Saturday, January 12, 2008

Tank Think Progressively

Three items caught my attention in the newspapers this morning. The first that government has all but ruled out a commercial rescue for Northern Rock after conceding that funding for a deal cannot be found. There was news reported earlier in the week that a further pensions “Black hole” of over £100 million had been discovered, so one can understand why HMRC and the Treasury are seeking to leverage any opportunity, in the next budget, to squeeze more tax from an already overloaded population facing higher oil and energy prices, inflation, interest rates, food prices and so on.

The saving of Northern Rock, which will reportedly cost you and me £650 a year is only one of the dots in a children’s puzzle, which when joined-up, show some kind of picture, perhaps of a smiling Gordon Brown, who knows? However, in this case, it may be argued that saving Labour's reputation was placed above the nation's financial stability and in this example, you and I have been generous in lending £24 billion to the bank to keep it going - which might never be repaid in full. A little like a political loan, which conjures-up an image of an embattled Peter Hain.

Ironically, I’m vice chairman of a political ‘Think Tank’ called the Conservative Technology Forum (CTF) but unlike The Progressive Policies Forum (PPF), through which Mr Hain received tens of thousands of pounds from six different people, employs no staff and has apparently not published any work since its inception in December 2006, the CTF actually conducts research, holds meetings and I was up at Westminster on business last Monday. Perhaps I’m not ‘Progressive’ enough?

A second news item that caught my attention was that the children, who stoned a pensioner, Ernest Norton, to death last year on a tennis court last year while he was playing with his son, have had their sentences quashed.

A retired engineering draughtsman Mr Norton collapsed when a half-brick fractured his cheekbone and he had a fatal heart attack. The gang of boys reportedly ran away cackling: "He's dead, he's dead."

The judge decided that because Mr Norton had a pre-existing heart condition, it could not be proved that the boys were responsible for his untimely death; neither could the bricks and stones.

This rather brings to mind that the young men, who were responsible for the death of Richard Would, the landlord of the Nottingham Castle pub in my ward– reported here - a year ago, are still at large. I met his widow, Lynne and attended his funeral and have a pretty good picture of what occurred that night and what the police did and did not do in the time that elapsed following the attack that led to a fractured skull and his death some months later.

In both these examples justice is not only blind but impotent as well and I note that the full force of the law will be applied against the “Canoe” man, John Darwin, who with his wife, swindled a life insurance company out of £250,000 but what you and I might think of as the prosecution of ‘Real’ crimes are frustrated by inadequate resources, a mountain of paperwork and a Crown Prosecution Service which makes a virtue out of mediocrity!

Conservative leader David Cameron appears to think along similar lines and claimed, in a speech last week in Manchester, that Britain is "creeping" towards a state where violence is socially acceptable. He said aggression was being "feted" - as illustrated by the use of mobile phones to film people being beaten up.

"Society" he continued, needed to be "resocialised" in order to "reclaim our streets" and public areas from gangs.

Cameron said he was not advocating "an army of vigilantes and have-a-go heroes" but said elements of community life had to be rebuilt.

"Our society is creeping slowly, with quiet resignation and muted resistance, to a state of cultural and social acceptance of violence in our country," he said.

"We're collapsing into an atomised society, stripped of the local bonds of association which help tie us together."

Low level disorder, from which greater problems grow, should not be tolerated, he said, while calling for tougher powers for magistrates, more prison places and an end to police performance targets.

Finally another education story related to this week’s local school league tables, - shown below - it appears that parents hoping to ensure places in oversubscribed Catholic schools are behind a surge in "late" baptisms into the Church in England and Wales. I think we can understand why!


Tony Beachcomber said...

The Northern Rock issue has more facets than a diamond when it comes to opinion. Do we listen to political opinion or finacial opinion. Politcal opinion can more or less be taken with a pinch of salt. Finacially the Northern Rock has borrowed a lot of tax payers money, it is still a going concern and nobody has lost any money. Perhaps negative opinion is people getting nervous when it comes to playing high stakes, but history will really be the judge of this issue.

DrMoores said...

"Borrowed" sounds rather like a political loan here. It's not worth £24 billion in assets, which is why nobody, including Virgin is prepared to buy it for that price. Also, you may recall that rather cleverly the principal assets are controlled by another company, which would have been revealed, like any pensions deficit, in a proper, "due diligence" purchase of the bank.

So in simple terms £24 billion loaned on a basis that even "Ocean Finance" would shy away from. So where do we get the balance back to the Treasury from the book value vs the real value of the bank. Answer at present appears to be you and me but perhaps I missed something?

I will ask Ewen to help if he reads this as he's an economist and I'm most certainly not!

