Alistair wields the subtle knife; but where will the dust settle?
The Bradford & Bingley nationalization will see the bank's bad loans separated from its profitable core operations swifter than, well swifter than a child and it's "daemon" in Phillip Pullman's "Golden Compass".
It's a valid analogy too, I think. What the Treasury and FSA are doing right now is to separate off the remaining workforce and depositors from the mortgage debt, so that the former can go on living safer but less exciting lives while the poor old £50bn daemon of bad debt goes spiraling off into the aether hollering "help!" I won't labour the point by evoking the image of Yvette Cooper as , or Alistair Darling as a , but it does lead us into a parallel world wherein elements that look familiar are re-arranged into a surreal narrative. And here's where it goes next...
B&B's funding model was to raise about half of new mortgages from depositors and half from the money markets. It has been said this made it "reckless" or in some way atypical of the banking sector. Yet as the points out, this is peanuts compared to the systemic recklessness of mortgage issuance in the mid-2000s:
"In the early years of this century, mortgage-backed securities markets grew very rapidly and became a very important source of funding for UK mortgage lenders. So much so that by 2006 such funding equated to around two thirds of net new mortgage lending in the UK. By the end of 2007 the total amount outstanding of UK mortgage-backed securities was £257bn as compared with total residential mortgages of £1200bn."
(Translation: 2/3 of mortgage lending in 2006 was financed from markets that have now disappeared; just over 1/5 of all outstanding UK mortgages are financed in this way]
So B&B's 50bn debts, £40bn of which are mortgages, will now be held by the state. Not all of them are bad debts. On the last count, about 7% of the mortgages were delinquent. But there is something special about B&B: that it made its money out of buy-to-let and "self-certification" mortgages.
A quick re-look at B&B's reminds me that it's the self-cert mortgages that have performed very poorly, and that the bank, under its new leadership, having failed to raise enough new capital, was already retreating to safer lending practices.
However I want to raise two questions that will make me unpopular with all except freemarket diehards.
1) In all public statements, ministers have been keen to emphasise that "deposits with the bank are of course not at risk". Why should that be? We know that the current regulations guarantee up to 32.5k per person per bank. But even now, today B&B is offering a "Great fixed rate of interest" - 7% for a one year bond. That is quite a decent reward for B&B savers, who knew their first 35k was guaranteed risk free even in the midst of a financial crisis, under the Financial Services Compensation Scheme. There is no current law stating that amounts over 35k should be protected - although the law is being drafted to cover up to 50k. Looking at B&B's interims, I see that while 59% of savers have put less than 35k in their deposit account, 8% have between 35 and 50k and a whopping 33% have more than 50k in this single bank. Why should they get all their money back when small investors who maybe held onto a few hundred shares at demutualization get wiped out?
Now I remember the day Alistair Darling guaranteed the savings in Northern Rock very clearly. I was in 11 Downing Street at a press conference with Mr Darling and Hank Paulson and after it, his special adviser, Chris Martin, came up to us and "clarified" what the Chancellor meant when he said the government stands behind Northern Rock savers: "there is no legislation, it's just the word of the Chancellor". I can't help thinking this has created moral hazard among people with £50k+ in B&B.
If you look at B&B's interim results you can see that it actually added 1.8bn to its retail deposits, at a time while both its internet and Isle of Man customers were getting out. So your average, analogue, bank depositor (average age 48_ says B&B) goes off to their local branch and puts money in: despite scare stories in every newspaper. Why? Because it was offering good rates and assuring the customers that it would not have to raise new capital. Then it had to; and couldn't; then it went bust.
(I also note that the "typical" deposit in B&B's Isle of Man operation is £105k. and that the Isle of Man's depositor protection scheme offers only £15k guaranteed and that there are £2bn deposits with B&B in the Isle of Man. Does that mean the IoM investors are mainly wiped out or will the Brit taxpayer end up bailing out this tax free bailiwick as well? I only ask.)
