As you are no doubt aware, several large banks came close to going bust in 2008, and were saved from formal insolvency only by the government lending/giving them billions of pounds to fund the losses incurred by the reckless greed of the bank’s senior management, who gorged on huge bonuses based on profit figures that were never real; the so called profits made in the great credit inflation of the post millennium debt binge, caused maybe by the Greenspan put, maybe, all the debt created lead to huge paper profits and massive bonuses for the executives. Of course, a huge amount of these profits were on paper only and have subsequently unwound as the debt goes bad.Thanks to the taxpayer chucking more debt to fill the gap, because these banks are now too big to fail, they avoided formal insolvency, except strangely Lehman Brothers, an exception that proved almost fatal for the global monetary system, which was saved by collapse by the ingenious plan of governments borrowing money from the markets to lend to the insolvent banks to save the system.So who is to blame? Politicians who got re-elected based on phoney economic growth that was all about consumer debt funded retail sales and property booms. And greedy bankers hungry for bonuses and the desperate desire to beat the other guy, to build an empire before being taken over by a larger rival. The politicians will slip away into obscurity, powerless to the end. The greedy fat cat bankers are sat on their winnings, apparently untouchable for merely getting it wrong.But if there had been no government rescue, formal insolvency procedures such as administration or liquidation would have resulted in an automatic investigation into their conduct and at the very least a ban from acting as a director for being responsible for running up such huge losses, for being so staggeringly incompetent. No such investigation awaits Sir Fred Goodwin and his peers, instead they are playing golf, off shooting or on their yacht, with their ill-gotten gains unchallenged and unrecovered.In the meantime, small and large companies alike are falling like flies thanks to the economic paralysis created by the imploding monetary system. Many of the directors of these failed companies will be taken to task by the regulators, yet the perpetrators of the biggest insolvencies ever, by a distance, remain outside any regulatory bodies investigation – they have got clean way. By a quirk of the system, because no formal court procedure happened, they have slipped through the cracks, faded away, blamed but not punished, going gracefully after a suitable period of grace to save face.Why is Sir Fred Goodwin still a sir? Why is the board of Northern Rock not being banned from acting as Directors for the maximum term of 15 years? Why do different rules apply to directors of huge companies, when directors of small companies are subject to a rigorous review even for a small liquidation where a few thousand pounds has been run up in trading losses, as opposed to several billion? If the Directors of the failed banks are not taken to task, what is to discourage those who follow from taking reckless risks in the future to pad out their bonus schemes?Where is the lesson for the millions of small businesses? Large company directors get paid more and should be held to a higher standard. Where are the politicians on this issue? Are they silent because they are uninformed or because they just wish things would get back to normal. Perhaps they don’t want to attack big business because they hold the re-election purse strings.If you want my opinion, the whole thing stinks.
Here are a few amazing facts and figures from the Telegraph on 28 October 2008:Toxic Debt is now $2,800 billion – “toxic” debt is apparently sexier than “bad” debt. From an accountants understanding, the debt is bad, as in, it is not going to be paid, as opposed to toxic presumably being, it is poisonous or smelly, or what?
Anyway, musings about the media latching on to the phrase “toxic debt” aside, this is the amount of the total bad debts incurred by major global financial institutions, according to the BoE, due to the US sub-prime mortage market “meltdown”. $2.8 trillion is a lot of money. But wait, it gets worse.
All these same institutions are facing deteriorating loan books with mortgages, credit cards and corporate loans all exposed to the contraction in the “real” economy as more people file for bankruptcy and more companies are forced into Liquidation and Administration.If the recession turns out to be as bad as feared by various media pundits, then the banks will have a few more billion to write off. But nothing on the scale of £2.8 trillion!And now, the pound has crashed against the dollar, now at a five year low of $1.5468, with the steepest fall in 37 years on Friday; it was over $2.00 just 6 months ago! If we are having a banking crisis, might as well throw in currency crisis for good measure.As a result France now has a larger economy than the UK! Apparently these things are calculated in Dollars – there’s a surprise. Bad for inflation, as imports and holidays cost more.
