Saving the world
Mark Bathgate 11:56am
The further revelations about the astonishing costs of the bank bailouts so far indicate just how much taxpayers’ money is now being used to plug the holes in the banking system. A key cause of the bank crisis is explained by the above IMF graph, charting the decline of some of the trillions of AAA structured credit assets created during the boom. AAA means “extremely strong capacity to meet financial commitments”, but now over 80% of the US AAA Collateralised Debt Obligations (CDOs) created between 2005 and 2007 are rated BB or lower, somewhere between junk bonds and default (and in some cases almost entirely worthless).
In terms of getting things totally wrong this is hard to beat. The belief in the end of boom and bust was shared as readily by the large investment banks and credit ratings agencies as it was by Gordon Brown, creating near endless amounts of "risk free" debt providing rocket fuel for property lending, private equity deals, and naturally, bonus pools. Chopping debt into lots of little pieces and putting it back together again offered a fat fee at ever turn.
For debt that was meant to be of such high quality, banks were exempted from holding capital in reserve against the prospect of any future losses. As Vince Cable brought to light earlier this year, these were such good bets that British banks and building societies hoovered them up – the extra yield for seemingly no risk proving an irresistible lure. Purchase of these kind of assets was one of the key mechanisms by which UK banks became so exposed to asset price bubbles and losses around the world. It was concern about the true nature of these assets – brought about by the collapse of IKB in Germany in July 2007 – which triggered the credit crunch, and the stories which started appearing on front pages in the summer of 2007 about banks being too scared to lend to each other. However revolutionary investment bankers thought they were, the basic fact of banking - that you need to lend to people who can and will repay you - had not changed.
Disaster ensued. From early August 2007 the banking system was increasingly reliant on massive injections of central bank liquidity as the interbank lending market collapsed. Despite the run on Northern Rock, Labour sailed on oblivious to the scale of the fermenting problem. No doubt assured about the good health of all these assets by the usual investment bank suspects, it seemed much preferable to blame evil short sellers and rumour mongerers for issues in the banking system than ask questions. Despite a further serious bank collapse with Bradford and Bingley and issues at various building societies, the penny still did not drop. A telling contrast is provided by the manner in which the Swiss dealt with problems with AAA assets at UBS through 2007 and early 2008, greatly mitigating the end costs and risks to taxpayers - the report into losses their MP's demanded still providing one of the best windows into how this disaster happened.
It was only when faced with global meltdown in early October 2008 that the penny finally dropped. The run on Northern Rock demonstrated that when depositors start fleeing with their money, government’s options are not great: either guarantee the bank or let it fail. A solvent government can always stop a bank run in it's tracks by picking up the costs. The 15 months of delay and denial since the start of the crisis simply left few options but to push the losses of the banks onto the taxpayer. We are now starting to find out the true costs of this: £130bn of direct injections and hundred of billions of pounds more potentially at risk.
Bank of England statistics detailing lending to non-financial companies shows that the flow of credit to British business has collapsed this year. In paying 10s of millions of pounds for "advice" to the very same investment banks responsible for the AAA asset fiasco, it looks like this naive and inexperienced government has simply let investment bankers run rings around them. Rather than save the world, Gordon Brown simply saved the bonus pool.
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Percy
December 5th, 2009 12:12pm Report this commentIt should also be noted that the Swiss government not only did some proper due diligence on UBS before they put any money in and have since exited its position and made a good profit for Swiss taxpayers. Contrast this with the performance of the great Chernenko and his band of student activists.
oldtimer
December 5th, 2009 1:00pm Report this commentExcellent post.
denis cooper
December 5th, 2009 1:32pm Report this commentSurely the most important lesson is to never believe anything produced by any of these commercial credit ratings agencies - including the bar chart reproduced in the article, of course, which will be no more reliable than the uniform AAA ratings the agencies (including Standard & Poor's?) originally gave to these CDOs.
I think I'd rather pay a tiny bit more in taxes each year to fund a unit at the Bank of England to carry out much more thorough and cautious research, enabling it to produce its own credit ratings as part of the prudential supervision role - which as we all now know should never have been transferred to the FSA - rather than having to pay huge extra amounts of tax to prop up lenders which had been misled by unreliable ratings from unreliable commercial agencies.
At least then we would know who to sack (or shoot) if the Bank's credit ratings were wildly wrong and that led to a catastrophic failure which we had to pay for.
Has anybody in the commercial ratings agencies been sacked (or shot)?
Or prosecuted for taking bribes to give undeserved favourable ratings?
perdix
December 5th, 2009 1:50pm Report this commentEveryone was in on the game: The homeowners got easy deals, the loan officers got a commission, the retail banks posted a profit,the investment banks got a cut of the re-packaging,the rating agencies got their fees, the goverments liked the taxes and the false sense of wealth which the boom created, the governments took the credit for the atmosphere of prosperity.Nobody wanted to ask any questions.
