Latest selected extracts from my Triple Crunch log
Page last updated: 23 January
Obama prepares for what he calls a “big fight with the banks” with limits on their trading.
21 January 2010: The day after a shock defeat for the Democrats in the Massachusetts Senatorial by-election, Obama makes a populist move on the same day Goldman Sachs announces mountainous bonus payouts. Proprietary trading operations will now be limited. “We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behaviour of financial players all around the world,” Obama says. “People are angry and they’re frustrated. From their perspective, the only thing that happens is that we bail out the banks… We’re about to get in a big fight with the banks.” The new banking regulation will be called “the Volcker Rule,” after its architect in the White House, Paul Volcker, the former Chairman of the Federal Reserve under Carter and Reagan. It prohibits any bank holding deposits guaranteed by the government from operating hedge funds, private equity funds, or from proprietary trading. On top of this will come a limit on the size of any bank.
My view: About time. Now we need Congress to pass this - no given - and the Europeans to show solidarity, which of course would help with the passage through Congress. But will they? This is a real collective acid test for politicians.
Obama announces a levy that will recover $90bn from the 50 largest US financial institutions.
14 January 2010: The President calls the bankers’ bonuses “obscene” and tells them: “I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses.” He urges other countries to follow suit. Obama needs to levy the fee to help cover a $117bn loss to the US treasury from the $700bn TARP bailout, and wants it in place by June. He intends to apply a levy of 15 basis points, or 0.15%, on the liabilities of 50 large financial institutions with assets of more than $50bn. Jamie Dimon, JP Morgan CEO: “Using tax policy to punish people is a bad idea. All businesses tend to pass their costs on to customers.”
£40bn bonus payouts to bankers show government efforts to curb excess have made no difference.
8 January 2010: The $65bn handout by the world’s biggest banks means they have elected to take the UK Treasury’s 50% tax hit themselves rather than pass it on to their workers. An Illinois pension fund has argued in a lawsuit filed yesterday that the payments harm shareholders. Goldman Sachs maintains the lawsuit is “completely without merit”.
My view: So, we have business as usual in the City of London and on Wall Street despite the best efforts of our increasingly toothless leaders, and the warnings of top regulators on both sides of the Atlantic. Business as usual in this context means moral bankruptcy today, and potential serial fiscal bankruptcy tomorrow, as a result of the inevitable next crash. The Illinois pension fund is right.
BIS invites top bankers to Basle to discuss resurgance of “excessive” risk behaviour in banks.
6 January 2010: The Bank of International Settlements – the central banks’ bank – says “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”. Among those invited were the CEOs of Goldman Sachs and JP Morgan Chase, and they do not plan to attend.
Fed chief says tougher regulation is still needed.
3 January 2010: “Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term,” Ben Bernanke says. “This description suggests that regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”
Governments have spent $10.8 trillion on the bank bailout so far.
16 December 2009: This is an average $10,000 for every one of the c 1 billion people in the richest countries (but 50,000 per person in the UK). $9.8 trillion has been spent by governments in the rich nations, $3.6 in the US (25.8% of GDP), $2.4 [£1.5tn] in the UK (94.4% of GDP), and 3.2 in the rest. China and other emerging nations have spent $1.6 trillion.
US banks are now hoarding over $1trillion cash, having risen $200bn over the last 2 months.
13 December 2009: “Nothing like this has happened in previous recessions, going back to the 1960’s. The Banks are not lending and until they lend, there will be no recovery in the USA.” “The situation is getting worse. The forecasts and announcements of the end of the crisis are premature.”
Time is up for short-term thinking in capitalism, Al Gore and David Blood write in the FT.
26 November 2009: “Behavioural economists believe they have the answer: our brains are hard-wired to think short-term because evolution has rewarded serial short-term successes such as avoiding predators and other dangers that faced our ancestors. Their survival ensured our existence – but predisposed us to the same kind of short-term thinking. As a result, even though our world is very different from theirs, long-term decision-making remains the exception, not the rule.” They commend the work of the Stiglitz Commission. Asset managers are compensated for maximising value short-term, and this is dysfuntional: “this approach to investing is not investing at all. It is trading, or – at its worst – gambling. These asset managers are betting that they can anticipate the behaviour of other short-term investors and move assets more quickly than the herd.”
Dubai bond default causes FTSE’s biggest fall in 8 months.
26 November 2009: Dubai World, the huge developer that has built glass towers and indoor ski slopes in the desert with billions borrowed from banks around the world, calls for a sandstill agreement on a big part of its debts. Stock market falls around the world on worries that banks have big exposure.