Still, the Oil price is crashing too, so that evens things up a bit.I note Russian retailers are starting to refuse credit cards from Russian Banks because the retailers don’t trust their banks to pay.In the meantime, the IMF has made emergency loans to Iceland, Hungary and Ukraine (one wonders what strings were attached by the IMF – privatisations and public sector cuts if past form is anything to go by).Not to be out down, in Japan, the Nikkei is at a 26 year low, and the Yen and Dollar carry trades (don’t ask) are crashing as a result.
In Hong Kong, the Hang Sen had its largest fall since 1991.Nine major banks in the US are to receive $125 billion this week as part of the monetary system rescue plan. Meanwhile the good news is that the frozen credit markets continue to slowly thaw, as LIBOR continues its slow drop since shortly after the Brown/Darling Monetary System Rescue Plan was instigated, indicating that it only might be working.As for the UK property market, almost a third of homes remain unsold after 6 months on the market according to globrix.co.uk, prices have dropped 16% in that period.
Another BoE report states that 500,000 homeowners have negative equity already and another 700,000 will be in negative equity if prices are confirmed as declining 15% from the peak in summer 2007. During the early 1990’s 1.8 million households were trapped in negative equity until the market recovered after 1995. The BoE report indicates that we are headed for similar levels in the current cycle.With all the gloom and doom (oh joy) I can report a dim light at the end of the tunnel , as the US housing market might just have bottomed out. The rate of US house sales increased unexpectedly, rising 5% in September, as buyers took advantage of cheap prices, with perhaps some fleeing volatile stock markets.
Given the US property bubble drove the credit bubble, the main source of the bad loans, it looks like asset prices might recover, and the remaining debt secured on US real estate asset will be good.Perhaps the credit crisis has peaked, now comes the aftershocks in the real world. The bi-annual BoE Financial Stability report states that the financial crisis is now the worst Britain has faced since the start of the First World War! Not sure what that means, but it doesn’t sound good.
Thoughts on the Greatest Credit Contraction in Financial History (the so called “Credit Crunch”). The mother of all Black Swans, the credit crunch was the day the markets froze. Nobody wanted to lend, everybody started worrying about getting repaid. The credit contraction that followed that we are now enduring was widely predicted as being overdue, and to be of unprecedented severity, due to the scale of the great credit expansion that occurred in the era of low inflation and low interest rates, such that real interest rates went negative in the US for years after 9-11. The bigger they are, the harder they fall. But still the suddenness of the credit crunch was a shock. The market for loans supported by mortgaged freehold property disappeared. The buyers (or was it borrowers) all took fright, took flight, and confidence has been permanently destroyed.
The extent of the forthcoming liquidation of money is unknown. To understand what actually happened I reckon this Article, published in MoneyWeek on July 11 2007, just about covers it:
Is the credit bubble about to explode?
Jul 11, 2007
Specialists are insisting that nothing’s wrong. But “there is a sense of crisis in the credit markets”, says Lex in the FT. Last week the turmoil in the subprime mortgage market crossed the Atlantic, with two UK-based hedge funds, Queens walk and Caliber Global Investment, reporting large losses owing to mortgage-linked derivatives; the latter is to be wound down.
This followed the near-collapse of two leveraged Bear Stearns hedge funds, one of which required the biggest bail-out since the rescue of LTCM in 1998. And now investors have grown cold on other forms of debt, raising fears of a global credit crunch. The major worry is the market for collateralised debt obligations (CDOs), whereby subprime mortgage loans are packaged together with other assets and sold on. There is no active market for CDOs. The only way to establish a market value is by selling them, which prompts other investors to revalue the securities.
The losses at Bear Stearns have raised fears that “the CDO emperor” has no clothes, as the FT’s Gillian Tett puts it. Merrill Lynch forced the markets to price CDOs when it sold off some of Bear Stearns; the top tranches fetched just 85% of face value and the auction was then called off. When they eventually downgrade, many investors would be forced to sell, rocking the $1trn CDO market. “You’ll see massive losses” from “banks, insurance companies and pension managers”, says Joshua Rosner of Graham Fisher & Co.
