Finance

Little Willy Hutton

He\’s good for a laugh this morning, that\’s for sure:

Thus the collapse of the American housing market, the explosive growth of American home repossessions and the discovery that \’structured investment vehicles\’ (SIVs), the toxic newfangled financial instruments that own as much as $350bn of valueless mortgages, are not American problems.

"Valueless"? Certainly, it\’s true, that people are having a hard time putting value upon them, which is the cause of our problems, but that\’s not to say that they are valueless, in the sense of worth nothing. Even the most pessimistic forecasts assume that the majority of those loans will continue to be paid, all the way to completion of the mortgage. Of those that will default, there migh be renegotiations, there might be foreclosures, the house then passing into hte ownership of the lender which they then sell again. Sure, there will be losses in that whole process but no one at all thinks that those $350 billion of loans are "valueless" ….except our foremost financial commentator, Little Willy Hutton, of course.

What should have happened, of course, is that when the Bank of England found that it could not find a secret buyer for Northern Rock in the summer, it should have done what it did in the 1974 secondary banking crisis. It should have taken Northern Rock into the Bank of England\’s ownership. Individual depositors and the City institutions alike would have been quickly reassured, and when the crisis passed the bank could have been sold back into the private sector.

But in 2007, the Ridley view of how to run a bank is also the authorities\’ view of how to respond to a crisis. There is a prohibition on even short-term public ownership. In a free-market fundamentalist world, this, like regulation, is regarded as wrong. Instead, the most expensive and riskier route has been taken so that Northern Rock remains part of the problem rather than the solution.

And that is also hilarious. For it doesn\’t mention why the Bank of England didn\’t do something (possibly) sensible like that. Because it is in fact no longer responsible for regulating the exposures of individual banks. Still responsible for the markets as a whole, true, but not the individual banks. That\’s the responsibility of the FSA. And, err, who set up this system of greater (note, greater, not lesser, at least on paper) regulation? Why, that would be Gordon Brown wouldn\’t it?

But of couse no criticism of the Great Man can be allowed to drip from Hutton\’s pen now, can it?

Good News From Citigroup

I have a feeling that I might be in a minority here, possibly even a minority of one, but this looks to me to be good news:

Fears of more turmoil hitting global stock markets grew last night after it emerged that Citigroup, the world’s biggest bank, has called an emergency board meeting for this weekend amid fears of escalating bad debts.

There were concerns in New York that the Citigroup board meeting had been called to discuss the possibility of the bank writing off an increasing amount of bad debt. This could seriously hit its profits.

Citigroup’s shares have already slumped 25 per cent over the past three weeks after the bank wrote off $5·9 billion (£2·8 billion) worth of bad debts.

Much of this originally arose in the US sub-prime mortgage market, which is currently in crisis as a large number of borrowers with poor credit histories have defaulted on their repayments.

Just to lay out why I think it\’s good news. OK, so we\’ve got the sub-prime mess. It\’s not just that though, the extension of loans that are now turning sour. The way that they were sliced and diced meant that the risks were spread (good) but that no one really knows where the risk is now (bad). This has led to all sorts of attempts to cordon off such SIVs and so on from the regular markets: one was being proposed by Citigroup indeed. Throw it all into one huge fund (the Superconduit) and hope the problem goes away.

However, all of these attempts suffer from one basic problem. Someone, somewhere out there, has lost a tonne of money on investing in the tranches and slices of these sub-prime mortgages. Until that loss is crystallised, made known, we\’ll still have the fear and uncertainty in the markets. And it\’s that fear and uncertainty which we actually fear a great deal more than we do the losses.

So who is it that "should" lose the money? Well, it "should" be the shareholders in the banks that leant it actually. And if this is what Citigroup is going to do, write down the debt, take the loss, then that\’s actually what we want. The loss is crystalised, we know where it is, and we can get back to having functional credit markets again. The right people will have lost money as well.

It\’s almost as if the larger the write down the better it is in the larger scheme of things.

How To Haggle

There\’s negotiation and then there\’s negotiation:

But the potential rewards are enormous and anyone doubting the power of haggling should take inspiration from the story of Mohammed Shafiq, an Asian off-licence owner, who, when faced a couple of years ago with a raider wielding a 12in knife and a demand for £500, remarked: “I can’t afford that; how about £10 and a drink?”

