Then and Now
Feb. 26th, 2009 01:12 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksEnigmatically, I am determined not to blow my top at the unbelievable stuff that is printed in the financial press every day at the moment. Unbelievable both in the sense of "this is just nonsense being spouted by journalists" and, in other cases, "this stuff being spouted by journalists is true. Unfortunately, the truth is so insane as to be unbelievable".
I say that I am determined not to blow my top because I have been referred to The Power Of Now by Eckhart Tolle. From what I've read of the book so far, if you strip out the mumbo-jumbo, there are some good mental tricks here to stop you going fucking mental in this insane and cruel world. And you can do so without building emotional brick walls and seeing the world as a battlefield. Never mind the crap surrounding the text (negative energy waves, that kind of tosh) -- if it works, it works, and Tolle's ideas for getting parts of your brain to stop driving you mad and get the other parts of your brain to keep you calm and sane look nifty to me. I've often thought that one of my problems is that I think too much, and Tolle addresses just this problem (I should also point out that it's a good book for anyone looking to try meditation).
Anyhoo, let's bypass the two surreal parts of Finance-Land this morning --- that Fred Goodwin has negotiated £650,000 a year pension for life (with the added irony that, should RBS not be nationalized and still go broke, he would be at the head of the queue of creditors, thanks to legislation enacted by the Labour Government), and (2) that the FSA (UK Financial Services Authority) chairman Lord Turner has admitted that for the past few years what it has been doing has basically been making sure that people weren't crooks, but not questioning whether they weren't stupid.
No, let's hunt out some common sense, and, if we look hard enough, we can find it. John Authers observed on the front page of the FT that the financial crisis was over. By this he means that the markets are now reacting to an economic crisis rather than a banking crisis. This implies a weaker yen, a stronger dollar, bond defaults, blah blah blah. But that isn't spellbinding analysis.
I preferred the contrarian analysis from Allister Heath in City AM, where he implicitly states that the trillion dollar losses being talked about by the idiots at the FSA and elsewhere (they are closing stable doors just when they should be leaving them open) are, basically, a load of bollocks.
I've heard the trillion dollar number a couple of times in the last few days. As you may or may not recall, I tried to calculate the amount lost as a result of sub-prime lending (a very different number from that which might be lost because of economic contraction) and I find it hard to come up with more than $150bn globally. While this is not that relevant when we might come up against a trillion dollar "loss" because of failed businesses, it's an important number for the calculations of the banks and the Bank of England.
Heath pointed out the obvious fact that the mortgages owned by British banks are not worthless. They are backed by real assets. Even in the US, where fraudulent activity was probably widespread, most of the mortgages owned by whoever owns them (it's still hard to work out who that might be) are not worthless. Heath also observed that in the last repossession crisis (the early 1990s), the worst year for reposessions saw 0.77% of homes taken from debtors. In other cases, the debt was serviced. If we assume a worse scenario than this in the US (say, 2.5%) carrying on for five years on the spin (a highly stringent stress test) then we still only get a 7% loss on assets or thereabouts (and this allows for a 50% discount on the sale of the home, meaning that someone else out there is a "winner" -- thus making even the 7% writedown an exaggeration of the true loss to the global economy).
Those are slightly complex numbers, but the net upshot of it is that the assets being held at the the moment, which can't be sold for love nor money, are unlikely to end up less than 93% of par (with an expectation of 97% or thereabouts). In the UK, the numbers are closer to 96%/98%. This compares with the BoE valuing £287bn of collateral (bought as part of the special liquidity scheme) against Treasury Bills lent at just £242bn. In other words, something that the BoE values at £242bn is probably going to turn out to be worth at least £280bn.
Now, this doesn't mean (as many a young city commentator and fund manager might be thinking) "go out there and buy shares in banks". For a start (see Authers, above), the problems at RBS, Lloyds and HBoS are now in the land of future defaults because of the recession -- mainly in the land of backing management buyouts which are going to go tits up. What it DOES mean is that as these subprime instruments unwind (something which will surely begin to be noticed in Q3 and which will become distinctly clear by March 2010) there will be some nice "adjustments" occurring in the unlikeliest places. The BoE and the Fed are two of these, but they could also appear elsewhere. Fortis, ABN Amro, the US bond insurers -- basically any company that has had to make "non-temporary writedowns" on products that it is still holding to maturity.
The IFRS accounting system must take some of the blame here, in that it is a lot tougher on accounting requirements.
