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Fantasy finance cuts many of the giants of global banking down to size
By Jeff Randall

Imagine what it's like to live through an earthquake and a gale-force
storm - at the same time. That is what's happening to the world's
financial markets.

Vast holes are opening up in the foundations of banks and other
commercial lenders, as violent tremors that began on Wall Street
arrive in London, Tokyo and elsewhere. As the weakest edifices
collapse, the damage is made worse by Hurricane Dodgy Debt that's
ripping through the credibility of many well-established houses.

Names that I had been taught to revere now look as though they have
been dragged through a hedge-fund backwards. Never mind Lehman and
Merrill Lynch, if you had told me even last year that Union Bank of
Switzerland would be brought to its knees by reckless lending, I
would have recommended a visit to a de-tox clinic on Lac Lé man. The
Gnomes of Zurich, once giants of global finance, have been cut down
to size.

I'll not pretend that The Daily Telegraph foresaw all of UBS's
troubles, but this newspaper has been highlighting for many months
the dangers of a banking system based on fantasy finance. Ever since
I rejoined from the BBC in October 2005, Damian Reece, Ambrose Evans-
Pritchard, Edmund Conway and I have been ringing alarm bells over
excessive levels of debt. Governments, companies and consumers were
indulging in a wild borrowing binge, yet hardly anyone in power
seemed to think that it was a cause for concern.

At times, it felt like being the barman who called "last orders" at a
Roman orgy. Some rivals mocked us (in particular those who had bought
into Gordon Brown's self-proclaimed "genius"). Some in financial
services dismissed us as gloomsters who didn't understand the
benefits of sophisticated techniques. One academic, an economics
professor, had the front to suggest that I was hyping up stories of
impending doom to sell more papers. [Names, please, Jeff -cs]

Where are they now? Just as some banks have been ruined by the credit
crunch, many fancy reputations for analysis, management and
leadership have been blown away.

Mr Brown was never a great chancellor; he wasn't even a good one. He
got lucky: right job, right time. His mistake was to believe his own
Budget speeches and take credit for outcomes that were wholly
serendipitous. Now, as he thrashes about, blaming external factors
for Britain's plight, the prime minister looks, well, sub-prime.

Yesterday provided another scary ride on the stock market's Wheel of
Misfortune. Victims are piling up. Shareholders who thought they had
bought blue-chips are wishing they had opted for fish and chips.

Tens of thousands of employees, through no fault of their own, are
going to lose their jobs. For those with millstone mortgages, in some
cases provided by a bank that's now in trouble, the outlook is bleak.

Suppliers to troubled lenders will be fretting over payments due. If
the worst happens, the big boys, those with accountancy departments
and teams of expediters, can usually attract the administrator's
attention, but what if you're the window cleaner or a sandwich man?

As for the culprits, it's going to be fascinating to see what becomes
of them. How many of the "mad scientists", the financial engineers
who designed and built the machinery that promised to convert toxic
waste into balance-sheet bullion, will stay in work?

We hear a lot about eggheads in the basement, but who were they? I'd
like to meet the PhD who strode into his bank's boardroom and
announced: "Great news. We can lend fortunes to people who have no
hope of repaying. Better still, it doesn't matter if the collateral
is worth less than the loan. From this, we'll become millionaires."

Then there are the executives who believed him. Superstars, such as
Stan O'Neal, the ex-head of Merrill Lynch, who, having lost the
company many billions, was hoping for promotion but, instead, had to
suffer early retirement and the ignominy of a $150m redundancy cheque.

He's not alone. The golf courses and yacht parks of Florida are full
of former bank bosses who convinced a remuneration committee that the
only way to retain their special talents was to take the GDP of a
medium-sized country and use it as the starting point for calculating
a chief executive's salary, bonus and share options. As President
Clinton nearly said, these guys got the goldmine and the rest of us
took the shaft. Finally, let's hear it for the accountants and
auditors who signed off the numbers. Please, stand up, so we can see
you. Don't be shy. This is your moment. [Of course these accountants
have it both ways - they’re busy now dealing with companies in
administration or receivership. -cs]

How much, I wonder, did the so-called Big Four accountancy firms get
paid by the banking industry to make all those sub-prime assets seem
like they had value? Who was kicking the tyres and checking the
inventories? Surely someone, somewhere with a degree in Adding-Up
must have peered into the loan book and questioned its contents?

