Friday, 31 October 2008
Byways and Tribal Capitalism

I have been indulging in leisure again. For nine days I backpacked along the ancient Ridgeway, the superhighway of Neolithic Britain and a trade route into the modern era. Starting about 6,000 years ago, (roughly the time Sarah Palin imagines Adam and Eve holding hands in a newly wrought Eden) the Britons occupying the plains either side of the Ridgeway were settling the river valleys to raise crops and herd animals. As the crops and herds increased, and the Iron Age and Bronze Age opened trading opportunities in new technologies, these Britons took strides that set them and their heirs on the road to market capitalism.

http://londonbanker.blogspot.com/2008/10/byways-and-tribal-capitalism.html

A good read. Tim

“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”

- Mr John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics

http://www.rgemonitor.com/roubini-monitor/253956/how_authorization_to_recapitalize_banks_via_public_capital_injections_partial_nationalization_was_introduced_-_indirectly_through_the_back_door_-_into_the_tarp_legislation

Final para:

Paulson should be lucky that his early opposition to such public capital injection in the financial system did not prevent Congress – via the back door – to do what was right. And he is now lucky that the first thing he could mention and did mention in his press conference yesterday was a plan to “inject capital into financial institutions” rather than the half-baked idea of spending most of the $700 bn to buy toxic assets.

/end

Maybe buying toxic assets was never the plan and Hank subscribes to Roubini’s more intelligent solutions? Yet another game of chicken with the idiot bankers. More to come. Tim

Paul Kedrosky at Infectious Greed posted yesterday on how the US bailout of AIG “saved the European banking system”.

He picks up on a report from the Centre for European Policy Studies:

The AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe.
…
…
A blunt metric for observing a bank’s dependency on negative basis trading might be to look at leverage and compare it to capital ratios. If the two are out of sync (with, perhaps, a sector average) it might imply excessive hedging to reduce capital requirements in some way.

http://ftalphaville.ft.com/blog/2008/10/01/16559/aig-and-an-overlevered-europe/

Here is the leveraging data for a few:

Leverage ratio of financial institutions from balance sheets
Leverage Ratio (total assets/equity at 30-Jun-2008 / 2007)

UBS 46.9 / 63.9
ING Group 48.8 / 35.3
HSBC Holding 20.1 / 18.4
Barclays Bank 61.3 / 52.7
BBV Argentaria 20.1 / 18.6
Deutsche Bank ?? / 52.5
Fortis 33.3 / 26.4
KBC 24.4 / 20.5
Lloyd’s TSB 34.1 / 31.0
RBS 18.8 / 21.8
Credit Agricole 40.5 / 34.8
BNP Paribas 36.1 / 31.5
Credit Suisse 33.4 / 31.5

Note Barclays at 60 :1 and a reported core (Tier 1) capital of under 5% ! Tim

Audio of the programme mentioned above in case you can’t get the video.

http://www.bbc.co.uk/mediaselector/check/worldservice/meta/tx/economy_debate?size=au&bgc=003399&lang=en-ws&nbram=1&nbwm=1

It has seen the collapse or takeover of a number of world famous financial institutions and now the US government is debating a $700bn bail-out plan.
BBC News is chairing a debate called World Economy on the Brink? to discuss the origins of the crisis, consider who might be to blame and look at possible solutions.
The discussion will be chaired by Andrew Neil and will feature leading members of the financial world including:
George Magnus, senior economic adviser, UBS
Ken Courtis, former vice chairman of Goldman Sachs, Asia
Terry Smith, chief executive, Tullett Prebon, an inter-dealer broker
Jim Chanos, founder and president of Kynikos Associates, a dedicated short-selling hedge fund
and BBC business editor Robert Peston.

http://news.bbc.co.uk/1/hi/business/7635388.stm

Note: Ken Courtis, former vice chairman of Goldman Sachs, Asia reckons this will turn out to be a $4 trillion affair! I agree. Tim

Jim Chanos of Kynikos Associates is one smooth short-selling operator, and as the Site that Supports our Shorts, we say this approvingly.

In an interview with Gillian Tett, he argues that politicians – and not short-sellers – ought to take the blame for the ongoing financial drama.

http://ftalphaville.ft.com/blog/2008/09/25/16343/short-sellers-are-not-the-villains-in-this-drama/

Incidentally has anyone in the Chicken game asked Hank Paulson how much additional equity the $700 bn will create in the bailed out banks? Bill Gross (Pimco) seems to think not a lot – $40-40bn and they’ll need another $500 bn before they start lending again. Do you think that SWFs will ask for less than Buffet?

Bill Gross also says the treasury will have to guarantee all CDS paper too !!! WTF Tim

http://farm4.static.flickr.com/3095/2886146358_6a4347f1de_b.jpg

Fingers are pointing at Clinton and the Fireman.
http://fintag.com/archive/2008/09/25/

“The Vortex of Debility”

Vortex
1. a whirling mass of water, esp. one in which a force of suction operates, as a whirlpool.
2. a whirling mass of air, esp. one in the form of a visible column or spiral, as a tornado.
3. a whirling mass of fire, flame, etc.

Debility
1. a weakened or enfeebled state; weakness: Debility prevented him from getting out of bed.
2. a particular mental or physical handicap; disability.

Hmm.
Anyway, here’s the graph that makes the point for Albert Edwards, SocGen’s ultra-bear, who’s having none of this Hanky Panke bail-out nonsense.

http://ftalphaville.ft.com/blog/2008/09/24/16291/edwards-the-vortex-of-debility