"Dang, this credit crunch is complicated"
May. 12th, 2008 08:09 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI was hoping that one day the worldwide union of spin doctors would hold up their hands and say "OK, we were wrong. It isn't just a liquidity problem. In reality, we're fucked".
But, well, it won't happen. What we are seeing instead is a gradual shift towards an acceptance that the crisis is systemic rather than technical. On Friday Martin Sullivan, London lad now in charge of AIG, sang a very different tune for his Q1 figures than he had for FY2007. Three months ago he had criticized accountancy rules for compelling AIG to take more than $4bn in writedowns. The maximum real loss, he said, after everything uwound, would be $900m.
One kind of wonders what person told him this -- probably the marketing department. Because by Friday he had accepted that the ultimate "worst-case" scenario loss was $2.4bn.
Now, there's a difference between revealing bad figures because of unforeseen events (an unfortunate, but understandable occurrence) and revising your worst-case scenario. By definition, the worst-case scenario shouldn't get any worse. If it does, you are incompetent because you have failed to allow for all possible develpopments.
The second area where it's become clear that this is much more than a temporary problem of liquidity has come in the field of tax receipts. I often chuckle when companies report some humungous loss but then headline the figure net of tax. All that means is that the gross bit minus the net bit will reduce government income rather than company income. It is no less "real" for that.
When these are individual setbacks, that's not too much of a problem. But when it's systemic, then it becomes a government problem. And, well, looky see what we have here. US corporate tax receipts off by 14%. And in the UK, where income from the banks is an uncomfortably large part of the corporate tax base, things look likely to be worse. That, in blunt terms is money that either (a) will not be spent, thus reducing the economic activity yet more in regions effectively dependent on the public economy or (b) will be raised from people like us, thus reducing spending capability in the more buoyant areas of the economy (i.e., the ones already hit by the loss of private bonuses this year). Either way, not a happy scenario.
The third evidence that this is "real" is one that's slipped a bit under the western papers' radar. Chinese companies have experienced a significant increase in late/unpaid bills from abroad, particularly the US. There's about $100bn in unpaid debt, and it's going up at a rate of $15bn a year. A Hong Kong analyst directly compared it to the HK property slump of 1988, which impacted the real economy for several years.
In a way, the property side of it is a bit of a red herring in that property was only the conduit for the real root of the problem -- consumers were borrowing from the future to pay for consumption today. If you can't borrow from the future, then you have to consume less, which means that western econmies need to produce less, which means fewer jobs. There was, in effect, a disconnection in our economy between production capability and consumption capability that could only be rationalised by borrowing from the future (or by companies paying a higher share of their income in wages). Eventually, as with all pyramid schemes, the whole caboodle stops and some people get badly burnt.
++++++++++
I was in Pershore for the weekend. I mowed a 65ft by 40ft lawn with the brand-new petrol mower. These are cool. Then yesterday we cleaned out the ornamental pond, fixed the pump, and got it working again. The pool now looks ace. It would have been nice to have before and after pictures, but, well, sometimes it isn't best to keep a record of everything.
The trip to Pershore was hell, owing mainly to a crash on the M4 that caused a rather more significant tailback than I anticipated. I came back via the A44 and the M40. If the traffic on the A44 section is light, it's definitely the way to go. But if there's slow-moving lorries or tractors around. Forget it. Then again, it's nearly 25% fewer miles, so perhaps I should accept the slower traffic.
_______
But, well, it won't happen. What we are seeing instead is a gradual shift towards an acceptance that the crisis is systemic rather than technical. On Friday Martin Sullivan, London lad now in charge of AIG, sang a very different tune for his Q1 figures than he had for FY2007. Three months ago he had criticized accountancy rules for compelling AIG to take more than $4bn in writedowns. The maximum real loss, he said, after everything uwound, would be $900m.
One kind of wonders what person told him this -- probably the marketing department. Because by Friday he had accepted that the ultimate "worst-case" scenario loss was $2.4bn.
Now, there's a difference between revealing bad figures because of unforeseen events (an unfortunate, but understandable occurrence) and revising your worst-case scenario. By definition, the worst-case scenario shouldn't get any worse. If it does, you are incompetent because you have failed to allow for all possible develpopments.
The second area where it's become clear that this is much more than a temporary problem of liquidity has come in the field of tax receipts. I often chuckle when companies report some humungous loss but then headline the figure net of tax. All that means is that the gross bit minus the net bit will reduce government income rather than company income. It is no less "real" for that.
