Roll Up, Roll Up - Everything Must Go

Fired on by Arnold Schwarzenegger's garage sale in California which saw old bikes, lawnmowers, sofas and old 8 track tapes raise an approximate 89 dollars and 15 cents to dent the state's budget deficit as much as gnat would the grill of a speeding juggernaut, Gordon Brown is putting out the country's old assets to help reduce the £175bn deficit.

From tomorrow you should be able to bid for the Tote on Ebay and Barclays will probably handle the student loan book as they are experts in taking toxic debt and turning it into £millions of profit for themselves and the alchemists who touch the rubbish with their financial version of the Philosopher's Stone. They are up to their old tricks again as with the Protium gag of last month, this time with £4bn of Collateralised Debt Obligations worth about as much as a knackered push bike in real terms. After those boys have finished with it there will be more capital on their balance sheet, a hefty book profit on a new loan and around 45 new millionaires after a few strokes of a pen and two fingers at the taxpayer and the FSA. The Student Loan book should be a doddle for clever people like that.

There are some who question the prudence of our PM on financial matters, would you believe. This fire sale should raise around £16bn to help reduce our rather desperate position and probably not inspire all the credit agencies curious as to how our Bond sales will go after our Quantitative Easing finishes as any more of it will reduce us to a banana republic with no bananas. Some wistfully remember that there was a time when we had rather a lot of gold in our vaults at the Bank of England - today those vaults are stationery cupboards as some bright spark sold it all close to the bottom of the market. Had we some left at this point it might have been handy as all those smiling chaps on TV might have bought some as those in the know will tell you gold is at record high prices.

Some would say only an idiot would have sold our reserves at a cut price and not kept it back for what it really was meant to be for - a rainy day when we were almost bankrupt. But Gordon knew best then as he does today. Fear not, £16bn is just the start of it. Jacqui Smith has pledged to sell her husband's collection of porn videos, Hazel Blears has said she would sell her second home if she could work out with the taxman which one that is while several MPs want to sell the shirts off their backs as they feel they are underpaid and hard done by on expenses.

Welcome to Britain, where it's the sale of the century. Everything must go.

From Loan Sharks To The Stupid

Yesterday we saw the cases of some horrifying debts imposed on desperate people by loan sharks. One woman who borrowed just £500 to buy a computer, was forced to repay a staggering £88,000 over just 7 years. It is beyond belief that such people can operate in Britain today and only get a suspended sentence of 51 weeks as their punishment.

The true extent of loan sharking is thought to be far greater than these test cases and as many as 165,000 people use loan sharks in Britain as the recession and credit crunch take their toll. Worse still, despite record low interest rates which are expected to remain at 0.5% for a sixth successive month, this figure could rise a further 35,000 in the short term. And it is not the domain of the destitute necessarily - professional people like nurses have been caught up in using loan sharks after their hours were reduced. These are desperate times.

While the advice from Government is to not use loan sharks and some £16m has been pledged to tackle the issue, the fact remains that even as we see light at the end of the tunnel in this recession, there are dark times ahead by those worst affected by it.

The Stupid Side

Contrast this terrible situation, if you will, with the utter stupidity that went on at HBOS. Yesterday we got another glimpse of some of the activities of Andy Hornby and his former executive team prior to the disastrous Lloyds take over last year. How Lloyds would wish to have turned back the clock as their Board, at the insistence of the Prime Minister himself, went ahead with the merger even though all indications pointed to the fact it could ruin their business. Indeed, so far did it ruin their business that we taxpayers now own 43% of the new group.

The losses within HBOS' Corporate Lending Division are staggering. In total over £19bn of loans have had to be written off since the merger related to loans made to businesses such as hotel groups, property developers and simple investors. The fact of the matter is that HBOS, in their absurd eagerness to lend as much as possible, simply did not undertake much, if any, due diligence on any of the loans - they just handed out the money to literally anyone for anything and had not a shred of interest if the businesses were able to service the debt in the long term.

While we may think these debts are not related to such exotic concepts as Collateralised Loan Obligations and other 'Derivatives' but are related to good, old fashioned bank loans, we would be wrong to think that. Ultimately, in a world where debt can be traded like a piece of precious metal time and again, and at each trade a smidgen of incremental profit is taken without anyone referring to whether the debt can be repaid, then it really did not matter in the 'New World Financial Order' whether HBOS did their due diligence or not. The debt was the precious item, not the asset or business it was related to.

I find it hard to believe that in the hubris that followed the credit crunch, people like Andy Hornby who as CEO and was responsible for this madness, were paid £60,000 a month on a consultancy retainer to help the business even after being fired - until someone finally noticed.

It is obscene that such incredible amounts of money could have been wasted for the pursuit of greed. Meanwhile, in the real world, if only a fraction of that wasted £19bn written off or the monthly £60,000 paid to Hornby even after he threw the money away was used to give loans to people who would otherwise use loan sharks, then we would not have loan sharks in this country.

