City Spivs and Speculators get paid (off) for ‘risk’ taking

Some years ago I was sitting in the accountancy module B212 ‘window dressing and off balance sheet techniques‘ during my Masters course when the lecturer at the time piped up that one of the biggest fears in finance was the fact that mortgages were lent long whilst money was saved or acquired from the market short. In principle short money can be called for very quickly whilst paying back a mortgage on demand is impossible. A interesting discussion took place as we considered the possibilities of savers suddenly loosing confidence and withdrawing funds to stuff under the mattress or inter-bank lending suddenly drying up and the fact that as mortgagees we would be unable to pay our loans on demand loans so all chaos could result.

Obviously I am drawn to this reminiscing from a course more than 20 years ago by this weeks events and the thought that we have actually looked into the abyss. If this loss of confidence had gone much further there is actually no way that any government could cover all of the required finance without long term fiscal consequences when looking at the proposed bailout of 700billion in the US this is clear – the figures are simply too huge – and there was (perhaps still is) a chance or a real depression. So how did we get here when the risk was well known. We have and governments are too blame here began to assume that the ongoing growth period from the mid nineties would go on forever – we believed for a short while the Brown and Bush nonsense that the boom and bust and the cyclic nature of economies was a thing of the past. Actually not many economists bought this line but there seemed to be over the last ten years a creeping complacency in the market and in the economy at large that growth would continue house prices would rise and all would continue as before – a complacency that ended a few short weeks ago.

One of the problems faced by HBOS for example was the breaking of the linkage between grannies saving, and loans being made to the newly forming families to buy their homes. Grannies tend to keep their money safe in a Bank for a rainy day – so save relatively long. More of the money that was being lent was being acquired on the wholesale market thus very short and when money becoming in short supply and loans were called in the whole circus came to an end. Coupled with this trend the window dressing of junk debt and reselling as triple A in other areas meant in some cases these inter-bank loans were unpinned by toxic and rubbish debt that could not in any case be collected. So a prediction of an accounting professor twenty years ago came all to true in a few turbulent weeks.

What is a little depressing about the saga of some of those who have fallen is they carried out these feats of financial engineering to the plaudits of their peers only a short while ago. The CEO of HBOS for example was hailed as a ‘genius’ only last year – to some extend it was rather pleasing to see a rueful former CEO contemplating the handover of his company in a garage sale to one of his former rivals. A 300 year old company sunk during his short three years at the helm – a nice achievement not unique unfortunately if you look across the water.

There is an old saying that goes ‘when the going gets tough the politicians run for cover’ and politicians on both sides of the Atlantic squarely place the blame on the city or processes such as short trading and not themselves. Not minded to the fact that their policies and management of the economic context and their abject complacency has led us to where we are now. In he UK eye watering public sector borrowing to finance the client state, virtually no monetary policy, the encouragement of a reckless financial environment the surreal belief that would go on forever and the belief in the infallibility of their stewardship and lack of responsibilities are where some the explanation lies. It was even more unedifying to see Brown and Captain Darling claiming credit for facilitating the solution to HBOS which they themselves had practically caused – now for more weeks of historical reconstruction.

Brown solves world hunger and financial markets in a day.

I am becoming used to seeing Gordon Brown in his many guises or relaunches (currently around number seven) giving out the impression that he is more or less single handedly running every ministry in this country. From facilitating mergers between banks, solving Clostridium difficile in hospitals, greeting our hero Para Olympians back home to lagging. It is the latter theme I would like to dwell on as I was astonished to see the other day the Prime Minister of the country on national TV launching a very minor initiative that in more normal times would have been handled by a much more junior member of staff. Here we saw the great man extolling (well droning on about) the virtues of his new ‘lagging credit’ where if you are destitute or living in a croft somewhere in the god forsaking north of Scotland you can get a grant towards cavity foam insulation or lagging the turf on the roof. It was a careful exercise in avoiding any concession to the middle class and ensuring that only his clients in the north (well it is cold up there) would benefit from his largesse whereas the rest of us have to fork out – the proposal being completely riddled with caveats and exclusions designed to exclude anyone not minded to vote labour.

What was more annoying was that he was in fact not giving us anything. Dressed up as a government initiative and as a vehicle for relaunch it seems that the energy companies on threat of swingeing ‘windfall’ taxes have to do this. If you are living in a turf roofed and lined croft in Brown’s constituency you have to apply to the companies for the work to be done gratis or at the discount rate if you have some spare cash. This whole thing was yet another example of a politician making an announcement, claiming the credit whilst taking no responsibility for the implementation or the consequences. What is certain is the energy companies, quite rightly in my view, will have to cover these costs by adding ‘it’ to the bills of Joe Public you and me – of course turf living Brown voters will be able to claim relief. Now for me it is a good thing to concentrate on energy saving we cannot go on as we are but to dress all this cock and bull nonsense as some sort of give away by Brown is absurd. This was only designed to make him look good and defuse the Left of his party who regard any aspect of profit making by energy companies or otherwise as an anathema so wanted the so-called windfall tax and this boil had to be lanced before his next relaunch (the eight) at the conference this week.

I don’t think this (the seventh or is it eighth I forget) relaunch will work either – the labour party have to come to terms that Gordon Brown is not and never will be a leader – so stop trying to make him out something he is not. What we need is some management by ministers including Brown to at least steer the ship of state roughly in the right direction until the next election when thank god we have the chance of getting rid of these incompetent bunch of morons – although what job any of these could do when they bombed out is beyond me.

Cheers from a Croft in Wales

Royston