Monday 19 January 2009

So The Bank Bail Out Wasn't Enough - As Suspected

We, the public, are simple people. We like the good times, we like borrowing and we love spending. It's in our blood and our Government positively love us doing it too - it makes them look really good. So when the bail out of banks was pulled off in October, we all loved our new superhero, Gordon Brown.

£800bn Was a Blind Guess

You see, we all think Brown and his army of thinkers are really intelligent. If they say £800bn is required, then they must be right - they have calculators, don't they? The reality is 9 months after his non-election, Brown is facing a fundamental challenge on the one thing he believed was his strength - the finances of this country.

Yet for all his techno-speak and super-hero antics, the problems we created and are now trying to fix are related to common sense. Which is why the remedies of mere bail outs had to be only the start of the massive bill we as a nation will have to face in order to put it right. Collectively, we spent beyond our means and way above what our household disposable income supported. We borrowed against the equity in our homes which has now collapsed just leaving the debt. The recession is now biting deeply and last week alone, despite a stimulus of £10bn of wanton largesse from Lord Mandelson to businesses up to £500m turnover including a fund of £500m to encourage people to recruit not make people redundant, over 13,000 people lost their jobs. As a direct result of the Canadian giant Nortel going down we face a bill of £1bn to bail out their 43,000 UK pensioners.

When you clear away the hit-and-hope tactics, stimulus packages and flowery talk, you cannot get away from the fact that all the £800bn did was save the skins of a small number of the greediest people in the world. And even that was not big enough for most cases.

The £800bn Bail Out Was A Knee Jerk

This week we have found out that yet more money has to be piled into one of the greediest of the banks, RBS, and the UK taxpayer is set to own up to 70% of a bank with £1.3 trillion of liabilities. The collective genius of Brown's advisers are now creating either an elaborate insurance scheme or bank underwritten by UK taxpayers again to insure or rehouse the 'toxic' bad debt owned by Banks. Here's the rub - no one knows how much of it there is and it makes you think, what is such a scheme likely to achieve? By allowing the Banks, the heart of what caused the problem, to shed their massive mistakes, we allow them to absolve all responsibility for that debt and give it to someone else so they can get back to the business that got us into this mess - lending stupidly.

Because that is what it will take to get us out of this mess, according to Brown. Lend again, like it was 2007.

Serious Miscalculations

I have blogged about what I thought about the state-sponsored anti-competitive takeover of HBOS by Lloyds. Meanwhile in the US we see the same on a grander scale. Bank of America, having eagerly spotted the ailing Merrill Lynch, bought it for a hefty sum. What a surprise when they find it has losses this year of $15-20bn they had not thought of and so BoA have gone to the US Treasury and asked for £20bn of capital and a $118bn guarantee for 'toxic' debt - over and above the bail outs - and all the while shedding huge numbers of jobs. Citigroup, the same - they sell a chunk of the company for cash and shed 75,000 jobs and still they have split the company to try and isolate the larger problem for bail out. Barclays in the UK, bought the remnants of Lehmans and, you guessed it, they need a bail out and are shedding jobs in their own Investment Bank arm.

Despite the £800bn bail out and the rest so far, it has not stopped these banks behaving like greedy idiots. None of them have a clue how bad their problems are but the one certain thing is that no matter what they are, they just carry on making mistakes and their respective Governments will keep on bailing them out with taxpayers money and guarantees.

Meanwhile, the Governments keep on paying out because they are desperate for the same people to start doing what they did before so that the economy stops plummeting and everyone can get re-elected.

But the Banks won't lend.

Lending Was, And Is, The Issue

Stupid lending and the flawed business model that fuelled it got us into this situation. Now, getting a mortgage is a far more arduous affair, the terms will be very different and, of course, the values of properties are very different. In fact, whichever way you cut it, buying a house right now is not a good idea as the asset is likely to lose around 20% of its value by this time next year. For the lending cycle to work as before, the fundamental assumption is that property prices rise beyond all relation to common sense and don't stop. Now that house prices have stopped rising and indeed gone backwards at a rate of knots, the Banking community seemed to have suddenly realised, despite all their natty advert smallprints, that what goes up can indeed come down. So now they don't want to lend.