Anonymous said...

Mark Steyn had a good take on what Cameron is alluding to viz the slide into social acceptance of violence. The point he makes is that, for example, beating a pensioner to death is not wrong because it's illegal. It's illegal because it's wrong. Something that seems to have escaped all too many thugs and their liberal apologists.

As to Northern Rock maybe they should see if Peter Hain can assist them. This will prove to be another waste of taxpayers money just to keep a few Labour voters sweet.

Ewen Cameron said...

The debacle that is Northern Rock is an indictment of the tri-partite system of Bank regulation, and of reckless management. The system was, incidentally, devised and brought into force by (guess who) Gordon Brown, and of the three parties involved, in my view, only the Bank of England emerge with any credit.

I and my team, in my day job as an investment manager, have been predicting a credit crisis for over two years. We issued a specific warning on Northern Rock three weeks ahead of its effective collapse (which was, incidentally, the first run on a UK Bank since 1866). It does not take a genius (which I certainly am not) to work out that any company with two thirds of its balance sheet rolling over in commercial credit markets every 90 days was vulnerable. The Bank of England were alarmed by the growth is securitised debt, sufficiently so to issue a warning of the dangers of a sudden loss of liquidity, early last year. Who listened? We did, but the powers-that-be certainly did not.

The Rock’s US counterpart, Countrywide, is America’s no.1 mortgage lender, and is also effectively bust. They are in discussions with Bank of America over a take-over, the only alternative to which appears to be Chapter 11 bankruptcy. Over 200 mortgage lenders in the US have gone bust, and it’s the American system of raising funds in Securities markets that the Rock copied. Ironically, until the mid 90s, they were a model of conservatism and probity, and came through the 90s housing crunch almost unscathed. It was only after they converted to a Bank, in 1997, that they got reckless.

Before some sales of debt this week (which raised £2Bn), the Rock has a mortgage book of around £115Bn. What that is worth depends on your view on its quality, but they were prominent in stunts like 125% mortgages, low-documentation or no documentation loans, and the buy-to-let market. In the US, these would all be classified as “sub prime” (a phrase, rather deliciously, which won the year’s vote for “word of the year” from the American Dialect Society). At its peak, the Rock was valued by the stock market at around £5Bn, now a fraction of that. In my view, it’s worthless, and I do not see why the taxpayer should be expected to rescue any value for shareholders. There are no prisoners taken in stock markets, and the danger were obvious, for anyone who cared to look.

Nationalisation now looks increasingly likely. The EU has a deadline of February for withdrawal of state aid otherwise. After nationalisation, either the mortgage book will be slowly sold off (and if arrears continue to leap by the 27% disclosed by the Rock in July, that may be difficult to do without huge losses), or, after a period of rehabilitation, if that is possible, it will be re-floated. Either looks like a potential bonfire of taxpayer funds to me.

One point of detail as regards taxpayer losses. The Rock is not actually paying a penalty rate of interest to the Bank of England on the £26Bn it owes. It can’t afford to. Instead, the penalty element is being rolled up as subordinated debt. In very crude terms, this means there is a very high probability it will never be paid back. So far, this amounts to around £100m. The Rock has another £750 of subordinated debt in the market, which currently trades around 65p in the pound. So that’s a technical loss of £35m of public funds already, and counting. Nice one, Darling.

The UK’s banking industry is a major component of our economy, and confidence is everything. International confidence in London’s supervision of the banking system has been deeply wounded by the Rock debacle. I rather wish we had someone with higher achievement levels in charge of trying to unpick the resultant mess.

Watch this space. Buy-to-let specialist Paragon Mortgages, which also depends heavily on commercial credit markets, announced a deeply discounted rights issue yesterday, to try and prop up its balance sheet. There will be more dents in the bodywork before this one is over.

All of us should watch what haappens to the Rock with diligence. There is a very strong possibility our money will be put where it should not be.

With regards

Ewen Cameron

Ewen Cameron said...

I nearly forgot....

Amonsgt the Rock's list of mortgagees is one Mr A Darling, adress, 11 Downing Street. Employment: Chancellor of the Exchequer.

They say truth is stranger than fiction!


Ewen Cameron

Michael Child said...

I was quite surprised to see on the news a priest justifying his refusal to baptise a child, regardless of the parents motives it did seem somewhat at odds with my understanding of Christian teaching. One would have thought that the church would see it as their duty to raise the moral standards of children and seize the opportunity to increase the number of Christian schools.

Anonymous said...