When these are individual setbacks, that's not too much of a problem. But when it's systemic, then it becomes a government problem. And, well, looky see what we have here. US corporate tax receipts off by 14%. And in the UK, where income from the banks is an uncomfortably large part of the corporate tax base, things look likely to be worse. That, in blunt terms is money that either (a) will not be spent, thus reducing the economic activity yet more in regions effectively dependent on the public economy or (b) will be raised from people like us, thus reducing spending capability in the more buoyant areas of the economy (i.e., the ones already hit by the loss of private bonuses this year). Either way, not a happy scenario.
The third evidence that this is "real" is one that's slipped a bit under the western papers' radar. Chinese companies have experienced a significant increase in late/unpaid bills from abroad, particularly the US. There's about $100bn in unpaid debt, and it's going up at a rate of $15bn a year. A Hong Kong analyst directly compared it to the HK property slump of 1988, which impacted the real economy for several years.
In a way, the property side of it is a bit of a red herring in that property was only the conduit for the real root of the problem -- consumers were borrowing from the future to pay for consumption today. If you can't borrow from the future, then you have to consume less, which means that western econmies need to produce less, which means fewer jobs. There was, in effect, a disconnection in our economy between production capability and consumption capability that could only be rationalised by borrowing from the future (or by companies paying a higher share of their income in wages). Eventually, as with all pyramid schemes, the whole caboodle stops and some people get badly burnt.
++++++++++
I was in Pershore for the weekend. I mowed a 65ft by 40ft lawn with the brand-new petrol mower. These are cool. Then yesterday we cleaned out the ornamental pond, fixed the pump, and got it working again. The pool now looks ace. It would have been nice to have before and after pictures, but, well, sometimes it isn't best to keep a record of everything.
The trip to Pershore was hell, owing mainly to a crash on the M4 that caused a rather more significant tailback than I anticipated. I came back via the A44 and the M40. If the traffic on the A44 section is light, it's definitely the way to go. But if there's slow-moving lorries or tractors around. Forget it. Then again, it's nearly 25% fewer miles, so perhaps I should accept the slower traffic.
_______
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no subject
Date: 2008-05-13 01:01 pm (UTC)http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/12/ccambrose112.xml
no subject
Date: 2008-05-13 05:51 pm (UTC)I was sad to see that the next on the list is Half Moon Bay, where I actually have several friends.
I would think that you would have more sympathy with these people, considering that the original wealth of the State was built entirely on gold ....
no subject
Date: 2008-05-13 02:12 pm (UTC)Glad to see you're still blogging-on relentlessly. Very impressive. A bit harsh, imo, on the worst case scenario incompetency. Strikes me as dangerous for any business to announce: a 'worst case scenario: upteen gazillion (to 7sd's)'. As the economic picture changes, so will, say, a worst case scenario to 2sd's, will it not?
chaos
no subject
Date: 2008-05-13 05:56 pm (UTC)Given what they knew of current business conditions, I suspect the worst-case scenario was at least £2.4 billion rather than £900 million. Since they almost certainly haven't hit the worst-case scenario yet, I would guess that £4 billion is a better assumption.
In the real world, we call this "telling porkies."
no subject
Date: 2008-05-13 07:08 pm (UTC)With "worst case scenario" I think we enter the realm of "reasonably foreseeable". Since what transpired in Q1 2008 was nopt only reasonably foreseeable, but had indeed been predicted by a fair number of people (including Pete aka aardvark and myself) I don't think that Sullivan can get away with claiming that this was a black swan. It was not a "worst-case scenario". It was an optimistic scenario.
CEOs are paid to put a positive spin on things. But good CEOs do this without actually looking like giant tits when things turn out to be worse than expected. Sometimes it's better to diminish expectations rather than maintain them.
But, in this case, I think that Sullivan believed his quants and actually thought that $900m (not sterling) was a W-C-S. He must have been very unhappy when some 25-year-old mate of Jerrod Ankemann walked into the office and told him that the maths were fine, but reality was out of sync.
PJ
no subject
Date: 2008-05-13 08:17 pm (UTC)I'm sure you're right in this instance on either duplicity or incompetence - I'm just guessing that in the financial world, when sentiment is king, you've got to angle shoot on 'worst case scenario' and say operate within a couple of sds, and so WCS inevitably moves as financial conditions change. Anyway, I naturally give deference on such matters.
Oddly, I saw a black swan for the first time just recently - eery red beaks.
chaos