books. I thang yew!

    Tim adds: Jamie Dimon is JP Morgan, not Citigroup. And yes, if they’d sold them, the problems wouldn’t be in the banks, the problem would be elsewhere. But that’s what we want: elsewhere isn’t systematically important. Pension funds, just as an example, don’t cause bank runs when they lose money. That’s actually what we want, not to have bank runs.

  12. Re Alex/Tim’s last exchange. Totally agreed, shifting the risk/losses to the ‘end user’ (the pension funds, hedge funds, SWF’s etc) would be/have been a good way of preventing the so called ‘financial crisis’.

    But it’s not too late!!!

    The mechanism is simple – assuming UK banks need about £37 bn capital (that seems about right to me), all banks have to do is convert a few percent of the bonds (i.e. £37 bn’s worth) that they issued to said pension funds etc. to share capital (a ‘debt-for-equity-swap) and hey presto! Problem solved!

    Even Conservative Home ran an article on the merits of this.

    http://conservativehome.blogs.com/platform/2008/10/mark-reckless-t.html

  13. So, Tim, your argument was that Will Hutton was an idiot for saying the banks had trillions of dollars of these assets. Which you now accept they do have.

    Further, you do realise that the only reason we’re having this problem is because they have them?

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