This is what is has all come down to: The story needs a little more to get it right. I'm going to work on it through today and post it just after midnight. Apologies for the delay. Those are not words we often use in the same sentence on this blog but fear not: this posting is not about British journalists but about an extremely brave Russian (well, half Chechnyan) lady who spoke this evening at thePushkin House. According to Bloomberg, the Group of Seven major nations is unlikely to adopt Britain's proposal to guarantee lending between banks when it meets today, a G-7 official told reporters in Washington. A useful overview on the current status of deposit guarantee schemes in EU member states. Interestingly, the schemes are posted under the heading "state aid". In The Financial Times today, Alistair Darling, our beloved and revered chancellor, has penned his thoughts. As he toddles off to Washington, he tells us: Via Reuters:
Monday, October 13, 2008
Angry ...
I've had enough. I'm not just pissed off. Not anymore. I'm angry - white-hot, molten angry, fulminating volcano-type angry.
If I was less controlled, I would be one of those who run amok with a machine gun, slaughtering innocents in some school or other. I understand how those people must feel - gripped with blind, passionate rage, lashing out at the world in a hail of purifying fire.
But that's not the way to do things. The wrong people get hurt, and you end up dead, fodder for the hacks and armchair moralists who prattle away without even beginning to understand what is going on. And as General Patton once said to his soldiers - your job is not to die for your country but to make some other poor bastard die for theirs.
The pen (or keyboard, these days) is mightier than the sword, they say. I hope it is. It needs to be, because I'm going to use it to kill those bastards - metaphorically of course, but they're going to be dead ... if it is the last thing I do.
My first target is Dr Charles Bloody Tannock, MEP and ^*!$wit extraordinaire. He has really ticked me off. That was a very stupid thing to do - but then, he is a very stupid man. But he is only a proxy target, typifying as he does the blind, malign stupidity of our ruling classes.
When I have done with him, I will move onto the real targets. I will explain why this financial crisis, with the incalculable damage it has caused, isentirely the fault of our ruling classes - of which Dr Tannock is a fully paid-up member. I will then explain why and how we must never, ever, let these dangerous fools do the same thing again.
This may take some time to write. I'll post when I can, sometime later today.
COMMENT THREADCracks beginning to show?
Headline reports from the Paris "summit" – this one of the 15 eurozone members plus Gordon Brown and "hangers on" like Barroso – speak of "a plan to confront the financial crisis which will involve hundreds of billions of dollars of new initiatives to head off a feared 'meltdown'".
Thus we hear of Sarkozy saying that governments would "buy into banks to boost their finances and guarantee inter-bank lending." "The EU," we are also told, "will ask the United States to help organise an international summit to reform the global finance system."
Details are sparse as it has been left to each member state to make their own arrangements – although it is being suggested that Germany alone is prepared to put €3-400 billion in the pot. The precise plans, we gather, will be announced after simultaneous Cabinet meetings being held today in Italy, Germany, France and elsewhere – before the markets open.
The guarantee on inter-bank lending is, of course, crucial. But, given the effect that the promise of a British guarantee has had on the Libor, no one is holding their breath.
In fact, at least one financial blogger is more than a little sour, warning that "there is a price to pay for those government guarantees." Blanket guarantees of everything, he writes, will eventually end in a collapse of some major country or some major currency, the break-up of the EU, or a global depression of some sort, perhaps all of the above.
These governments are simply transferring the risk of bank collapse to their economies as a whole, "betting the farm", so to speak, that this will hold the line. But it is rather like tying oneself to a rotten tree in a storm in a bid to stop it being blown down. It might be better to cut the rope.
All of that makes another of Sarkozy's comments rather interesting. He is calling for "new accounting rules for banks" to be enacted "without delay". This looks hopeful except that he specifically declared: "On the reform of accounting norms for valuing bank assets, we got the agreement of the British prime minister on the proposal we will make on Wednesday with President Barroso."
This is our old friend the "mark to market" rule and the reference to Wednesday is to the autumn European Council meeting - something the journos will insist on calling a "summit". Thus, it looks like the commission will be tabling formal amendments on that day.