I did not see the newsclip, Michael, but I am sure the priest concerned was absolutely correct in not carrying out a baptism. The parents and god-parents are required to promise to raise the baptised child in the faith by teaching and by example. If they clearly have no such intention and it is being considered purely as a means of gaining a place at a preferred school, then quite rightly the priest should not baptise. This problem exists in Westgate where there is a sudden rush each year by parents to show regular attendance at St. Saviours with their children so that entry to Ursuline can be gained by Christian faith and regular christian worship. I do not believe that any selection at a comprehensive school should be made other than if it is a faith school. I would like to see prospective pupils who are baptised Roman Catholics questioned simply about their faith e.g.

'What colour were the vestments the priest wore last Sunday?' Could you recite the 'Our Father, Hail Mary and Creed please? What was the subject of last week's sermon? Could you sing the first verse of your favorite hymn? Could you tell me 5 of the ten commandments? etc etc

If nothing else it might switch on parents to instructing their children in the faith and making sure the family attends mass regularly. Good for the soul all round!

Tony Beachcomber said...

Ewen, if you had the power what would you have done to prevent this.

DrMoores said...

In Westgate and Birchington we call them "Ursuline Conversions", sticking around the church just long enough for the twelve months prior to making the application and sitting towards the front of the church so that they are seen by the priest. Once they are in, they are gone. All rather depressing, spriritually and morally!

Michael Child said...

Simon I’m sorry it just won’t wash you have a child say the worst in Thanet for a year you offer religion, a mystical experience and it’s not enough to keep its attention, who’s a fault?

DrMoores said...

Sadly, I don't believe it's a matter of keeping the child's attention and my own experience would say that too. My first teaching job was as a housemaster at St Augustines by the way, so perhaps I'm still a bit of a closet Jesuit at heart!

No, I quite understand why this happens and as a parent would do what any good parent, aethiest, agnostic or believer, to achieve the best for my child; it's a natural human instinct.

What is sad, from my own point of view, is that so many people today have no real experience of sprituality or religion, Islam, Christianity or otherwise. I'm fascinated by the the experiences of a C of E vicar in the TV series "Extreme Pilgrimage" at the moment.

But you are an extremely well read man Michael and perhaps a better understanding of my own views can be found in the short story by the philosopher Miguel de Unamo - 'Dom Emmanuel the Good Martyr - (forgive my spelling) sometimes described as "Unamuno's Marxian Slip: Religion as Opium of the People."

Old Augustinian said...

A closet Jesuit? Surely a closet Benedictine? Bergh, Egan or Alcock?

DrMoores said...

That's a good question. I honestly can't recall after thirty years but I think it was Alcock. The Jesuit quip because as a boy I was told at school I was likely to become one! Shows how wrong they could be!

Michael Child said...

youth of today, rings and rivets and even a hard football, they come in the shop they walk to the mind, body and spirit section or even fiction, fantasy, perhaps horror. They are really looking for answers

Ewen Cameron said...

Tony, you ask a very good question. A full answer would run to more space than can be afforded here, but I’ve commented publicly on this over several years in our weekly and quarterly briefings.

The explosion of securitised debt since 1999 is very complex, but, it’s scale should not be under-estimated. We are talking many trillions of dollars here. High profile examples in the UK include the debt-funded takeovers of Manchester United and Debenhams. Recent casualties include the takeovers of Alliance Boots, and Chrysler, the debts of which are proving very difficult to sell on (the banks lend, then sell the debt).

In short, the regulators could sensibly have done several things.

In the specific case of Northern Rock (or any other lender using securitised debt), one simply answer would be to limit the proportion they could carry in 90 day debt. This would oblige them to package debt into proper, long term bonds, with proper credit ratings. If you visit the investor web site of (say) Hammerson, a FTSE100 property company, you’ll find a clear explanation of what debts they have, when they roll over (up to, I think 2024), and their credit ratings (all investment grade).

A lot of the problem is once-removed from Northern Rock and originates in the USA, where debt of this type became increasingly sliced-and-diced into incredibly complex packages of still unknown toxicity. CDO’s, MBS’s, SIV’s and probably R2D2’s, if they had got that far. Nobody knows quite what they are holding. The Banks don’t, the regulators don’t, and the holders don’t. This is why everyone’s gone into a major funk. US sub-prime debt, on the derivatives market, currently trades around 16 cents on the dollar. Co-ordinated central bank intervention, around the globe, has done little to unlock the seizure.

Why didn’t the regulators or the market act to clamp down on this? Well, being clear, transparent and accountable impacts profits. The remuneration of the Rock’s Board is a matter of public record, and though Applegarth’s head has now hit the basket, I don’t see him handing back his last three years earnings.

A small dip into a complex pond, but I hope this helps.

With regards

Ewen Cameron