What happened to that curious accountant - he must be out there - who
looked at a pile of radio-active dung and suggested to his client
that it was worth much less than nothing? Was he relocated to the
firm's office in South Ossetia, or simply sectioned?
These questions and many more need to be answered.
===========================
THE TIMES - Business 17.9.08
1. Financial turmoil could force £20bn in spending cuts or 5p extra
on income tax, Institute warns

Gary Duncan, Economics Editor
Drastic cuts of £20 billion in public spending, or a rise in income
tax of as much as 5p in the pound will be needed within three years
as financial turmoil and the economic downturn drive the Government’s
finances deep into the red, a leading think-tank said yesterday.

In the latest in a raft of warnings over the toll on the public
finances from the severe shocks buffeting the economy, the National
Institute of Economic and Social Research emphasised the tough
choices confronting Gordon Brown and Alistair Darling as the downturn
undercuts Treasury tax revenues.

As market upheavals, tumbling share prices, plunging house prices and
the severe squeeze on consumer spending power all sap economic
growth, the weakness of tax receipts, and higher bills for benefits
as unemployment climbs, are set to send government borrowing soaring,
the Institute and other experts believe.

With borrowing already at very high levels, the still sharper plunge
into the red faced by the Treasury as growth remains weak in coming
years will force spending cuts or tax rises by 2011 at the latest,
the think-tank said yesterday.

Cuts of 3 per cent in planned levels of public spending could be
needed by 2011-12, with swingeing rises in tax required if these were
not made, the Institute’s economists estimated ahead of what are
expected to be grim figures for the Government’s finances due to be
released tomorrow.
“The Government needs to be seriously rethinking spending plans given
what has happened over the past year,” Ray Barrell, the Institute’s
senior fellow, said. “Either spending needs to be cut or taxes must
rise.”

The Institute’s warning came on the heels of estimates from the
Institute of Fiscal Studies that government borrowing will be £65
billion higher than is planned over the next three years if economic
growth is in line with the Bank of England’s latest forecasts.

That would raise total national debt by 3.4 per cent of GDP, pushing
it decisively above the 40 per cent of GDP ceiling prescribed under
the Treasury’s so-called sustainable investment rule, the IFS
calculations suggested.

By 2010, the extra borrowing needed would be the equivalent of £467
for every Briton, the figures also indicated. The projected worsening
in the state of the Government’s finances would be still worse were
the economy to suffer an even more severe downturn than the Bank of
England has so far forecast.
================
2. UK unemployment rises to nine-year high

Grainne Gilmore

The number of people of out of work rose by 81,000 to a nine-year
high in August as the rate of Britons claiming unemployment benefits
surged at the fastest rate since the UK's last recession.

Some 32,500 people signed on for jobless benefits during August,
official figures showed today, signalling the largest increase since
1992.
Unemployment also rose, reaching 1.72 million people but business
organisations said numbers could rise as high as two million by the
end of next year to levels not seen since Labour came to power in 1997.

The CBI, the employers' group, said that the number of people out of
work could rise by 450,000 by the end of the next year, while the
Trades Union Congress said that the number of people out of work for
more than a year could surge by 700,000.

Today's figures will add to Prime Minister Gordon Brown's mounting
problems as he grapples to maintain control after a second minister
quit yesterday while battling to keep a grip on Britain's slowing
economy.

Figures also showed today that number of people in employment also
fell for the first time in nearly two years as the deteriorating
economic conditions took their toll.

Earlier this week 5,000 City workers lost their jobs as Lehman
Brothers, once America's fourth largest investment bank, filed for
bankruptcy.
Howard Archer, chief UK and of Global Insight, the economic
consultancy, said: "It seems inevitable that very weak economic
activity and deteriorating business confidence will exact an
increasing toll on the labour market over the coming months."

The rise in both unemployment and benefit claimants will come as
disturbing news for the Bank of England, which is hampered from
cutting interest rates to shore up the economy by soaring inflation,
which rose to a 16-year high of 4.7 per cent last month.

The increasing number of people losing their jobs will also raise
fears over the future of house prices, which have tumbled by more
than 10 per cent since last summer, according to Halifax.

People who can no longer keep up with their mortgage repayments will
be forced to accept low offers for their property, dragging house
prices down further.