The downward revaluation of mortgage-backed securities raises the spectre of “a mass of margin calls, asset seizures and fire sales”, making Bear Stearn’s problems look like “a walk in the park”, says Antony Currie on Breakingviews. No wonder, then, that jitters over the mortgage market have led to “a global retreat from risk in credit markets”, says Francesco Guerrera in the FT. For the first time in years, investors have balked at risky bonds. Only $3bn of the $20bn in junk paper planned for issue last week was sold; companies ranging from steel group Arcelor Mittal to US retailer? Dollar General have had to shelve their debt offerings; and lenders are refusing “covenant-lite” deals for leveraged buyouts, says Ambrose Evans-Pritchard in The Daily Telegraph.
The “window of cheap credit” is slamming shut for buyouts or companies trying to re-finance. This is how a credit crunch starts. “Confidence in cheap credit could have had its last call.” agrees Tom Stevenson, also in The Daily Telegraph. As credit spreads widen and central banks hike rates further to combat inflation, corporate earnings and the “arithmetic of the takeover boom” that have underpinned equity markets are under threat. According to Albert Edwards of Dresdner Kleinwort, “all investment portfolios will be shredded to ribbons. This is the big one.”
More than a year later, and this article has proved prescient, with the credit crunch now being blamed for everything, and I do mean everything that is going wrong in the world. In human terms this means a failed business,a company in liquidation, personal bankruptcy, repossession of your home, redundancy, no mortgage deals to buy a house or move, economic recession, it’s all doom and gloom in the media.In financial terms we are witnessing the destruction of money on an apocalyptic scale. This is the greatest credit contraction in the history of the financial system, simply because, the credit expansion that preceded it was vast and unprecedented in history in its length and scale. Inevitably, despite all the claims for economic stability, what goes up must come down.
The crash is usually short and brutal. Based on the length of the period of money expansion, some 15 years, the contraction could last 3-5 years before the fear is diminished and greed starts to turn the tide once more. It could well be that the globalised economy will prove resilient and the huge amount of bad debt will be shrugged off and the developing economies will drive additional growth.
Alternatively, it could be that by globalising, the entire global system will be infected by the sub-prime contagion. If that is the case, it is utterly exposed to the bursting of the financial bubble and an asset deflation on a similar scale to the credit that has been created, and is now being cancelled, will unfold. Ask the man behind the curtain, maybe he knows what is going to happen.
I have always hated the name HBOS, it was an abomination (I mean why was the “of” included, it was bad grammar).
The fact that the name they came up with was so wrong, in my simple way of looking at things, shows that Halifax and Bank of Scotland should never have merged in the first place.What were they thinking, what was the point? From the Directors of Bank of Scotland’s point of view, a desperate effort to keep up with Royal Bank of Scotland, there ancient rivals in the tiny Scottish market.
Fearful of at best being left behind, and even, unthinkably, being bought by RBS (an abbreviation which is grudgingly acceptable as it ignores “The” and “of”) they plunged recklessly into a merger with the largest mortgage bank in England. Today that fateful strategy lead to the ultimate humiliation of being sold for a government guaranteed discounted share swap, to an English rival, with shareholders investments mostly destroyed, and the employees jobs threatened. In the meantime, the domino effect continues – who will be next? Will Morgan Stanley survive as an independent – my punt for the day is that they will be bought by Goldman Sachs in a share swap deal, but what do I know. AIG, proud sponsors of Man United have been nationalised by the Americans for $85 billion, a trifling amount compared to the Freddie and Fanny bail-out (just the $3,trillion or thereabouts). It’s got the stage where the numbers don’t seem to matter any more – it’s all funny money, U.S. dollars that is.
As George Soros said on TV earlier today, if the financial systems survives, a few bank failures is neither here nor there. What was scary is that he is considering the possibility that the global financial system could fail. I guess that would start with a run on the dollar. I can’t think of one man more likely to start a panic againts the Dolar than the venerable Mr Soros. As long Mr Soros sits on his hands, Uncle Sam can keep printing dollars and paying for oil and cars and gadgets with this funny money, and the Germans and Chinese and Russians and Saudis etc keep signing up for the next round of US Treasury Bond issues, then the system will survive. But if confidence in the Dollar collapses, then we are all truly in the shit. I felt the fear running down my spine reading today’s analysis in the Telegraph – these are historic times we are living through, completely momentous, – it is hard to believe we’re all doomed on such a beautiful day.