Now here's my second question, even more unpopular than the first. What should happen to all the buy to let homes owned, as of today, by the government? Ultimately buy to let owners are investors, who have taken a risk despite umpteen warnings that the housing market is to high, going to crash, crashing, etc. With B&B gone a huge chunk is taken out of the supply of new buy-to-let mortgages. As the old 2-3 year mortgages roll over it will become, I suggest, quite hard to get buy-to-let mortgage, especially on the old "interest only" terms that were being offered to some.
Therefore some buy to let investors will find themselves with properties where the rent no longer covers the mortgage. We have never seen how the buy-to-let model performs during a downturn: if it performs badly the government will be left actually owning a large number of properties (not to mention a large number of recently installed Ikea kitchens). The selfsame government stands in need of creating millions of affordable dwellings and was kind of relying on buy-to-let as part of the solution.
Within two to three years the government is going to be facing a pretty hefty repossesson-deflation spiral in buy-to-let unless it tweaks the market back to the old profligate lending practices, which I doubt it will. So should it get into the business of farming these properties back to social landlords at knockdown prices? Hit the comments button.
Finally, on the eve of what promises to be a busy Monday for Newsnight, there is the question of what the bailout does to the public finances. If the full 50bn loan book of B&B goes onto the national debt in addition to Northern Rock's bad debt we are already on our way to a hefty American-style bailout, and for only two, medium sized institutions.
If, in addition, the government goes for some form of the Crosby £40bn a year taxpayer insurance of new mortgage issuance, to replace the likes of Northern Rock and B&B, then it's not just that "we're not in Kansas anymore", we really are in a Pullmanesque parallel universe - because so far for entirely legitimate reasons the bailouts have been regarded as "temporary" and .
If I see Alistair Darling riding a diamond shaped creature that looks like a hippo on rollerskates down Whitehall tomorrow, and loads of "dust" flowing out of the Treasury, I will not be surprised.
Comment number 1.
At 28th Sep 2008, barriesingleton wrote:BUT THAT'S NOT IMPORTANT RIGHT NOW (Drebben).
At the risk of losing immediacy, I would like to ask (again) is the FUNDAMENTAL problem one of losing sight of what money IS?
In cosmology, we have moved from a real man standing in the bottom of a well in some Eastern land to a savant, standing in front of a whiteboard with symbols all over it, purporting to represent the universe. In making this shift cosmology has lost the plot and now believes in fairies (Big Bang, Black Holes and even CERN.
Is it not likely that money's progression from a piece of valued substance to an unsubstantiated notional value (aka Scotch Mist) means that markets manipulate symbols just as cosmologists do, and the result is an analogous unreality?
If this is so, to pull monetary levers, connected to nothing, is surely to call back the tailors to mend a tear in the Emperors New Clothes? It will end in (more) tears.
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Comment number 2.
At 28th Sep 2008, bookhimdano wrote:in one way its a socialist dream if the govt is to end up in control of not just the financials [and by extension a good chunk of industry] but housing ? it might not be how the revolution the comrades thought would happen but its a revolution none the less.
but will the dead hand of the sir humphreys strangle any benefit that the public might of got out the deal? We must rely on them to carry on the whitehall tradition and provide the usual wasted opportunity outcome?
Some free marketeers do say there is a natural logic of events. Which means massive losses for both the 'guilty' and innocent. But is that the greater good?
is there not a 'higher' good at work. Yes the financials started a fire in their own building but do we just say we should let it burn down or do we reason that that fire might set other buildings on fire [which looks like happening] and so send the whole city in flames?
logic would then dictate they were sent 'a bill' for the trouble. However the reality is that politicans rely on the financials for party funding and 'jobs' so any bill is likely to remain with the taxpayer.
in short, from historical evidence, we should expect govt to screw it up over any assets they manage but if one good thing did come out of it would be a new model of regulations that changes the current 'heads i win tails you lose' model between private and public finance?
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Comment number 3.
At 28th Sep 2008, bookhimdano wrote:have a look at these two charts of the Dow 2008 and 1929 and see if you think they are identical.
search youtube for
Futures Trading and Analysis 09-26-2008
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Comment number 4.
