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More Willy

Dear me, he really doesn\’t understand, does he?

For example, there are some $554tn worth of so-called interest rate derivative contracts whose price is linked to Libor – manufactured products whose alleged purpose is to hedge the risk of unexpected interest rate changes in a world of floating exchange rates and free capital movements.

In fact, there is no way that these instruments can insure against system-wide movements. Some bank has to lose by being the sucker paying out, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer. Derivatives should rather be seen as economically purposeless constructs whose ease of manipulation in opaque markets makes the investment banks rich – while the rest of us take our chances.

Facepalm.

Derivatives are indeed zero sum for the participants in the market. But as a whole they shift risk. That is their purpose and function. So is Ooour Woolly now saying that risk shifting is economically purposeless? Let\’s ban life insurance then, eh? Oh, and fire, house and flood insurance. And farmers should bear the risks of crop prices, bakers of input prices, no one should be allowed to offload that risk onto the speculators through the futures markets.

Because, you know, risk shifting is economically purposeless.

Snigger:

That is only a start. The banks and the British Bankers\’ Association can no longer be allowed to set Libor: this task must now be done by the Financial Conduct Authority that is to succeed the FSA.

Market interest rates are going to be set by the government, eh? No, no, I cannot see any form of moral hazard in that at all, Nope, not a scrap.

London must also fall into line with international practice and require all derivative trades in the over-the-counter market to post appropriate collateral.

Perhaps one of yuou more financially aware readers coud fill in here. I\’m aware of the way that with a CDS someone with an AAA rating did not have to post collateral (AIG being the poster chid for the subsequent problems) but I\’m unaware that anyone else in the markets, or anyone at all now, does not have to post collateral on a trade.

What is it that Willy has got mixed up here?

I would go further and require all financial instruments to be traded in organised exchanges.

Tee Hee. And what happens when someone wants a bespoke contract? Is an OTC contract to be illegal, meaning that one simply cannot transfer risks for something that is unusual?

And for the coup de grace:

As far as possible, the underlying causes of the over-inflated size of finance should be addressed. If there were less exchange and interest rate volatility, there would be less underlying demand for instruments to protect against it. This is, of course, the case for a system of managed exchange rates and a European single currency.

Instead of deifying floating exchange rates as the magic bullet for all economic ills – the default position of the British economic establishment across the political spectrum — floating rates should be seen as another driver of our over-inflated financial sector.

Join the euro and we won\’t need a financial sector!

A trivially small part of The City concerns itself with sterling, either in FX or interest rates. However, London is a place where much of the hedging across time of euro interest rates takes place. And $/€ FX as well. Neither of these woud be affected in the slightest is the UK was inside the eurozone.

I\’m sorry, but Hutton is one of two things here.

1) Deeply ignorant of the very system which he seeks to reform.

2) Lying through his teeth about how ignorant he is.

Either way, we really shouldn\’t be taking his prescriptions seriously.

Dear God Willy Hutton: Can\’t you even get Libor right?

It beggars belief that the top of Barclays did not know what measures it had to take to pull through. It had to lie about the rates it was paying to borrow money.

This came easily because the practice had become habitual. The London interbank offer rate is set each day at 11am in all the key currencies lent and borrowed in London. Each major bank submits the interest rate it is paying to the British Bankers\’ Association and the average becomes the benchmark rate for most of the world\’s loans and financial contracts.

No, it is not the rate at which they are borrowing. It is the rate at which, in their opinion, they woud be abe to borrow in size.

You might think that this is just another titbit from one famed for pendantry but this is important. It simply is not true that a bank such as Barcays is trying to borrow today, in all currencies and all maturities that make up the various Libors. Thus the system can opny be opinions about what rates woud be if they tried to.

Sure, the Euribor system of others determining what rates they woud end at seems better, but that sti faces the same probem. It\’s an opinion.

Now, did they ie about these opinions? Oh yes, they most certainly did. But they were not, as you allege, borrowing at one rate and reporting another. They were reporting an opinion at which they woud be abe to borrow in size.

Standard Chartered\’s London costs

Not quite, not really:

Standard Chartered is taking a $700m annual hit on its bottom line as a result of being based in the UK, it can be disclosed.