It is that simple. If banks had lent even a tiny proportion of the combined £584bn currently ring-fenced in the Asset Protection Scheme as Toxic Debt, then the problem of 2,500% interest rates to desperate people would never occur.

Here's the rub. Loan sharks exist because they know people are desperate enough to pay anything for a loan. And they survive because people pay the astronomic interest rates back. Defaults simply get rolled up in more interest and in the end they make incredible profits on tiny debts.

It's a salutary lesson for banks and credit card companies. If they just thought about it, they could lend money to such people and get the debt serviced and repaid. Instead the banks lent money to any old company without so much as a cursory glance as to what the money would be used for and the company's ability to survive and repay.

In a world where a company can collapse and rise again like a phoenix the very same day, shedding its debt obligations and leaving creditors in the mire, we find this far more acceptable than helping desperate people who need money and have every intention, and often the means, to repay.

It is a direct consequence of the banking system we have today that more money than God has can be chucked away without a cursory glance, the executives expect bonuses for it and then desperate people are ignored. The disgusting thing about these two shocking stories is that we have the wherewith all to stop this now without even thinking about it. The solution is right there and can be implemented within hours. And loan sharks would be out of business and never seen on these shores again.

The chances of it happening and interrupting the party in the banking world are negligible, not while the investment bankers are murmuring in the PM and Chancellor's ears to make sure the world is how they want it - and we paid £11m for that advice too. Again, a sum that would mop up every loan sharked debt in existence if only we used money the right way.

Welcome to the world of finance, just complicated enough to make sure we never question it but simple enough to know it's wrong.

Let it Fail, Let it Fail, Let it Fail

Sing the title of this entry to the tune of the Christmas song, 'Let it Snow' and we have a natty little anthem for the day.

I was pondering, at the beginning of all this banking fiasco, that had the Government stepped in at Northern Rock and just picked up the mortgage book and guaranteed all depositors, just what might have happened.

This was not my idea, no less an economist as Nobel Laureate, Joseph Stiglitz, suggested this some time ago. He was fixed on the fact that a contract for a Credit Default Swap or Collateralized Debt Obligation was in fact a two way contract or bargain jointly entered into by two companies fully aware of the consequences if something went wrong like part of the debt was toxic. Indeed, if they had had any sense, just prior to signing the deal they might have embarked on a bit of 'Due Diligence', that long lost phrase which went out of the window during the Enron scandal to have avoided such a calamity.

Stiglitz was of the opinion that if we had allowed the consequences of that failure to play out, only then could we have teased out what the true underlying liabilities were - not just at Northern Rock but in the entire banking system. True, many banks would have failed but he claimed that we could have used the shell of those old banks to build new ones with more secure procedures and tighter regulations to focus them on their core functions of providing credit and capital.

Further, Stiglitz asserted that the overall cost to the taxpayers would have been less in the long run as at least we would have known exactly what we were paying out for. His claim is that in the current scenario, we are propping up an already failed system, that part of the guarantees and loans that we have paid for will actually underwrite part of the 'good books' because no one is encouraged to itemise the toxic debt as it is being all paid for so why not ask for more and cover current good debt.

Sound wrong? Just look at the Enterprise Loan Guarantee Scheme from the Government meant to cover and encourage new lending - banks are taking existing loans, handing out small increments to qualify for the scheme and then getting 75% of the original debt covered. The amount of net new lending is trivial.

My view, which is with Stiglitz, is that banks should have played this all out. I dare say there would have been more sad cases like Mr. Kellerman in the US as bank executives were troubled with the terrible burdens of their greed, but I doubt it would have troubled them that much. There would have been a terrible loss of confidence in the banking system, have no doubt. That is what has been most protected in all this - banks must never fail, according to all Governments. The fact is that some banks do fail. Lehmans were left to fall and the repercussions were not that huge.

The problem we have bought for ourselves, as Stiglitz has pointed out, is that if all we do is reset the sail to catch the wind again, then all we have done is hidden the problems to manifest themselves again in the future. He now predicts we have set ourselves a course which will commit us to ever shortening cycles of peaks and terrible troughs in our economies with no chance of any kind of sustainable stability. There is no doubt that the alternative would have meant a period of recession possibly depression but we are in a different age now. No more the '30s where people could not eat, the majority would still have had some way of providing for themselves. It would have been a different kind of austerity that would have curtailed our wanton materialism - and would that have been such a bad thing? Besides, it could argued that this is exactly what we are going to get anyway.

As Stiglitz does, I think we have missed a massive opportunity to put this all right and start again, properly.

Am I Missing Something Here?

I don't normally agree with Robert Peston - he looks for the sensational in everything about this crisis. In fact, without it, he would just be the bouncy hack who did the occasional TV spot. Now he's a household name and the guru of the financial collapse, with some even crediting him with the whole misery we are in.

I dare say in Downing Street there are those who are looking to see how they could actually blame it on him - after all they are doing a great job in making us believe that the present set of ministers had absolutely nothing to do with it.