But another culpable character is the FSA, which seems to be demanding tougher "stress tests" just when it should be easing them. Let's take a poker analogy. Or, rather two analogies.
1) You are a winning player. You have a very good run. Your bankroll equation tells you that you need a $15,000 bankroll, given your recent win rate and volatility. You have $30K in the bank. You then hit a shit run, and you lose $10,000 of your $30k. But your stats still tell you that you need a $15k bankroll. But you decided to step down in stakes to rebuild, thus reducing your requirement to $9k. However, the regulator steps in, sees that you have lost a third of your cash, and immediately goes "uh-oh, clearly you're in worse shape than we thought. We're upping your bankroll requirement from $15k to $25k". And so you have to go out and borrow money to carry on playing, even though you are at lower stakes and even if you were at your original stakes, you wouldn't need it.
2) You are really a losing player who has been very lucky. All of the above takes place as before. In this instance, increasing the bankroll requirement will merely stave off the inevitable a little while longer. It won't solve the underlying problem.
And that's the regulator for you. It doesn't address the underlying problem. And it never has. What it does is put unnecessary stress on a winning player, while failing to stop a losing player go gaga.
________
I say that I am determined not to blow my top because I have been referred to The Power Of Now by Eckhart Tolle. From what I've read of the book so far, if you strip out the mumbo-jumbo, there are some good mental tricks here to stop you going fucking mental in this insane and cruel world. And you can do so without building emotional brick walls and seeing the world as a battlefield. Never mind the crap surrounding the text (negative energy waves, that kind of tosh) -- if it works, it works, and Tolle's ideas for getting parts of your brain to stop driving you mad and get the other parts of your brain to keep you calm and sane look nifty to me. I've often thought that one of my problems is that I think too much, and Tolle addresses just this problem (I should also point out that it's a good book for anyone looking to try meditation).
Anyhoo, let's bypass the two surreal parts of Finance-Land this morning --- that Fred Goodwin has negotiated £650,000 a year pension for life (with the added irony that, should RBS not be nationalized and still go broke, he would be at the head of the queue of creditors, thanks to legislation enacted by the Labour Government), and (2) that the FSA (UK Financial Services Authority) chairman Lord Turner has admitted that for the past few years what it has been doing has basically been making sure that people weren't crooks, but not questioning whether they weren't stupid.
No, let's hunt out some common sense, and, if we look hard enough, we can find it. John Authers observed on the front page of the FT that the financial crisis was over. By this he means that the markets are now reacting to an economic crisis rather than a banking crisis. This implies a weaker yen, a stronger dollar, bond defaults, blah blah blah. But that isn't spellbinding analysis.
I preferred the contrarian analysis from Allister Heath in City AM, where he implicitly states that the trillion dollar losses being talked about by the idiots at the FSA and elsewhere (they are closing stable doors just when they should be leaving them open) are, basically, a load of bollocks.
I've heard the trillion dollar number a couple of times in the last few days. As you may or may not recall, I tried to calculate the amount lost as a result of sub-prime lending (a very different number from that which might be lost because of economic contraction) and I find it hard to come up with more than $150bn globally. While this is not that relevant when we might come up against a trillion dollar "loss" because of failed businesses, it's an important number for the calculations of the banks and the Bank of England.
Heath pointed out the obvious fact that the mortgages owned by British banks are not worthless. They are backed by real assets. Even in the US, where fraudulent activity was probably widespread, most of the mortgages owned by whoever owns them (it's still hard to work out who that might be) are not worthless. Heath also observed that in the last repossession crisis (the early 1990s), the worst year for reposessions saw 0.77% of homes taken from debtors. In other cases, the debt was serviced. If we assume a worse scenario than this in the US (say, 2.5%) carrying on for five years on the spin (a highly stringent stress test) then we still only get a 7% loss on assets or thereabouts (and this allows for a 50% discount on the sale of the home, meaning that someone else out there is a "winner" -- thus making even the 7% writedown an exaggeration of the true loss to the global economy).
Those are slightly complex numbers, but the net upshot of it is that the assets being held at the the moment, which can't be sold for love nor money, are unlikely to end up less than 93% of par (with an expectation of 97% or thereabouts). In the UK, the numbers are closer to 96%/98%. This compares with the BoE valuing £287bn of collateral (bought as part of the special liquidity scheme) against Treasury Bills lent at just £242bn. In other words, something that the BoE values at £242bn is probably going to turn out to be worth at least £280bn.