The Asian-focused bank, which is headquartered in London, is booking the hit to profits as the result of the bank levy, the cost of funding and other regulatory costs.

The bank evy is a little different from the other things. The bank levy is the cost of purchasing government deposit insurance on those deposits (to the bank, liabiities) which are not covered by other schemes. This, at least presumaby, has vaue to the bank as it reduces the cost of the bank of those funds.

I don\’t doubt that there are stupid costs which have been loaded onto them for being UK domiciled but the banking levy is rather over egging that particular pudding.

Explaining Vodafone taxes once again

I hadn\’t realised this but it does make perfect sense:

Vodafone has been heavily criticised for its tax arrangements after it paid no UK corporation tax last year, despite being headquartered in Newbury, Berks. It paid £700m in payroll and other taxes, but wrote its corporation tax contribution off against capital expenditure of £575m, as well part of the £5.96bn it paid for spectrum in 2000.

That £6 billion is obviously a business expense, it buys spectrum for 15 years and thus will, one assumes, be written off over 15 years.

That\’s a £400 million a year write off against UK operating profits, no? Add that to the £575 million (I think) capital investment in the UK network last year and one can see how there\’s no tax bill on £402 million of adjusted profits.

Which leads me to ponder: who has Vodafone pissed off to be getting this much attention? There\’s definitely something of a campaign against the company. A series of allegations of tax dodging none of which have actually come to anything once all the details are known.

Some of these allegations (all of them?) can be traced back to Richard Brooks at Private Eye. So what happened? Did someone at Vodafone screw his pooch? Nick his mistress? Not respect his authoritah when he was a tax inspector?

I can definitely hear the sound of knives being sharpened: but why?

It had to happen with microfinance, didn\’t it?

A book due to be published this week claims that banks, including Deutsche, Citigroup and Standard Chartered, are placing cash into funds that make millions from charging up to 200pc interest on small loans.

So if microfinance does indeed alleviate poverty then we\’d like lots of people sending their money in to finance microfinance. If they are profiting from that then all well and good: who gives a shit about profits as long as the poverty is being alleviated, eh?

If microfinance isn\’t alleviating poverty then of course we need to rethink the entire process.

But here we\’ve a third view: yes, poverty is being alleviated but it\’s immoral that anyone should profit out of poverty being alleviated. Which is …..odd.

The background here is that the banks are not doing the doorstep lending themselves. Rather, the microfinance institutions are doing that. But they\’re looking for more cash so that they can scale their activities. There are two logical sources: grants, charitable gifts and so on, or good old straight access to the private financial markets. Those latter are obviously larger, meaning that if they can meet the standards then they can scale more quickly and more poverty can be alleviated faster.

What the banks are doing is looking at the insitution, the microlender, as a whole. Is it worth making an interbank loan, subscribing to a bond issue? This would be charging something close to a market interest rate. I don\’t know what they are charging but it\’s pretty typical large bank lending to small bank sort of stuff.

And this is what we would like to be happening of course. If microfinance is successful then we\’d like it to expand and expansion is best funded by access to private capital.

And yet here we\’ve someone complaining about precisely that.

Go figure, hunh?

Telegraph Obits Dept: Must try harder

Born in Poland on October 15, 1915, Shamir emigrated to British-ruled Palestine in 1935 after his family perished in the Nazi Holocaust, and the diminutive but pugnacious immigrant soon joined Begin\’s Irgun Zionist militia.

No.

He emigrated to Palestine in that year, yes. The Holocaust was indeed where his famiy perished. But the emigration was before the Holocaust…..1935 was before even Kristallnacht, let alone the execution camps. Goog grief, Hitler didn\’t even invade Poland until 1939.

Sorry, just not good enough, not in an obituary.

On that minimum wage thing

It is uncomfortable that the people most alarmed by the night of chicken shop raids are the employees: young teenage brothers from Pakistan who are obliged to show inspectors their living quarters above the shop, students from Bangladesh, who watch with growing unease as border officials check their papers.

The people with these less than minimum wage jobs are rather keen to keep them.

Sir Robin Wales has no affection for chicken shops…….. It makes sense for us to cut out this exploitation of people. While a raid like this will be difficult for those people [who are being exploited],

In other words, Sir Robin knows when you\’re being exploited better than you do.