At 28th Sep 2008, Joe Otten wrote:Yes, absolutely, the government should replenish its social housing stock from failed buy-to-let properties. What is the alternative? Dump them at fire-sale prices?
It is bad enough we taxpayers have to bail out the banking sector from time to time, without the worst end of every deal too.
Privatise profit, socialise loss, etc, more on my blog.
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Comment number 5.
At 28th Sep 2008, martinwwicks wrote:Yes why not take such properties off people whose idea of fun is making money out of people without a roof over their heads, and usually restricting the contracts for six months.
But how many is this likely to be Paul ?
It's no substitute for abanding the Thatcherite housing policy, and allowing Councils to start building new Council Housing.
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Comment number 6.
At 28th Sep 2008, barriesingleton wrote:A MATTER OF CONFIDENCE
I have just been watching the movers an shakers of USA government giving a press conference about a bill (just published on the internet) that will start 'putting things right'.
They all seem to know what they are talking about . . . But history is strewn with expert 'consensus' in all walks of life that turned out to be wrong. The person who knows the truth (the boy who said the Emperor was naked) is not usually found in the corridors of power and conformity - you need a maverick.
The Western way of life, today, either excludes or sends mad its mavericks. For example, in science, we have the 'peer review system' guaranteed to exclude poor work and brilliant insight alike. Somewhere out in the wilderness is an individual who has a clear view of the money/man matrix, but that person will be ignored while the experts perform expertly.
Does it not stand to reason that, if this event can be understood, and corrected for, by the usual suspects, one of them would have seen it coming?
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Comment number 7.
At 28th Sep 2008, Chrisgg wrote:Good stuff Paul....potent, pungent and caustic but also with a higher form of sarcastic wit.
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Comment number 8.
At 29th Sep 2008, Chrisgg wrote:Excellent points barriesingleton. There are people who predicted this crisis but the rest of us were too greedy to listen. We wanted to blow our bubbles and believe in them. We were too busy following the herd in case we missed out on nirvana.
As an example, I sold my shares 6 months ago in Personal Assets Investment Trust because they kept predicting a crash in the financial markets and were continually full of doom and gloom. They explained their theories repeatedly in quarterly newsletters, warning of unsustainable lending practices in the credit and mortgage markets. They talked of an impending correction. I thought they had lost their courage and confidence. They were pilloried at AGMs by disgruntled investors perplexed or angered, by their move out of the stock markets into cash. Meanwhile the footsie continued to soldier on as if cocking a snoop at their theories.
But now look at the mess we are in. How right Personal Assets were in every detail. But most people didn't want to hear at the time. They were too busy making paper profits.
Where did I put my money?........in banks of course because I thought they couldn't go much lower! If only I had kept it where it was!
It's not just about all those nasty greedy speculators....it's about nearly all of us who are prone to follow like sheep and climb on bandwagons....including people who lied about their earnings to secure a mortgage they couldn't afford as well as those who turned a blind eye and lent the money.
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Comment number 9.
At 29th Sep 2008, markanash wrote:Paul
Not directly related to this particular blog post, but relevant to the wider subject. The Tories proposal to establish an Office of Budget Responsibility. Risible!
"Budget responsibility" is, er, the responsibility of the elected MPs in the government and in particular the Chancellor and, ultimately, the Prime Minister. This latest Tory announcement is both pathetic and a powerful indication that they are as clueless as the Labour lot. Not to mention, it involves adding yet more cost to the public sector budget.
Heaven preserve us as we enter into the toughest decade in living memory without a competent politician (let alone political party) in sight.
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Comment number 10.
At 29th Sep 2008, alphaptarmigan wrote:Paul - how sure are we about the Financcial Services Compensation Scheme. It is after all an independent body funded buy levies from the firms that, themselves are in difficulties? This was another Brown reform. Previously it was the Depoit Protection Board.
Unlike the Federal Depeosit Insurance Corporation (FDIC) it does not have a fund of $49 billion underpinning its guarantee.
