How Should I Know?
Dec. 11th, 2008 02:41 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksA rare flash of honesty from the banking sector, yesterday.
Although Treichl played his fair share of the blame game, his points yesterday must have hit home. He said that it didn't help that if any bank at the moment said that it had increased its exposure to other banks (i.e., re-entered the interbank lending market) then the institutional investors sell the stock and the analysts say that they (the banks, not the stock sellers) are idiots. Then again, it's very sad when a bank CEO lacks the courage to tell the market "Fuck what you do with the shares. My decision is right". If the banks continue to let their actions be determined by institutional investors, then they are bigger wimps and cowards than I thought. It was following institutional pressure that got a lot of them into trouble in the first place (and it was AIG's attempt to generate a return on equity more bank-like than insurance-like that spelt its eventual near-doom). Although the institutional investors might moan, I don't see EGMs cropping up trying to unseat executives if they have the guts to say "we are going to start lending to selected other banks. We think it's the most profitable thing to do".
When there is a general flight from risk, risk is the thing to be taking. It's paying a higher price for a set amount of risk taken. I am still to understand what kind of business model says that you should buy stuff only when it is expensive "because everyone else is buying it" and not buy it when it is cheap "because no-one else is buying it, therefore there is something wrong with it". This is not the Wisdom of Crowds. This is the stupidity of sheep.
The cowardly banks are waiting to see where the winners are and where the losers are before entering the market (current ETA, April 2009). The shrewder banks -- the ones that move first, will realize that, since there are bound to be some winners and some losers (indeed, since the amount that has actually "lost" is a mere fraction of one percent of the amount that is nominally "at risk", any gamble is effectively something like 49.95% to 50.05%) then a spread of risks when risk is available at a good price ought to be very profitable indeed. You only to be 0.1% on the right side in your judgement to turn a profit.
Unfortunately there is no way that I know for us peasants to make cash on this, because we are talking about areas of total opacity. No bank is going to move back into interbank lending in the full glow of publicity. What the investor needs to do is to look at character, style and past history of "doing what we think is right, rather than what the market thinks is right". Such players are thin on the ground.
In addition, much of the old banking model is broken, so the old profit numbers are unsustainable. In a second addition, there's still a capital shortage. Even if you think that interbank lending is the right thing to do, there might be other things which are more attractive.
The only "interbank lending" that we, the public, can take part in is fixed-interest deposits, and I think it's interesting that the public is prepared to step in where the banks fear to tread. Those two-year fixed rates have been snapped up as if there is bno tomorrow. It's a funny old world where the 'safe' retail investor is prepared to be more of a venture capitalist than the leading banks.
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said Andreas Trechl, CEO of Austria's Erste Bank.
"If I knew how to restart inter-bank lending, I would talk to Mr [Jean-Claude] Trichet (ECB governor) and to politicians in Europe. Buit I haven't a clue",
Although Treichl played his fair share of the blame game, his points yesterday must have hit home. He said that it didn't help that if any bank at the moment said that it had increased its exposure to other banks (i.e., re-entered the interbank lending market) then the institutional investors sell the stock and the analysts say that they (the banks, not the stock sellers) are idiots. Then again, it's very sad when a bank CEO lacks the courage to tell the market "Fuck what you do with the shares. My decision is right". If the banks continue to let their actions be determined by institutional investors, then they are bigger wimps and cowards than I thought. It was following institutional pressure that got a lot of them into trouble in the first place (and it was AIG's attempt to generate a return on equity more bank-like than insurance-like that spelt its eventual near-doom). Although the institutional investors might moan, I don't see EGMs cropping up trying to unseat executives if they have the guts to say "we are going to start lending to selected other banks. We think it's the most profitable thing to do".
When there is a general flight from risk, risk is the thing to be taking. It's paying a higher price for a set amount of risk taken. I am still to understand what kind of business model says that you should buy stuff only when it is expensive "because everyone else is buying it" and not buy it when it is cheap "because no-one else is buying it, therefore there is something wrong with it". This is not the Wisdom of Crowds. This is the stupidity of sheep.