But, from the tenor of the comments, it looks like we are dealing with the sham reform announced at Ecofin last week, a story already picked up byReuters.
If that is all the "colleagues" have to offer, it is not very much. Later today, the US SEC is expected to announce its definitive "guidance" on the revised application of the rules, about which the commission is making such a song and dance.
In the US, this has not quelled demands for a complete suspension of the rules. John Allison, chairman and CEO of BB&T - a well-capitalized North Carolina bank holding company with assets of $136 billion – stresses a point similar to that made by the TPA. He is saying: "If we had fair value [mark to market] accounting, as interpreted today, in the early 1990s the United States financial system would have crashed."
But, if the "colleagues" are still playing their games in Europe, down in the grass something is stirring. On Friday, Reuters was reporting an intriguing comment from Thomas Steffen.
Steffen is the chairman of the German Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and is also in charge of insurance supervision at the financial watchdog BaFin. He is voicing concerns about "fair value" and has stated, "We should not change the principles, but we should be ready to revisit the concept of [in]active markets, where markets obviously do not provide appropriate prices."
Then, we heard last night from Klaus-Peter Mueller. He is another German financial luminary, president of the BdB federation of German banks and supervisory board chairman of Commerzbank AG (CBK.XE). This is a "big cheese" by any measure.
Mueller thinks (or, at least, is saying) that the outcome of Friday's G-7 (G-1.32?) meeting and yesterday's Paris summit "could be the turning point in the current financial crisis" – although he did not state the direction in which the turn might be made.
Crucially, he regards a recapitalisation of banks as "only a temporary measure," backing "government plans" to modify accounting rules. As lessons to be learned from the current crisis, Mueller says, "accounting rules have to be modified."
Echoing Thomas Steffen, he suggests that, "… one shouldn't juggle the principle of a fair-value-valuation. This principle remains right." But he adds, "if products due to an extraordinarily market situation can't be regarded as tradable then this must be taken into account on the balance sheet singularly." In the medium term, therefore, "a reform of the capital requirements directive is important."
If this is not exactly an expression of urgency, the staid and formerly totally obscure International Accounting Standards Board is getting its skates on. According to the Financial Times it is meeting today, in a bid "to head off the threat of action by the European Union" – stirring stuff indeed.
Unfortunately, it is confining itself to considering the "sham" reforms, which the FT says could only ease "future strain on balance sheets". It would not provide an immediate - and urgently needed - boost to current asset values.
However, European Central Bank governing council member Christian Noyer isjoining the fray, agreeing that the rules "need to be overhauled" – a more fundamental reform. But he is cautioning against a move during the financial crisis.
"Noting that valuation rules may not be optimal for all instruments in all market circumstances," he declares, "does not mean that they should be changed in the midst of a crisis." A sudden change of the rules as markets collapse could raise moral hazard issues and amount to "valuation forbearance" - allowing companies to gloss over losses on their portfolios.
Thus, on both sides of the Atlantic, the pressure does seem to be building for a more fundamental reform of the "mark to market" system, despite the determination of the British MSM and the chatterati to ignore this issue.
Whoever would have thought that accountancy could be so exciting – or have I completely lost it?
COMMENT THREADSunday, October 12, 2008
A delicious rant
It can be found here. Meanwhile, Jim McConalogue takes on the EU inCentre Right, linking to his own piece in The Yorkshire Post.
Jim's piece elicits a comment on theCentre Right blog from a certain Mark Williams, who airily declares:The EU has very little to do with bank regulation and capital adequacy, which is agreed on a much wider international basis at the Bank for International Settlements … All the EU directives do is require all EU countries to adopt the Basel accords so that no EU country can try to gain a competitive advantage in banking by applying a lighter regulatory regime.
Under normal circumstances, this would easily win the "fatuous comment of the week" prize. However, there is just too much competition. Fresh fromdemonstrating that human life can exist without the blessing of intelligence, Charles Moore triumphs again in The Spectator. There, he is happily telling us, in respect of the financial crisis, that because, "We are not part of the single currency. We are free to do what we want …".