Standard and Poors warns that most global banks are still unsafe.
24 November 2009: Nearly all fail the 8% safety level under the S&P risk-adjusted capital method, meaning they lack sufficient capital to cover trading and investment exposure, risking further downgrades in the 18 months ahead. Unless they strengthen capital set aside, they risk downward ratings adjustments.
My view: No wonder SMEs still find it hard to access credit, despite all the taxpayer billions poured into the bonus-cult temples.
Audit giants face increasing claims from investors for signing off accounts ahead of the crash.
25 October 2009: The number of claims against them is multiplying, and they extend well beyond Madoff. They have a sorry record indeed. PWC sign offs include Northern Rock and Lansbanki. Deloite’s include RBS and Bear Stearns. KPMG’s include HBOS and Kaupthing. Ernst and Young’s include Lehman Brothers. They charged millions for audit and non-audit consultancy alike.
My view: Every segment of the financial-services value chain, from product origination through governance through shareholder oversight through rating through audit seems to be rotten.
Wall Street is designing yet more complex derivatives, this time involving life insurance policies.
6 September 2009: Bankers are now buying “life settlements,” life insurance policies that sick and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. These they then securitize (package in bundles of hundreds or thousands) to make bonds that they can sell on to big pension funds and other investors. The latter then sit and hope the people with the insurance die earlier rather than later, because earlier means more profit. Wall Street trousers fees for creating the bonds, reselling them and subsequently trading them. With $26 trillion of life insurance policies in force in the United States, only a small fraction of policy holders would need to sell to make a $500 billion market. The United States residential mortgage securities market reached a peak of $941 billion in 2005, but is down to $169 billion so far this year. Some banks are also repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.
FSA chairman says “socially useless” banks must have bonuses taxed.
27 August 2009: In an interview with prospect magazine Adair Turner (ex McKinsey consultant and vice-chairman of Merrill Lynch) questions whether the City has grown too large, and calls much of its activity “socially useless.” He also backs taxes on financial transactions – Tobin taxes. Tobin’s idea, outlined in 1972 after the break-up of the fixed exchange rates, was designed to limit the damage speculators could cause. At the 2005 G7 Gleneagles summit development campaigners proposed it be used to finance development aid. 0.005% on currency transactions would raise $30-60bn a year. Some $912tn (£561tn) is traded annually in foreign exchange.
My view: If only he and his organisation had the teeth to act on this.
Islamic, Jewish and Christian leaders launch campaign to restrict usury
22 July 2009: London Citizens, an organisation including trade unions, voluntary organisations and religious groups, seeks a law to cap interest at 8%, and today will march on RBS to start the campaign. They point out that ancient Rome capped interest at just over 8% in a rule that lasted 1,000 years.
My view: 8% ought to be fine for anyone - especially when the banks are buying the money at 0.25%, or even getting it free, before lending on.
Nomura Research Institute chief economist says west is misunderstanding effects of recession on businesses
5 July 2009. Richard Koo has analysed Japan’s credit crunch, when Japan suffered a $15tn collapse in asset and share prices, equal to around 3 years of GDP. Companies swung rapidly from profit maximisers to debt minimisers, and this deepened the downturn. The UK’s collapse is £2tn, so far, equal to 18 months of GDP, and companies are becoming debt minimisers en masse. Governments should spend and borrow far more than anyone in America and Europe is contemplating, Koo argues, worrying about debt later. Will Hutton writes new banks will be needed, and old ones broken up, in order to get capital moving.
My view: Though it is probably the correct analysis, the tide of opinion has turned the other way almost everywhere. The Conservatives talk constantly of imperatives for cost cutting and most editorial writers have swallowed this line.
As reforms run into the ground, the City seems to be returning to business-as-usual
25 June 2009: Banks are hiring again, telling their staff they can expect a record year for bonuses. Barclays, Nomura and others are trying via headhunters to hire star staff away from other banks who can’t pay big bonuses. The International Swaps and Derivatives Association, and hedge funds, are lobbying hard against reform. As things stand it looks as though even the riskier activities may remain more or less as before.
My view: Almost all the people I speak to about the crisis are furious with the mainstream banks for what they have done. If their refusal to change continues – voluntarily, if governments are too weak for the task – aren’t they are risking a consumer-backlash whirlwind, and in doing so aren’t they imperilling their shareholders’ interests grievously - never mind the imperilment involved in simply returning to their old risky practices?