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Comment number 11.
At 29th Sep 2008, JunkkMale wrote:Dear Messrs Prudence and Onwiththejob,
To cut out what seems to already be way too many highly paid and/or pensioned middle persons, I am leaving my wallet and what's left in it out on my currently debt/mortgage free home doorstep for any institution and individual - who you evidently hope will help you stay in power - to lift whatever they fancy from, to keep them in a manner to which you have let them become accustomed in over 10 years of 'oversight'.
Rgds, JM
ps: Not so sure on the income tax demand
pps: Aunty, licence fee is looking iffy, too.
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Comment number 12.
At 29th Sep 2008, barriesingleton wrote:THE ELEPHANT HAS LEFT THE BUILDING
There are some heart-warming words in our LANGUAGE such as: Virtue, Integrity, honour, altruism, trust and wisdom. They no longer thrive in our CULTURE and are a positive threat to the ethos of PARTY POLITICS.
J Gordon Brown exhibits a 'split' functionality allowing him to be both Son of the Manse and a power-hungry, devious manipulator. HE has risen to the top. It is not hard to derive the qualities of those in the pool beneath him.
Until we - the voters - choose our MPs LOCALLY, without party interference, and for their embodiment of the intangible attributes listed above, the outwardly flourishing Oak will continue to exist by the rot at its core.
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Comment number 13.
At 29th Sep 2008, bena gyerek wrote:SEA-SICKNESS
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Comment number 14.
At 29th Sep 2008, Fabius_Maximus wrote:No.9 Markanash,
One name...Vince Cable. Listen to what he says and you hear the words of a man who does appear to be the competent politician you seek.
It's just a shame that he bats for a team that isn't really in the game.
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Comment number 15.
At 29th Sep 2008, emptyend wrote:Very good points Paul. Why should the depositors and bond-holders get full protection with taxpayer cash? What happens next time? Do we all now have to guess whether the Chancellor deems bank XYZ sufficiently worthy of gerrymandering support with taxpayer cash?
And why aren't the so-called investors in buy-to-let getting the same sort of treatment as the shareholders - especially if they have falsified elements of their mortgage applications?
All that Darling seems to be doing is creating a lottery in which some people reap windfall profits (or avoid the losses that a reasonable and prudent person might have expected to take in their position)......which means that the profligate get rewarded - again!
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Comment number 16.
At 29th Sep 2008, bena gyerek wrote:paul, very proud of you for refraining from naming rbs in your interview with jezza just now. not that that is going to save them..
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Comment number 17.
At 29th Sep 2008, guy evans wrote:re: the house vote and no plan B, should i invest in a pig, a goat n a few chickens to add to my vegetable patch? or should i just begin learning mandarin pdq?
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Comment number 18.
At 30th Sep 2008, bena gyerek wrote:i see two possible outcomes for the political crisis:
1) house democrats and republicans continue to try to seek a joint solution. imo they are doomed to fail. the closer elections get the less to gain / more to lose for individial representatives from voting on an unpopular bipartisan proposal. i think people went home straight after the vote (as justin webb observed) because they are going into full campaign mode. those that voted no already decided that they are campaigning on an anti-wall st ticket.
2) democrats decide to push through a partisan proposal, namely outright nationalisation / recapitalisation of the failing banks (resulting in direct government control of executive compensation and the workout of bad mortgages). this is what the likes of krugman and soros, to name but two, have been arguing for from the beginning. i am very interested to understand why 95 republicans voted no, and whether they would support this partisan proposal.
also, i think crucial now is what mccain decides to do. he has a big opportunity to jump on the anti-wall st bandwagon. given how he has suffered in the polls since this crisis began, it would be a logical move for him.
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Comment number 19.
At 1st Oct 2008, chrisboote wrote:Notice the pattern of bailouts or regulation relaxing
NORTHERN rock
HALIFAX-Bank of SCOTLAND
BRADFORD and Bingley
All Areas where Labour are under immense electoral pressure
This is the grossest form of vote-buying since the River bailout
Actually, it's even worse than that
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