After such a gloomy summer, the temptation to retire to a sunny beer garden for the afternoon is overwhelming, a few cold lagers while dissecting the Times take on affairs. Ahh, bliss. Never mind the Banks, as long as the Brewers keep making a profit, this country can take anything. As for a financial tip, if I was a speculator, I would stay out of property for the moment, stick your cash into gold, which might just triple in the next 3-5 years (again, what do I know?). When this financial crisis spills into the so called “real economy” then inevitable we are looking at an increase in Liquidations and Administrations, in personal bankruptcy and IVA’s.
Fortunately we have some excellent insolvency practitioners (myself included?) who can help UK entrepreneurs and especially small company directors survive and thrive in the most testing of economic conditions ever in the history of money.
Liquidation of a company is never an easy decision to take. Deciding when the company is insolvent is often not clear cut. Often there are reasonable grounds for the directors of the insolvent company to continue to trade in the expectation that the company can trade out of the cash flow problems, which have often been caused by an unexpected event such as a bad debt, or a sudden loss of business due to external events, such as for instance the credit crunch.
Sometimes the directors’ mind is made up for them by an unsecured creditor sending in the bailiffs to collect on a county court judgement (ccj) or a secured creditor withdrawing support once they start to get nervous. Banks have pretty good monitoring systems these days, so when a company breaches it’s banking covenants, or starts receiving writs or a ccj, the bank will know about it thanks to the electronic adverse credit monitoring systems we can all enjoy in the digital economy. Where a bank is a secured creditor, that is, it has a debenture granting a fixed and floating charge over the company’s assets, the bank has the ultimate sanction of appointing an Administrator for the purpose of selling the company’s assets in order to repay the secured lending.
Indeed, if the company owes money to an aggressive unsecured creditor who foregoes the debt collection route of applying at county court for a county court judgement, but instead applies for a winding-up petition, then the company is faced with being placed into compulsory liquidation, at which point the Official receiver attached to the county court local to the company’s trading address will be appointed Liquidator. Increasingly many creditors are using the winding up petition as a debt collection tool.
Compulsory Liquidation usually spells the end for the company and the business. However, Voluntary Liquidation can be a route to save the business, and/or a way for the directors/shareholders to exit the insolvent company and pass the winding-up over to an appointed Liquidator. At the point of Liquidation control of the insolvent company passes from the directors to the Liquidator who takes control of the company for the purpose of the winding up.
The directors face an investigation into their conduct by the Liquidator who will report to the BERR unit responsible for director’s misconduct if he finds any evidence of misconduct on the part of the directors. This is the irony of the situation where directors of an insolvent company who seek advice from an insolvency practitioner will often be advised that it is in their best interests personally to proceed to instruct the IP to assist with placing the company into Liquidation. Trading on whilst the company is technically insolvent places the directors at risk of being disqualified for a period of years. The directors often think that it is their duty to creditors to fight on and try and recover the situation and make sure that all unsecured creditors get paid. However, if they fail in the attempt and the liabilities end up greater than they were when previously advised to consider placing the company into Voluntary Liquidation or Administration.
As such, it is worth considering, at the point the company is technically insolvent, being unable to pay its debts as they fall due, and/or the value of the assets are less than its liabilities, that it might be in all stakeholders best interests to continue the business in a new company, without the risk of the directors being pursued by the Liquidator for insolvent trading or being pursued by the BERR disqualification unit under the Company Directors Disqualification Act 1986 for other issues such as trading with crown monies, or failing to keep proper books and records. Such a business transfer can be effected by either voluntary liquidation or by administration.
Administration is now the weapon of choice of the banks, this procedure now having largely replaced Receivership for all but older debentures on secured debt. Directors also can appoint an Administrator if this route is possible and appropriate and a more effective alternative in the situation than creditors voluntary liquidation (CVL). More on that subject on another day.
So if your company has a cash flow problem, and is short of working capital, and you need insolvency advice, the only thing that is certain is that doing nothing is not an option. Look at funding options, but also look at restructuring options. The law is there to help small businesses survive, the sooner directors take action, the better chance they have of controlling the situation for a better outcome.