Take up the White Man\’s burden!
Have done with childish days–
The lightly-proffered laurel,
The easy ungrudged praise:
Comes now, to search your manhood
Through all the thankless years,
Cold, edged with dear-bought wisdom,
The judgment of your peers.

So who thought Cameron wouldn\’t do this?

David Cameron has ruled out any referendum that could see Britain leave the European Union, insisting that the UK should remain a member of the union.

The same sort of wibble we\’ve had for a coupe of generations now. It\’s not quite right for us, problems,  our partners don\’t see it quite the way that we do. But we\’ve got to stay in so as to influence those 26 to 1 votes against us.

And it also makes Cameron a worse poitician than even I think he was. The biggest danger to any future majority is UKIP, on what, 8% or so? Peeling off the eurosceptics. Not enough to form a block in P, true, as with FPTP, but enough to kill a Tory majority.

Polly on competition in the NHS

Cancer networks are the template, as they caused survival rates to soar by joint working: one hospital does the best diagnostics, another the best surgery and a third the best chemo and radiology, collaborating not competing.

That is the heart of a market economy. The division and specialisation of labour. And the only way of getting to the collaboration part that we know of is a market.

As for the competition: it\’s the diagnostics departments of hospitals two and three, the surgery departments of one and three and the chemo and radiology departments of one and two which are the competition.

Why do people find this so difficult to understand? This \”collaboration\” that the left are cheering on is a market economy. It\’s the whole damn point of having one.

Spooky or what?

Yesterday was the day I officially moved from Germany to the Czech Republic. All of 50km but it is over the border.

And yesterday Germany lost and a Czech player threw Nadal out of Wimbledon.

Spooky, eh? Perhaps I should team up with David Icke?

The euro bailout

When the transfer takes place to the European Stability Mechanism the new loans will not be given seniority, giving extra security to Spain’s creditors.


That seems to be the crux of the matter.

The new bonds do not subordinate the old, they rank pari passu. That means the ESM is on the hook for them.

What\’s going to be interesting therefore is the rate at which the ESM can borrow in the markets. For, at least I think I\’m right here, the ESM is being funded by jointly guaranteed bonds. Not by the ECB printing money, but by borrowing.

At which point, the greatly interesting thing becomes: at what rate can the ESM borrow?

An interesting point about Barclay\’s and Libor

On the manipulation by the bank itself:

It is hard to identify who exactly lost out as a result of these fictions. Since there was no interbank funding to speak of at the height of the crisis, it may not in any case have mattered very much.

Well, sorta. While there was indeed very little interbank lending, this being one of the actual problems at the time, there was still the huge towering edifice of mortgages, swaps, futures and so on priced off this now illiquid measure.

We don\’t extradite to places without fair trials

Seems like a fair enough law.

Shawn Sullivan faced spending the rest of his life behind bars under a controversial sex offenders’ programme in the US, but two senior judges said this would amount to a “flagrant denial” of his rights.

If convicted, he\’d serve his sentence, then be put into a sex offenders institution.

“Civil commitment is not a penal or criminal sanction; it is rather a means by which the State can protect the community from dangerous behaviour that the committed individual is unable to control.”
…
The court was told that no one had ever been released from the treatment programme in Minnesota since it was set up in 1988.

This \”fair trial\” lark, this civil liberties stuff, means that if you\’re fairly tried, found guilty, then sentenced, well, you did the crime so do the time. If the sentence is life inside so be it.

But if the sentence isn\’t, having served whatever the sentence is then you have to be let out, not locked up indefinitely on hte basis that you are a bad \’un.

For this civil liberties shtick means that you get setnenced for what it is proven you have done. Not for what you might potentially do in the future. And yes, this does apply to paedos just as much as anyone else.

All we need to do now is have a look at the European Arrest Warrant to see whether all our fellow EU jurisdictions offer the same protections as our own system. Unlikely that they do, eh?

Ritchie still doesn\’t get the efficient markets hypothesis, does he?

On the subject of Barclays and Libor.

Third, the means the assumptions of the efficient market hypothesis that underpinned City regulation have to be swept aside for good: they’re a fantasy, as some of us have said for a rather long time.