On the business side, as firms struggle to attract orders, cut costs and lay off people, they need cash to survive as many large businesses operated on a marginal business model funded by cheap borrowing. This was another recipe for disaster and only works if the graphs keep pointing upwards. Most did not understand how a recession worked and so did not plan for this and consequently need cash to just survive. And of, course, Banks don't lend money for wages as they can't be sold - they lend for growth or assets.

The vicious circle that the credit crunch and recession has concocted has a long way to go yet.

Working Out What Next

The Government seems to be reacting to new situations daily and this has been the Hallmark of New Labour - Opinion Poll driven Government. The same with their tactics to solve the money crisis - they chucked an amount of money they thought was big at the problem thinking it must do the trick. The answer lies in common sense. The difference between what has been spent in our economy from the proceeds of Mortgage Equity Release and the current value of homes is roughly the amount of money in deficit we are - at a simplistic level. When you add that up you will understand the basics of the problem between here and the US. Most of the money was derived from selling it as debt and that's where the Banks problem lie.

Sub Prime was only the manifestation of the stupidity, the whole business model was flawed. Today, it hangs like a millstone around our necks.

This problem is huge, beyond the paltry sums being thrown at it and that's why we should not trust the army of bankers surrounding Government because they are only ever going to act in the interest of saving the banking system. Meanwhile, out in the real world, order books are shrinking, customers are defaulting on debts and money is hard to come by - people are losing their jobs and while the schemes offered by Mandelson may be a stop gap, if orders are not there, businesses will not survive.

The reality is that there is an enormous price to pay for the excess of the last 10 years and we either try and shore it up to fail again at some point in the future or we face it and somehow take the bad news on the chin and get us back to reality.

Thinking Aloud

I'm no genius. I'm just someone angry about all this stupidity and how we are letting people get away with it by listening to their solutions which protect themselves more than us. What strikes me is that there is not room enough for all these Banks and we have a financial system that has lost all touch with its purpose of providing capital and credit. Instead we have unregulated, get rich quick schemes, hedging, shorting, derivatives and other motley instruments of doom. Many would argue that we would not get the fluidity and vibrance of markets and therefore money would be less available for lending. And that's the heart of it - we are going into a phase where we must grow slower so we will not need as much.

Another issue I have a problem is that there is absolutely no punishment for failure in all this. Even as we speak, Merrill Lynch's CEO, John Thain, who famously asked for $10m as a bonus from his Board for not letting it go bankrupt, somehow omitted to tell BoA the extent of his firm's losses. He carries on. In fact, so few Banking executives have lost their jobs its scary - yet a few hundred thousand tillers, back room people, administration staff, call centre people, IT, customer service staff etc have lost theirs.

And yet we not just allow them to get away with it, we actually bail them out.

What is for certain in all of this is that Gordon Brown and his advisers have no clue as to how much this is all going to cost. For each piece of band aid they use to cover the cracks, another larger one appears. Each time they come up with a scheme to encourage jobs, another few thousand are lost. They just don't seem to get it - the VAT giveaway was a prime example. They gave away £12bn yet people spend less. It has nothing to do with VAT saving - it's because they are uncertain of their future.

Fear & Uncertainty

The point is, after all the massive bail outs and further pledges and dumb solutions, the uncertainty in the Banking sector has returned. Barclays shares slid 40% last week and the whole sector is once again in the spotlight as, like the dawn rising, people once again are awaking to the fact they had no idea just how bad the problem in our economies were.

It was always there to be seen and despite what Brown always said, the IMF said that Britain had borrowed far too much in the previous 6 years and therefore this recession would hit us harder than anywhere else. 'King Canute' Brown is in denial but he make sure we are all locked into the long term solution - borrow, borrow, borrow so that Banks can lend, lend and lend.

But I don't think we will spend, spend and spend.

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