According to reports, the disoriented raider responded by saying he would accept £50 and as Mr Shafiq considered the figure, Mrs Shafiq sneaked up and whacked the robber with a rolling pin. Mr Shafiq then clubbed him over the head with a brass-handled walking stick before calling the police, the exchange having cost him not a single penny. That’s what I call a deal.

Financial Ignorance

Oh dear, oh dear oh dear:

But shorting Northern Rock destroys a company, puts people out of work and annihilates the investments of citizens and pension funds.

The shorting of stock does not destroy a company (not unless they\’ve been putting up stock for loans to it, at least). So what on earth is he talking about?

Abandoning the Dollar

Doom and gloom announced as two countries announce that they are diversifying their reserves out of the US dollar. It\’s not so much the two countries (Qatar and Vietnam) as what that might mean for other larger ones.

However, as Dean Baker points out, this isn\’t a bad thing at all: it\’s actually an excellent one.

The dollar is declining for a simple reason — it was over-valued. The United States had a trade deficit that exceeded 6 percent of GDP at its peak. This was not sustainable, as just about all economists recognized. There are two ways to reduce a trade deficit: a recession or a fall in the dollar.

Unfortunately a falling currency doesn\’t immediately cut a trade deficit: there\’s something called J-curves which can have the effect of increasing it in the short term (prices are sticky, see). But with a high trade deficit yes, a falling $ is what we would actually like to see, not something to be feared (unless you are, like me, someone who gets paid in $ and spends in € but then the world economy isn\’t there to please me).

No, Not Quite

Let\’s rearrange this so that it makes sense shall we?

Lenders have put up the cost of taking out a personal loan by up to four per cent as they start to pass on the cost of the credit crunch.

Lenders have started to charge properly for loans after years of underpricing them relative to the risks of default: the thing that started the credit crunch.

Vince Cable on Northern Rock

The panic has been stabilised for the moment by the de facto nationalisation of Northern Rock and the promise to guarantee the value of deposits. It will be important to ensure that this guarantee does not become a crooks\’ charter in which any dodgy bank will be able to lure in depositors with attractive interest rates, expand rapidly using Northern Rock\’s business model and then call in the Government when it hits trouble.

Well, yes, that\’s the moral hazard part of it all, isn\’t it. By making xertain behaviours less risky you make them more likely.

The FSA also has much to answer for. It beggars belief that it failed to see any connection between Northern Rock\’s reliance on financial markets, rather than customers\’ deposits, and its frantic expansion into new mortgage lending with ridiculous multiples of incomes and loan-to-value ratios.

Well, those loans haven\’t actually gone wrong (yet!) so we\’ve no evidence that they were a bad idea. But yes, the FSA does seem to have been asleep at the wheel. They\’ve only been responsible since 2004 mind, so it might be that the system cooked up by El Gordo wasn\’t actually fit for purpose.

But the Government should not be allowed off the hook. Eddie George warned what could happen if the Bank\’s responsibility for systemic stability was separated from day-to-day banking supervision. Gordon Brown ignored him. When I asked who was responsible for the dangerous bubble in the housing market against which new mortgages are secured, I was told a tripartite committee. No one was in charge.

Quite so. This little dig is also worth savouring:

David Cameron\’s claim to have anticipated the personal debt problem didn\’t persuade even his supporters. Economic policy is not a branch of the public relations industry.

 

Northern Rock: Still Lending

And still lending at what seem to be (at least to me) dangerous multiples of income:

Northern Rock stands accused of “reckless” lending after it emerged this weekend that the beleaguered bank is still offering mortgages of six times salary to potential borrowers.

Despite provoking the worst banking crisis for decades, the bank last week offered a reporter posing as a first-time buyer a £180,000 mortgage even though he had a salary of only £30,000.

The loan was at least £30,000 more than other leading lenders were prepared to offer. Repayments for the loan would have accounted for more than 60% of the fictional buyer’s take-home salary.

It is, of course, the taxpayer that is extending that loan. A good use of your money, don\’t you think?