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Friday, 10 October 2008


A young gentle breathy voice (female) explained very cold facts sweetly this morning on BBC radio 4 news the scariest facts of the financial crisis beginning with retail investors exiting the equity markets and probably unlikely to return for years, $trillions of uncertainties, and so on. I may be an old eccentric, but this seemed surreal especially when the next item was a discussion of Euthanasia workshops with campaigners for assisted mercy killings. Again a young woman tells us that mercy killing is inevitable but society has a responsibility to protect the vulnerable or suicides may be botched if done without proper safeguards - which drugs to use etc. Could these stories be related?
There are fears growing that governments are now proving to be powerless to stop the financial meltdown just as the banks themselves are. We supposed experts may say this is just ignorant panic. But the fact is that loss of confidence in institutions (what prudential risk regulations call reputational risk) is also systemic. Confidence in regulators and governments is low (witness: European government bonds' insurance has tripled in 9 months from 15bp to 50bp). The struggle is about restoring confidence and trust. That is proving very hard.
Markets in Europe are in steep free-fall this morning (FTSE down 10% before a small 3% bounce) after Japan fell to lowest for 2 decades, US biggest fall since '87, short-sellers back on The Street now targeting any banks and markets that have appeared relatively inviolate so far, a big UK insurer says it can survive a 40% further fall in shares because it is well hedged (like they have no counterparty risk in derivatives?), G7 gathering, major banks studying small print of UK BO plan and of TARP in US, and IMF is reported as having calculated that there were 127 banking 'crises' cases in last 27 years and that they cost governments on average 13% of GDP! That is reported by one of FT's LEX columnists, but that's plainly wrong - I prefer Tim Bond's more positive outlook! Other code-in-clear messages circulating in the ether are that any bank managers still in offices who got us into this mess must go now with their bonuses stopped. One good egg says he's been through 7 crises since 1957 (one every 7 years) and each time the leadership of the banks was wiped out, but that only means the benefits of experience are lost too. This see-saw debate about conditions that ought to attach or not to bail-outs assumes too that the £400bn and $700bn bail-outs are taxpayers' money being spent straight off government current budgets. Of course, that's not so - most of the sums quoted are confidence measures like guarantees where any actual funding is secured or swapped for financial assets.
The choice now before US, Euro and UK authorities is being starkly described as total subsidy of the financial system (such as guaranteeing interbank lending) or putting money directly into the banks. US government putting money directly into corporations has not happened since the Great Depression (says the FT, though I recall it was required in the late '80s S&L crisis). Tim Bond of BarCap has a useful story to tell about the Sweden's rescue of it banks in the early '90s that included blanket guarantee for all banks' liabilities, plus capital injections, but no protection for shareholders (why they are so mis-used, always coming last inthe pecking order escapes me). GDP fell steeply and all equities halved in '90-'92 before recovering in '93. The financial system pre-curses the 'real economy' (so-called) and concludes that if Sweden's experience is a good guide, bank stocks and equities generally should start rebounding in the next 3-4 weeks.
Anyway, 3-month sterling and euro Libor are little changed (central rate cuts on Wednesday failed to flow yet into the interbank market) and US CP contracts $56.4bn last week (down $264bn in a month). Investors are waiting to see if more new measures are likely such as the UK's guarantee of interbank lending and awaiting signs that TARP is working. Another day, another trillion down and no initiatives of any positive note from the banks themselves! UBS decides to tell us "it’s clear that the banks are presently powerless to forestall the effects of the destructive adverse feedback loop” and RBS Greenwich Capital, extols the need for ”a clearing mechanism or a government guarantee . . . to facilitate term lending” and other suchlike whereby one has the impression bankers know no more than what's in Reuters, Bloomberg, WSJ and FT and on web news services.
I know from my own sources that in large banks' auditors are struggling to clarify trading book accounting records (most of which exist on many systems, little of which, beyond net sums, makes it into general ledgers), and are urgently, anxiously trying to collate all exposures to frozen counter-parties and all major asset classes that were not so comprehensively aggregated in full collateral detail before; why, because what did such data matter when trading books could change dramatically from moment to moment - but, no longer, not now that scarcely any market appears fully liquid (except for government, NGO and agency primary bond markets and the FX market as $ rises, Yen bobs about, Euro slides and the £ drops 15% from above $2 earlier this year to 2005 rates).
The risk accounting tasks currently are like trying to reconnect broken arctic ice (a metaphor the FT applies to Iceland's woes - abandoned by all except maybe a possible loan from Russia!). Not just traders, but banks' broad-rooms, journalists and regulators all squint incomprehending at yields on government bonds that just now ticked higher in Europe - remarkably - before yields on two and five-year notes tightened as equities slumped. The dislocation in swap spreads amid the inversion between 10- and 30-year swap rates prompted a collapse in the 30-year swap spread over the 30-year Treasury yield, briefly trading at an unprecedented negative 2bp before returning to a positive 14bp. What's to be divined from those tea-leaves?
Well it might be connected to erstwhile safe havens like commodities performing mixed - as oil hits a 12-month low below $85 (good news for shippers) and as fears harden that the global economy is collectively heading south. But, I have yet to see any actual analysis that proves the world as a whole is moving entirely as one.
Then what's up closer to home, in Edinburgh? Anxieties are all about what's happening to our two big banks and what will happen to property (unprecedently down 7% this year and Merril-Lynch telling us we're not yet half way through a UK property fall that is 18% this year already!). If our 2 big banks are taken over and headquarters move elsewhere, what happens to house and office values? My wife's fed up with all this. She's telling me she's bored with all this financial crisis talk in our drawing rooms and at dinner parties and is off to her swimming club, while I sit here calculating global ABS prices. But, at least we have two art opening parties this evening followed by fish curry dinner with a bond trader, lawyer, journalist, a headhunter, and a property manager - hey, just like NYC midtown east, and somewhere in the local corridors of power, in our upturned boats new Parliament and our new city council offices fronted by a daft wooden statue of the average man, the elected are discussing if it's time to diversify away from dependence on financial services (over 30,000 jobs in Edinburgh alone) - maybe invest more in art (half a dozen major museums and a recent growth in large private galleries) and in our so-called "creative industries" (we are "the festival city" with theatres, publishers, advertisers, artists, performers galore) that supports about 6,000 mostly part-time jobs. can creative bankers get jobs in the money-obsessed arts - is this the next asset class bubble wave to surf until it too crashes and burns? A short-seller tells me he's shorting JP Morgan and BoA! Time methinks to dust off my new vulture fund plan again for investing in intangible distressed assets that depends on selling discounted tax liabilities and 10 year zero coupon art-backed bonds. The world must divide between those who can make money out of others' losses and those who ride their losses to oblivion. Er, I'm joking, of course.

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