Insolvency is a business like no other. My approach is simple. Help the person who comes to me for assistance.
It is simply a case of first understanding the situation, think about it carefully, than form the best plan for the person asking for help. If there is a job in it for Findlay James brilliant, if not, no problem, it’s good to help, we are not desperate for business, and we know from experience that we may well be paid back with a referral from that person in the future. At the end of the day, we all like to repay a favour.
So don’t expect a hard sell from Findlay James, in fact the opposite applies. We don’t tend to chase up prospective clients after meetings, too be honest we rarely have to. Our clients want the truth, the facts, the real options, and that is what they get. At the end of the day, when you decide to put your faith in a professional, what you really want is no surprises, no moving the goal posts after the forms have been signed. That is our aim, to make sure you fully understand your choices and what you are getting yourself into.
All Insolvency Practitioners are looking to get in front of potential clients and sign them up for a liquidation, administration or voluntary arrangement. We are no different in that respect. Every Insolvency Practitioner has the same powers and duties and must deal with clients to the same ethical standards. There are big firms small firms, and yes, medium sized firms. As a rule of thumb, small firms deal with smaller clients, large firms deal with larger ones.
We are trying to be different in that we are a small firm, but operating nationally via a network of associate accountancy practices who work closely with Findlay James to deliver insolvency services in their local area. This business model has been operating successfully now for several years. It allows us to be flexible, to enjoy economies of scale at our Head Office in Cheltenham, with a network of experienced qualified accountants supporting our clients locally when needed. By operating on a significantly lower overhead basis than our larger competitors we can make more from less, we are not under pressure due to large fixed overheads, and hence under pressure to sell you a solution that you don’t need. I hope that makes sense to you if you are looking for assistance and uncertain where to turn. Check out our web infomercials, then if you think it would be helpful give us a call.
Welcome to the new, state of the art, hi tech finjam.com, an accountancy website like no other. The objective is simple – to have the best website in the insolvency profession, in terms of providing effective financial-literacy crash courses, for companies and individuals, to provide the financial survival tools when faced with insolvency.
I have repeated myself many times, the same rules apply so I have to. This has involved travelling hundreds of thousands of miles in the process. I have always enjoyed life on the open road, but maybe it is time to change the model. Chasing round the country is not really what I want to be doing anymore, frankly, I am a bit older now, I have to spend time with my young children, see them playing sport at school instead of being stuck in traffic on the M6. Then there is the price of diesel, carbon issues, it’s not a politically sound thing to be doing, never mind the fact that I am operating with crutches having busted by knee up playing football.
Another key objective is that video, rather than makes it easier for people to learn what they need to know about insolvency and company law, in order to take the fear out of it. It is the uncertainty that creates the stress, uncertainty about your financial situation is the worst form of stress, apart from bereavement.
How bankruptcy is in a fact a nightmare for the banks, and how killing a company is easy. How you can never really understand it until you have been through it. And forewarned is forearmed – never was this saying more true than when applied to the world of insolvency.
At the end of the day, online infomercials are no substitute for seeking one on one advice when the time is right; they are aimed at being a preliminary information gathering resource, supplemental to the traditional process of seeking professional assistance. While every company is much the same, every business is unique, if the situation is sufficiently serious you will need to speak to a qualified professional so, when you are ready pick up the phone and give us a call or request a call back on finjam.com.
Thank you Alisdair Findlay
2 August 2008
The current period of economic growth kicked off way back in 1992, and now in 2008 we are looking over the edge of an economic contraction and wondering how long, and how deep?
The fact that nobody actually knows makes it all the more fascinating pondering where it will all end.
It is established economic theory that the greater the expansion of credit, the bigger the contraction of credit once the expansion falters. Greed turns to fear and the whole process goes into reverse.
The credit crunch(contraction) currently underway has been instigated and exacerbated by the massive broker fraud that has been unwinding in the U.S. , the scale of this bad debt should be causing bank failures, akin to Northern Rock.
Policymakers have decided that banks will be supported come what may, as to allow them to fail would be potentially catastrophic, creating a prolonged and deep economic contraction on a scale not seen since the great depression in the thirties.