So having heard the fairly obvious news yesterday that unemployment shot past 2m with a very serious burst of new claimants which seemed to surprise everyone but those who had read the papers, we also heard that the country's deficit rose another £8.9bn to £75bn for the year and rather ominously tax revenues collected dropped 10%. These were not unexpected but I suppose we were all praying that somehow all this incredible amount of money that has been pumped into the financial system would have actually started to do something by now.

No, not really. And that doesn't seem to surprise me either.

More News

In between finding out that the mystery illness at the Fat Duck in Bray was in fact the noravirus, which I presume gets its name from having rolled down stockings and a Yorkshire accent when viewed under the microscope, we also heard that the National Audit Office has spotted that Northern Rock was allowed to lend £800m in risky mortgages for a further 6 months AFTER it was taken into ownership by the generous taxpayer. In fact the Rock was still handing out 125% mortgages in early 2008.

At that time, the Government was at the helm, attending to the detail of running a bank. The PM had told us that sub-prime had triggered the Credit Crunch and was nothing to do with us and here was the bank he had rescued handing out mortgages worth 125% of the value of the property in a FALLING house market. Gross incompetence springs to mind as just recently the same lot actually approved bonuses for staff at the Rock just for paying back some of the money it owes us and then allowing it to unilaterally change the terms of the rest of the loan so it can go back and do some more daft lending. So it's our property - which one of you allowed them to continue like that? Go on, own up.

We must be all barking mad.

Banking and The Future

But I digress. My eyes alighted on Peston's latest blog and for once I was intrigued. He harps back to being a junior in the 1980s and watching how Old Fart bankers seemed to lend to Third World Banana Republics and lose the lot, or to fat, oily businessmen like Robert Maxwell who stole it - Polly Peck springs to mind too. They were suckers for men in suits with big talk and very aggressive to plebs in the street like you or I. Peston yearned for flash, confident bankers who would think creatively and modernise banking.

Be careful what you wish for, is the adage, as indeed we got some new bankers alright. The fast-buck merchants came to town and off they went 'collateralised debt obligating' and 'credit default swapping' (CDO and CDS) their way to being extremely rich. And we became far better off because of it. Our personal earnings had gone down but because the trickery and sleight of hand of the new style of banking, more credit was made available to us and, thanks to a generous Central Bank, at cheaper prices than ever before.

And we spent and spent - like there was no tomorrow.

Peston looks at the essays of Sir Jeremy Morse, former head of the now defunct Lloyds Bank which he is credited for saving (how does he feel about its situation now, I wonder?), who says that we have two choices on the road ahead. 1) we rein back banking to something like the 1980s and focus on using deposits rather than wholesale money markets to finance lending and so severely restricting the debt people can have going forward - which would definitely shrink the economy for some years to come - or 2) we reconstruct the banking system largely as before but with the worst excesses removed. He claims this would plunge us back into the 19th century world of harsh troughs and periodic peaks but less inflation for some reason beyond me.

This latter course of action has been the only one considered - there is a massive obsession with politicians to maintain growth as it has been the sure fire vote winner at the last two elections and the only hope in the next. So the current policy is to increase the money supply with Quantitative Easing, and this money will arrive with us in the form of more credit for us to run up more debts.

As our PM constantly reminds us, he wants credit levels to get back to the mid-2007 level and so we fuel our addiction to credit and debt.

The Road To Ruin

Peston's piece is a sharp reminder of where the combined genius of Government and finance are wanting to take us. If debt was a primary cause of the financial mess we are in, the answer to solve the issue is for us have more of the same.

It is logical at one level, i.e. the theory, and downright stupid in terms of common sense - at some point we must reduce our indebtedness, it simply cannot just go on. The timer to the next financial crash seems to have been started and we haven't finished this one yet. Jeremy Morse is right - we will go through cycles of rapid growth and then massive and very hard crashes.

This crash has not been fun - we must be crazy to think this is the way ahead.

If you turn the clock back 12 years when the smiley-faced Tony Blair took over with his jowly, grumpy Chancellor in tow, the graphs looked lovely for a good while. Unemployment went down, we all used our properties to create more money, interest rates fell. Now, 12 years on, unemployment has gone back to the same levels, our houses have lost all the gains we spent, and we are in an economic crisis which we will all pay for in taxes for the next 20 to 30 years. Oh, and several of the banks are largely nationalised.

How the mighty fall.

Brown says that the politics of the Centre Left are the only way forward. That would be the economy with one forward gear and 3 for reverse, I assume? We all had such high hopes for these guys but you only have to look around at the mess the world and our country is in to know they got it horribly wrong and their way forward will only compound the error - massively.

At some point, we are going to have to clear up this mess and pay the true price of the excess of the last 12 years. Just to remind us of those whizz-kid instruments of mass destruction, the CDO stood for an 'obligation' and CDS a 'swap'. These kids struck the bargains - like the rest of us they should have been prepared to honour them.

Why should we pay and let them all rise again? We must be all truly mad.