Now, this doesn't mean (as many a young city commentator and fund manager might be thinking) "go out there and buy shares in banks". For a start (see Authers, above), the problems at RBS, Lloyds and HBoS are now in the land of future defaults because of the recession -- mainly in the land of backing management buyouts which are going to go tits up. What it DOES mean is that as these subprime instruments unwind (something which will surely begin to be noticed in Q3 and which will become distinctly clear by March 2010) there will be some nice "adjustments" occurring in the unlikeliest places. The BoE and the Fed are two of these, but they could also appear elsewhere. Fortis, ABN Amro, the US bond insurers -- basically any company that has had to make "non-temporary writedowns" on products that it is still holding to maturity.
The IFRS accounting system must take some of the blame here, in that it is a lot tougher on accounting requirements.
But another culpable character is the FSA, which seems to be demanding tougher "stress tests" just when it should be easing them. Let's take a poker analogy. Or, rather two analogies.
1) You are a winning player. You have a very good run. Your bankroll equation tells you that you need a $15,000 bankroll, given your recent win rate and volatility. You have $30K in the bank. You then hit a shit run, and you lose $10,000 of your $30k. But your stats still tell you that you need a $15k bankroll. But you decided to step down in stakes to rebuild, thus reducing your requirement to $9k. However, the regulator steps in, sees that you have lost a third of your cash, and immediately goes "uh-oh, clearly you're in worse shape than we thought. We're upping your bankroll requirement from $15k to $25k". And so you have to go out and borrow money to carry on playing, even though you are at lower stakes and even if you were at your original stakes, you wouldn't need it.
2) You are really a losing player who has been very lucky. All of the above takes place as before. In this instance, increasing the bankroll requirement will merely stave off the inevitable a little while longer. It won't solve the underlying problem.
And that's the regulator for you. It doesn't address the underlying problem. And it never has. What it does is put unnecessary stress on a winning player, while failing to stop a losing player go gaga.
________
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no subject
Date: 2009-02-26 02:43 pm (UTC)I am disappointed, but unsurprised, not to see stories about how the fact that Northern Rock has paid back so much of its loans so quickly might imply that the Government might eventually make a profit off what it had to do to help Northern Rock out - and, probably slightly less plausibly, might not do nearly as badly as feared out of other support it has had to give.
In real cloud cuckoo land, I'd kind of like to see the government make hostile takeovers of banks whose market capitalisations are absurdly low, purely with later reprivatisation at a profit for the public purse in mind.
(Edited to make a sentence hopefully make sense.)
The other way of looking at it...
Date: 2009-02-26 08:56 pm (UTC)In those circumstances, comparison to British historical repossessions (particularly since there was mortgage interest benefit for the last house price...In fact, under those circumstances, Britain 1990-1997 isn't comparable to Britain 2007-...) are further examples of nonsense from journos.
Looking at California (probably worst case, I grant you):
Repossession 2007 = 91,000
Repossession 2008 = 242,000
Population = 37m. If we estimate average household size at 3 (and I have NO IDEA what the right answer might be...) = 12m households and 2% repossessions last year. Not sure that 2.5% is a ceiling there, but your numbers might be ok. I'd bet on the over :-)
Even if California gets to 5% pa repossessions, most of the US outside Florida, Colorado, Arizona isn't going to hurt nearly as badly, because the lack of strict planning laws means the price rises weren't as steep. The black ice here is that people can use the put option to drive a hard bargain where the bank "adjusts" the balance of the mortgage.
The UK isn't going to do anything near as dramatic because of the lack of the "put option". However, that will mean that the UK will have a flatter, longer repossession curve.
What I ought to find out is what form the BoE assets take. It's like the useful life of potatoes vs frozen chips at room temperature! If there are raw British loans in hock at the pawnbrokers, then losses (outside of Northern Crock & B&B) can't be much worse than 20% of face value on the worst loans in the package. If they've been CDO-ed etc, all bets are off. I believe that if you've got the wrong tranche, you could be whole at 15% down, and wiped out at 20% down.
Likewise, if they have US bubble state loans in any form, all bets are off.
Do you know what the mix is?
Re: The other way of looking at it...
Date: 2009-02-27 07:37 am (UTC)But, in the grand scheme of things, the BoE mix is top of the range.
In the US, the "put" option does indeed change things somewhat, but I still tjhink that you will find a higher level of debt servicing than the current debt default assumptions appear to claim.
PJ