Sep. 25th, 2008

Grey days

Sep. 25th, 2008 07:29 am
peterbirks: (Default)
One of the (many) drawbacks of working here is that I see far fewer points of interest during the day about which I can write. My journey time is shorter. It mainly involves travelling in the City. City people are boring and predictable. You can tell that they are boring and predictable because they wear loud expensive shirts from TM Lewin or Hawes & Curtis to shout "look at me! I'm not boring or predictable!" Er, yes you are. Now, please return to Fenchurch Street or Liverpool Street for your train to Billericay or Chelmsford.

I could write at length about poker, but it all gets a bit boring doing that and I'm trying to maintain at least some level of "staying a step ahead" of the text books (or, more bluntly, the "majority view").

So, that just leaves Financial Armageddon. When that starts to be a bit same-old, same-old, then you know that you are in trouble.


Bush's speech at 9pm last night (2am UK time) seemed to confirm that the US Treasury, the Fed and the White House are deeply concerned that another, bigger, financial institution could be on the verge of hitting the rails. Of more interest (to me) was confirmation that the banking system in the UK has, in efect, ceased to function. The one thing that they said they were good at, they have turned out to be shit at.

So, rather than lend money to each other for three months at more than 6%, they are depositing it with the Bank of England at 4%. Once again this is kind of unknown territory. The BoE's standing facility offers a home to banks that find themselves with too much cash overnight and no-one to lend it to. Well , that's the theory. It deliberately pays a rubbish rate. What has happened now, however, is that the aversion to three-month risk is so great that, even though there is no shortage of potential borrowers, the banks are taking the "certain" overnight 4% rather than lending to any other financial institution at three-month 6.25%. Three-month LIBOR has become completely dislocated from the BoE official rate. The standing facility is performing a function almost completely different from that which it was designed for.

And two other, almost farcical, upshots of this are that, far from pumping money into the economy, the BoE is now taking it back, because all it can do is boost the overnight liquidity market.

Put simply, there's buckets of overnight cash around ("we don't think you, the counterparty, will go bust within the next 24 hours") but absolutely no three-month cash around ("but we have no idea whether you will be solvent in three months").

I suspect there's some technical reason for this beyond the generic "lack of confidence" argument, with perhaps some significant rollovers coming up within this timeframe.


The second possible upshot is that the BoE could, theoretically, be making shedloads of money on this, with a little bit of rule rejigging. At the moment it's sitting there saying "we can't pump the money into the bit of the economy that matters". So, why not widen its remit?

+++++++++++++

And I just noticed the following, which is an interesting upshot from my recent post on the companies included in the FSA short-selling ban. I pondered why Man Group was excluded....

London hedge fund manager Man Group plc has apparently become a victim of the short selling of its peers. After its stock fell almost 8% Tuesday, the company asked the Financial Services Authority to add its name to the 34-strong list of companies, mainly banks and insurers, where short selling is restricted
.

I really ought to be more careful.....

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