The cowardly banks are waiting to see where the winners are and where the losers are before entering the market (current ETA, April 2009). The shrewder banks -- the ones that move first, will realize that, since there are bound to be some winners and some losers (indeed, since the amount that has actually "lost" is a mere fraction of one percent of the amount that is nominally "at risk", any gamble is effectively something like 49.95% to 50.05%) then a spread of risks when risk is available at a good price ought to be very profitable indeed. You only to be 0.1% on the right side in your judgement to turn a profit.
Unfortunately there is no way that I know for us peasants to make cash on this, because we are talking about areas of total opacity. No bank is going to move back into interbank lending in the full glow of publicity. What the investor needs to do is to look at character, style and past history of "doing what we think is right, rather than what the market thinks is right". Such players are thin on the ground.
In addition, much of the old banking model is broken, so the old profit numbers are unsustainable. In a second addition, there's still a capital shortage. Even if you think that interbank lending is the right thing to do, there might be other things which are more attractive.
The only "interbank lending" that we, the public, can take part in is fixed-interest deposits, and I think it's interesting that the public is prepared to step in where the banks fear to tread. Those two-year fixed rates have been snapped up as if there is bno tomorrow. It's a funny old world where the 'safe' retail investor is prepared to be more of a venture capitalist than the leading banks.
__________
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no subject
Date: 2008-12-11 03:50 pm (UTC)I'm struck by the current Government whining that the banks aren't lending enough so small businesses. Increasing lending to poor credit risk clients doesn't seem like it should cause any problems, surely?
no subject
Date: 2008-12-11 04:27 pm (UTC)Is this fair? I thought the market cap of a bank counted towards its capital requirements, so even a temporary drop in share price can trigger a need to raise capital elsewhere. Am I wrong?
no subject
Date: 2008-12-11 04:27 pm (UTC)Well, for savers, there *is* no tomorrow. Base rates down by almost two-thirds in a few months. And the more canny amongst them listening to the Pete Birkses (is that the correct plural?) of this world warning that medium-term increased inflation is likely to wipe out what's left. No wonder the few remaining 4% to 5% deals look good.
The other side of this is that the banks themselves are becoming more interested in fixed-term retail investors - I can't image, for instance, that a few years ago the likes of Close Brothers (http://ceemage.livejournal.com/13708.html) would have been interested in part of my meager bankroll.
It's a funny old world where the 'safe' retail investor is prepared to be more of a venture capitalist than the leading banks.
Yes, although the retail investor also has the benefit of the £50,000 FSCS "guarantee." Maybe something similar for inter-bank lending is the only way to kick-start the market, but I'm guessing even a £500m government-backed "guarantee" would be pretty small beer in the wholesale money market?
no subject
Date: 2008-12-11 05:23 pm (UTC)http://en.wikipedia.org/wiki/Tier_1_capital covers the point (link trhough also to the rather more complex areas of Basel II Solvency requirements.
You may be confusing it with "equity capital", which is in accounting terms, after all liabilities are paid, the remaining interest in assets.
This is, in a sense, the European Embedded Value methiod of measurement.
The point is somewhat confused by there being a positive correlation between equity capital and market capitalization (obviously), but movement in the latter does not as itself affect a bank's need to raise capital. Tier 1 capital and Tier 2 capital (the basic building blocks of bank's solvency) do not change every day with a movement in the bank's share price, although the share price will quite often change in response to a deterioration in Tier 1 capital!
PJ
no subject
Date: 2008-12-11 05:27 pm (UTC)Oh, and Mike, how do you feel about being bailed out by the US taxpayer? Interesting Bloomberg thing this morning which in effect stirs up the potential political controversy of the AIG bailout merely rescuing the solvency of AIG counterparties<
no subject
Date: 2008-12-12 09:58 pm (UTC)According to received wisdom, Lloyds Bank might fit the bill nicely as a "Fuck you, you sheep" sort of bank. Then again, as a soon-to-be-ex customer, I always thought that Lloyds' trumpeted prudence was more an admission that they were crap at investment, and they knew it. Which is better than the alternative, I suppose.
Funny how the teenybop Masters of the Universe could have been so adept at inventing, in effect, ever more complicated forms of fiat money when given the incentive of fuck-me bonuses; but are now incapable of inventing a replacement form of wholesale money market bonds.
I mean, how difficult could it be? One random piece of lying gibberish is surely as good as the next.
no subject
Date: 2008-12-20 11:36 pm (UTC)