WTF has the EMH got to do with this case? All the EMH says is that markets are efficient at processing the information about what prices should be in a market.

Did this Burke really work as an economist?

Seriously, in The City?

Listeners to the Today programme on Radio 4 on Wednesday were treated to a knockabout interview with the architect of the Laffer curve: a graph which purports to show that lower tax rates for the rich will lead to higher tax revenues.

It\’s also a theory which has been widely discredited, both on a theoretical level and in practice.

Disproven in theory? What? You jest, you mean proven in theory the argument now being about where the tax rate that maximieses revenues is, that is what you mean isn\’t it?

Because with the Laffer curve – perhaps unusually for economics – we have a historical instance of it being implemented by a direct proponent. Laffer was an associate of the Reagan administration, which had a staged cut in the marginal higher rate of personal income tax from 70% to 28%. The effect on the budget deficit was also striking. Reagan doubled it to $155 billion and tripled government debt to more than $2trillion. His successor, Bush senior, was forced to raise taxes as the deficit doubled again.

What logic! The deficit rise thus taxes collected must have fallen. But, erm, what happened to spending at the same time?

Not all taxes were treated the same. Payroll taxes were increased. So taxes were cut for higher earners while workers paid more.

Ooooh, dearie me. Something to understand about the US system. The payroll taxes pay for social security. This is supposed to be self-financing over the long term, not reliant upon general revenue. Recall all that stuff about the trust find etc? Those Reagan rises in FICA were all about restoring actuarial balance to the SS budget.

You could characterise it the way Burke has done but it would be deeply misleading at best to do so.

The Laffer curve relies on the twin assumptions that the rich create the output in an economy and that they need incentives to choose idleness over work. But there is little evidence to support these hypotheses. On the contrary, economists from Adam Smith to Karl Marx have known that all value in an economy is created by labour.

Erm, incentives to choose work over leisure I think you\’ll find. And this is true of everyone of course, not just the rich.

But I am fascinated: can someone survive as a City economist while still believing in the labour theiry of value?

I do love seeing the scandium news

Such fun:

RENO, Nev., Jun 27, 2012 (BUSINESS WIRE) — EMC Metals Corp. (the \”Company\” or \”EMC\”) CA:EMC -15.38% announced today that it received notice of a lawsuit filed against the Company on Friday June 22, 2012 in the Supreme Court of Victoria, Australia, by our Nyngan Scandium Project partner, Jervois Mining Limited (\”Jervois\”).

The Company delivered a timely NI 43-101 F1 Technical Report on the Feasibility of the Nyngan Scandium Project (\”the Report\”) to the JV Partners in February 2012, designed to meet the specific requirements set out in the JV Agreement for a 50% earn-in to the Nyngan Scandium Project (the \”Project\”). EMC believes that all requirements for the Report as defined in the JV Agreement were met, however Jervois subsequently rejected the Report as inadequate, and denied EMC its 50% earn-in interest in the Project.

I know someone (indeed, was looking for money from them at the time) who has invested goodly amounts in EMC. On the basis of this Jervois property interest.

I said that there were several people in this \”scandium space\” that I simply would not trust. Even if you don\’t want to invest in me, I went on, certainly I could not recommend investing in them.

Pity I didn\’t get the cash, of course, but all rather satisfying a few years later…..

Murder in Bennett Street

This is both nasty and full of coincidence.

A father of one has been charged with the murder of his PhD student girlfriend at their Georgian home while their baby cried nearby.

Investment administrator Paul Keene, 31, is accused of killing 28-year-old Carmen Miron-Buchacra, known as Gaby, at their Georgian home in Bath, Somerset.

That Georgian flat being the next street up from my own flat in Bath. Bennett Street rather than Alfred. But here\’s the coincidence:

Mr Keene is listed as working as an administrator for Advance Investments Limited, in Bath, since 2007.

On its website, the company claims: \’Paul has become an integral part of the Advance support team.

\’With over ten years\’ experience in different sectors of the Financial Services industry, Paul prides himself on delivering consistently excellent customer service, case management and adviser support with a clear focus on the customer experience.\’

His company lists former London Irish, England and British Lions rugby star Mike Catt as a client.

And Mike Catt used to rent my grandmother\’s old flat which is the next street over again, Russell St.

Spooky or what?