So, the solution to a failing bank is to lend it more money, i.e. create more debt, and delay the necessary credit contraction indefinitely. We are now set on a course of indefinite, infinite credit expansion, which is I believe, somewhat unprecedented.
Theoretically, this can work if we have ongoing, infinite economic growth - a pretty big if. No more business cycle, no more boom and bust. Just boom. If all this sounds mind boggling, that would be because it is.
So where will it all end? I wish I knew. Economic commentators like Roger Bootle are now forecasting stagflation, rising inflation and stagnant growth.
Then there is the issue that economists have this bewildering habit of ignoring resource constraints.
Will central banks ever consider the issue of energy policy linked to economic policy? Do they already? I don’t see much evidence of it.
Goldman Sachs are forecasting $200 a barrel within a couple of years, because of increasing demand from developing countries, particularly Russia, India And China. Then there is the small matter of a finite supply of the stuff. That is why oil prices will rise inexorably, and food prices with it.
In the meantime we are depending on economic growth to help meet our ever rising interest payments.
If you are in a hole, stop digging used to be a reasonable maxim when in trouble, now it seems to be the case that when you are in a hole, dig faster and hope no-one notices that your hole is beginning to look like a grave.
I read Roger Bootles’ book “Other People’s Money” a few years ago and in it, he expounded on the possibility of economic growth that was not directly related to resource usage, such as software sales, and other types of intangible services. Maybe technology, in particluar ICT will provide the key to the kingdom of economic nirvana, we can but hope. Certainly this blog didn’t take much in the way of actual energy or resources, the productivity gains from our ICT tools can be profound.
On the other hand, if our resources are diminishing surely we should seek to conserve them, to reduce our consumption. But that sounds like a recipe for economic contraction. Confused? You should be. Anyone who thinks they have got this world worked out is barking mad.
But on the basis that economic expansion is necessary for our society to succeed and to ensure all are fed and housed and cared for, we should all keep spending. But a period of austerity seems unavoidable, in which case, it is those who have no debts who will be best placed to weather the storm.
It seems crazy that spending like there is no tomorrow is in a way, for the greater good. And being sensible and saving and not spending is a deeply selfish act that shows you are only interested in your self!
Just thinking about it gives me a headache. I am off to the pub to do my bit for the greater good, and for my headache!
Cheers. Alisdair 19 05 2008
The fact that large financial institutions such as Northern Rock and Bear Stearns have been effectively underwritten by the central banks and the governments of the US and the UK shows the dilemma faced by regulators and governments – the risk of the domino effect in the financial system is greater than the perceived risk of moral hazard in effectively saying to larger financial institutions’ we will guarantee your liabilities whatever the type of lending you have been making, because the alternative of total financial meltdown is too awful to contemplate.
There appears to be a lot of genuinely frightened commentators in the media who are profoundly worried about the fragility of our financial system.
The failure of the CCC subsidiary of Carlyle Group is evidence of how history appears to be repeating itself. This CCC fund was leveraged 31 times, i.e. for every $32 invested only $1 was it’s own money the rest was borrowed. Leverage is great when you win and a total disaster when you lose. This type of investing was the reason why the 1929 stock market crash was amplified, as the leveraged investment was invented in the roaring twenties on the back of a booming stock market.
We have witnessed the relatively short memory of financial markets as the same phenomenon has been unfolding in the ever more complex investment banking products dreamed up by arch capitalists intent on getting seriously rich betting other people’s money.
As the hedge fund boom unravels, we could see the domino effect reaping a whirlwind that could lead to a decade long slump in economic activity, as happened in the thirties worldwide, as happened in Japan since the 1980’s (the Nikkei is still below it’s 80’s peak).
As much as the central bankers try and prop up the system, and we all hope they are successful, I am brought to mind a certain King Canute, who failed to command the incoming tide. The point being if there is no risk of failure bankers will become prone to ever more reckless behaviour in pursuit of personal aggrandisement. This is known as moral hazard – but as the markets have failed again, they have to be bailed out by the public sector, the poor old taxpayer who ends up picking up the tab for the dangerous behaviour of reckless bankers.
