Apr. 15th, 2008

peterbirks: (Default)
UK banks are begging the prime minister today to bail them out. Of course, they aren't phrasing things like that. The CEOs of Barclays, HBOS, HSBC and RBS are holding "high-level talks" on the best way to solve the current "credit aqueeze".

Once again, the inherent assumtion here is that there is an irrational flight from risk, and that all that is needed to solve this problem is for the government to step in to provide some liquidity to the market.

As the FT wrote this morning:
"Central to the talks are moves to revive demand for securities backed by mortgages and efforts to reduce interbank lending rates, which have remained high in spite of the Bank's decision to cut rates again last week."

I don't know if I was the first journalist to point out that cutting interest rates doesn't make an iota of difference when fear and mistrust is paramount, but I must have been one of the first. Today, of course, this is "conventional wisdom", but I don't remember many people saying this when the first rate cuts came through. Journalists and analysts alike seemed to assume that this would feed through to the bottom line. Now they know better.

However, people still seem to be buying into the mantra that, if the central bank would only accept mortgage-backed securities as collateral, everything will be fine.

But if I were the Bank of England in this situation (and, after a fashion, as a taxpayer, I am), I would be asking "but what if the reluctance by the banks to take these mortgage-backed securities as collateral is rational?" Aren't we effectively accepting as collateral something that might be worthless? And, if it does turn out to be worthless, that means that you, the banks, have robbed the taxpayer. well, that's hardly fair, is it?"

To which the banks can only reply "ahh, but, it's only a liquidity crisis, honest. Everything will pan out fine in the long run".

It doesn't matter how much you dress this kind of thing up, it's a de facto government bail-out using taxpayers' money as the guarantee of last resort. If the problem is systemic rather than one of liquidity (or even, as is most likely the case, just partially systemic and partially one of liquidity) then the government "temporary help" will turn out to be a taxpayers' bail-out.

And the problem is, just as the banks are swearing blind that it's a liquidity problem, Wachovia Bank has anounced a complex capital-raising (if you have to raise capital, make it hard to work out precisely how much you need to raise and where you are raising it from) and has also released some rather horrible analysis on defaults.

In effect, Wachovia has spotted the moral hazard involved when your debt exceeds the value of your property. The theory was that mortgagees with a good past credit history (i.e., those not classified as sub-prime) would work through their problems, negotiate with lenders, and eventually pay off their debt with real money. What is actually happening is that they are walking away from their debt and saying "here's the keys, we're off to rent".

That is staggeringly bad news for the banks, and Wachovia is now allowing for a 20% default rate on building loans. And it isn't much use, if you are a bank, to be holding 10,000 repossessed houses, unless your lenders are prepared to accept part-ownership of a detached home in Kansas City in lieu of interest.

If any bank came to me with a capital-raising request after showing me those numbers, I would (with great pleasure), show them the door. And that, I would posit, is in no way a liquidity crisis or an example of me showing an irrational fear of risk. It's a sensible response to a plea for money from a basket case.

So, if as a private investor I would tell them to sod off, why should I, as a taxpayer, have to bail them out?


One of my occasional mad forays into the Amazon Music Store resulted in a delivery today. Here's what arrived:

1 Dory Previn (Artist) "Mythical Kings and Iguanas/Reflectionsin a Mud Puddle"
2 Dory Previn (Artist) "Mary C. Brown & The Hollywood Sign/On My Way To Where"
3 Focus (Artist) "Hocus Pocus: The Best Of Focus"
4 LCD Soundsystem (Artist) "Sound of Silver"
5 Andrew Bird (Artist) "Armchair Apocrypha [Soundtrack]"
6 Hold Steady (Artist) "Almost Killed Me"
7 Bright Eyes (Artist) "Cassadaga"
8 Hold Steady (Artist) "Stuck Between Stations [Single]"
9 Okkervil River (Artist) "The Stage Names"
10 Sigur Ros (Artist) "Hvarf - Heim"
11 Beirut (Artist) "The Flying Club Cup"
12 Silver Mt. Zion (Artist) "13 Blues for Thirteen Moons"

Interesting that Amazon too now feels the need to define which bit is the artist and which bit is the title. Many's the time I've forgotton which is which.

Whatever happened to the days of "The Beatles" and "Meet The Beatles"? You knew where you were then. Silver Mt Zion are a Montreal-based spin-off from God Speed You Black Emperor -- them of the 28 Weeks Later soundtrack.


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