Holly ......
December 5th, 2009 2:12pm Report this commentWhat I would like to know is, Why the MSM took no notice of thousands of people amongst the general public who where SCREAMING OUT that things were dire.
The Westminster bubble is a bit like that place Alice visited.
Only worse!
Now the media scramble to catch up with the reality we are living through.
What took you so long to believe us(who are having our lives ripped apart)as opposed to 'them',who are still getting paid,still getting bonuses and are untouched by their own dismal failings.
Is the country being governed by the right people? Is it being governed at all?
Is the truth being given by the media?
Start a 'we need an election NOW' campaign on Monday and we might just begin to trust the media again.(not that we believe everything we read,never have never will).
Labour are doing a hatchett job on Britain & need to be bought to book.
Where's Danno when you need him?
Moraymint
December 5th, 2009 2:46pm Report this commentperdix
Neat summary.
Snowman
December 5th, 2009 2:56pm Report this commentListen you doom mongers, not all is lost. The very nature of banking makes the financial world based on credit and run by the banks insolvent. Trust me, it’s not a joke.
Provided, we, the people who entrust our meagre savings into the vaults of the nasty banks don’t lose confidence (I know, it’s hard to do, but try we must ) we’ll be OK.
Hysteria
December 5th, 2009 4:24pm Report this commentHolly "why did no one take any notice"
read Perdix's post - there is your answer.
Snowman
December 5th, 2009 4:57pm Report this commentperdix, you a star, you got it in few words.
Percy
December 5th, 2009 6:48pm Report this commentPerdix, spot on.
Moraymint
December 5th, 2009 7:41pm Report this commentI own and run my own business; my wife is a doctor; we have two daughters. I am struggling to keep the wheels on my business. I have been pouring my personal savings in to keep it going. I am paying last year's tax liability out of my savings; we are profitable, but we need cash to keep the wheels turning; my bank has been manoeuvring for about 4 months to pull the plug; they're just waiting for us to breach a covenant before moving in to kill.
The situation in which we find ourselves today is both unprecedented and grotesque. A minority of us in the private sector - excluding the banks - are now propping up a hideous, monstrous, soft totalitarian state - and its banking mafia pals.
The situation is wholly unsustainable and will collapse soon; it's not inconceivable now that I'll be going down with the ship. The situation was designed and engineered by a grossly incompetent political class, utterly detached from the realities of personal liberty, wealth creation and the invisible hand that underpins the economics of prosperity.
I have never been so transfixed by what's going on around me in my life before (I am 52 years old and spent the first 20 years of my working life as a commissioned officer in an infantry regiment). I am convinced that the Government has lost all control of the economy and that we face socio-economic meltdown in the coming years.
The British people fell hook, line and sinker for the deceit, propaganda and spin that was so-called "New Labour". In fact, the Labour Party had become so obsessed with gaining power that it installed a feckless, vacuous, telegenic con man (Blair) as its leader. Unreconstructed socialists (Brown, Balls, Straw, Darling, Harman et al) seized control of the nation through the back door - and the rest is history.
The Labour Party went on a Marxist (or was it Stalinist?) binge primarily at the expense of ordinary, decent, honest, hard-working middle-class people like you and me - and, of course, by borrowing almost incomprehensible sums of money simply to pay the wage bills and the operating costs of a relentlessly ballooning, wasteful and largely useless state machine.
The project has self-evidently been an unmitigated disaster. Now, for the next decade and more, our nation's citizens will pay for it. The Labour Party absolutely must be destroyed on the back of this; consigned to oblivion and never, ever again be allowed to hold the levers of power and re-run the utter catastrophe that will now be this Labour Government's legacy.
What a staggering mess; I can hardly believe that it has come to this.
Simon Stephenson
December 5th, 2009 9:25pm Report this commentPerdix (1.50pm) may be right, but I myself think that there are more powerful forces at work than that an entire generation chose, more or less unanimously, to abandon prudence.
I believe that mainstream attitudes are incapable of maintaining society at the level of sophistication that we have reached, and that the sooner the general public re-understands the need for political elitism, the sooner we will get an authority with the ability to steer society forward. Conversely, the more we continue to delude ourselves of the supremacy of the popular will, the further we will travel down the road to ruin.
The financial and economic mistakes of the last 15-20 years are the direct result of the mainstream having too much influence over complicated judgments. It's not that society's most capable have made bad decisions, it's that they haven't been allowed to make good ones.
Dorothy Wilson
December 6th, 2009 10:38am Report this comment"Nobody wanted to ask any questions."
It was truly a Faustian pact. Now we are just beginning to see the real truth in all its rottenness.
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