You reap what you sow, in Capitalism as in agriculture. The unravelling of trillions of dollars of loans gambled on bad loans secured on property in freefall will spell the end of the dollar as the world’s reserve currency and could prove cataclysmic for hyper-service economies such as the U.S. and the U.K. The oil producing countries will want euros for their oil – once this transition happens the U.S. is in serious trouble. The Euro was at a record high to the dollar yesterday, and with another cut in U.S. interest rates, this trend can only continue.
The U.S. is unable to service it’s massive current account deficit ($58 billion last month, capital inflows to the U.S. were down from $72 billion in December 07 to $37 billion in January 08) because who wants dollars any more. It’s been a long time coming, but it is possible that the recession we are now in could be of historic proportions.
Unless, unless the U.S. housing market rebounds, and the U.S. consumer spends like there is no tomorrow. Never underestimate the stupidity of the general public – sometimes ignorance is bliss, hey what the hell, I am off shopping – it is the only thing that will save us from financial Armageddon.
The Blind Leading The Blind and the Domino Effect
The US, UK, European and Swiss Central Banks issued $280,000,000,000 into the banking sector, by issuing government bonds, with the security being “damaged assets, as in mortgage backed securities” in an unprecedented, concerted attempt to shore up the global financial system. This sort of debt swap has never been done before. In my layman’s eyes it would appear that they are effectively saying to the banks we will take all the hits, you have a Northern Rock style guarantee that we will support you. Talk about moral hazard!
We are living through a financial crisis unprecedented in it’s scale and scope, and the fear is that it is going to get a lot worse. There is real panic in the air. The mistakes of the past have been repeated. The 1929 crash was amplified by highly leveraged investments going bad, we are now going to see many hedge funds, private equity firms and banks fail as their highly leveraged bets go wrong. I prefer the term bet to investment, it is more honest.
You can see why governments are so obsessed with economic growth, as this allows the financial system to function. When growth disappears, the money system starts to implode. Failure begets failure, what we in the insolvency profession know as the domino effect – a large failure like Rover will cause multiple failures in its wake, and so on, the domino effect ripples on for years.
So who will be the casualties, who will be the largest institution allowed to fail? Anyone for Bear Sterns or Citigroup?
In the meantime, the badger has his first budget later today, and I can’t help thinking what an irrelevance he is. He is totally at the mercy of the machine, he had no choice to nationalise Northern Rock, and he must go along with whatever Mervyn King demands.
Figures from the council of mortgage lenders showed that 50,300 mortgages were taken out in January 2008, 34 percent lower than last year. Then the Department of Communities and Local Government (DCLC – who comes up with these stupid department names, they are a nightmare to remember) announces that house prices are up 8% from last February!
Mr King wants a period of austerity, he wants a house price re-adjustment, so do people without a house, and the house builders are bracing themselves for a big downturn. That downturn is now. Hang on to your hats, the housing sector has been driving the UK economy for 13 years, and all the easy credit and household debt has been accumulated on the back of the feel good factor as house prices tripled. The only question is how far, how fast the fall will be, soft landing or slump? The badger would do well to have a few fiscal rabbits up his sleeve to stimulate the housing sector – if only he read my blog? If only anyone would? Hey, if you don’t write it, it’s certain no-one will.
In the meantime, the speculators have moved on from shorting sub-prime securities to of all things oil, wheat and other commodities, now seen as safe havens. Texan crude hit $110 a barrel another record high. The MD of Greggs is kicking off in the press about the price of wheat, blaming this on speculators, not poor harvests, increased demand or biofuels. Wheat hit a record $13.495 a bushel recently. And it’s being driven by financiers making bets to try and recover their losses to the sub-prime meltdown – my head hurts just thinking about it. Why can’t they just bet on the horses like everybody else? Of course event hat is not certain, given todays cancellation at Cheltenham due to the high winds.
Severe storms from the North Atlantic late in winter/early spring again, more evidence of Climate Change, but that discussion is for another day, although I do like the link. Started a new book “The Carbon Wars” by Jeremy Leggett about the history of Climate Change politics, should be good. Still working my way through “The Shock Doctrine” by Naomi Wolf, one of the most enlightening and truly depressing books I have had the privilege to read.