But, for Mark Williams as a consolation prize, we've found this - and even got a picture for him.
COMMENT THREADThe end of civilisation as we know it
The text of Article 1(1) of Directive 86/635/EEC shall be replaced by the following text:
You will be pleased to learn that this comes from Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions.
'1. Articles 2, 3, 4(1), (3) to (5), Articles 6, 7, 13, 14, 15(3) and (4), Articles 16 to 21, 29 to 35, 37 to 41, 42 first sentence, 42a to 42d, 45(1), 46(1) and (2), Articles 48 to 50, 50a, 51(1), 56 to 59, 61 and 61a of Directive 78/660/EEC shall apply to the institutions mentioned in Article 2 of this Directive, except where this Directive provides otherwise. However, Articles 35(3), 36, 37 and 39(1) to (4) of this Directive shall not apply with respect to assets and liabilities that are valued in accordance with Section 7a of Directive 78/660/EEC.'
To think that there are people out their expending their life energies on writing this stuff, and even more on reading it and trying to understand it.
And people complain that the constitutional Lisbon treaty was incomprehensible?
COMMENT THREADThey've known it all along!
As previewed last night, we have discovered cast-iron evidence that the EU commission has known for at least a year that there have been disastrous "shortcomings" in its system of financial regulation. This system includes the measures for the application of the "mark to market" rules which lie at the heartof the current banking crisis.
The commission has also known that changes to the system were urgently needed to prevent a repeat of the "market turmoil" of the summer of 2007. Yet, despite a massive effort, it has only just been able to deliver drafts of these vitally needed changes.
What is particularly damning though is that the commission is actively hiding its part in what amounts, probably, to the most serious regulatory failure in the history of mankind – certainly the most expensive.
To avoid having to admit openly that its own regulatory system is at fault, it sneaked out its changes to the legislation earlier this month. Amid a barrage of deliberately misleading press coverage, it sought to camouflage the amending laws by blending them in with a raft of long-planned and well-signposted additional laws.
The changes the commission is proposing directly address – in its own words - the "shortcomings" in the law officially known as Directive 2006/49/EC – the "Capital Adequacy Directive". It is this that we pinpointed as the major cause of the current meltdown in the financial services industry.
To confuse matters though – we think intentionally – the commission has since unofficially relabelled this law and its partner in crime, Directive 2006/48/EC, collectively as the "Capital Requirements Directive" (singular). This means, amongst other things, when you google the official title, this one does not show up.
The commission proposals are included in a 45-page draft EU parliament and Council amending directive. This aims, inter alia, to correct and improve the rules on the crucial area of "crisis management market value" – at the heart of the current crisis.
This document is accompanied by two other highly technical "Commission Directives", one 14 pages and the other 7 pages, plus a 148-page impact assessment document.
Had the commission openly admitted its "shortcomings", there is an outside chance that the media would have picked up the story and made an issue of it. And, in this febrile climate, with the hunt for scapegoats in full cry, this could have been highly damaging to the EU.
Thus, in what has all the hallmarks of a carefully orchestrated deception plan, the documents were slipped out into the public domain, the clear intention being that they should not be noticed.
This sleight of hand took place on 1 October, three days after David Cameron had given his unscheduled speech to the Conservative Party conference in Birmingham, calling for the changes which the commission is now addressing.
In what was clearly part of the deception – effectively a variation of "hiding in plain sight" the publication of the new commission proposals was announced at a press conference in Brussels on the afternoon of 1 October.
Fronting the deception was financial services commissioner Charlie McCreevy. Using the newly-minted and misleading "Capital Requirements Directive" title, he launched into a dense, highly technical speech. It was entirely misleading in its content and bore no relation at all to the nature of and primary reasons for the changes. It succeeded in throwing the bored journalists off the scent.
To accompany the speech, the commission had to produce a press release. This is routine and not to do so might have aroused suspicions. Thus, the convention was followed and, in due course, one appeared on the commission "rapid" press website.
This was slightly more revealing, but so densely worded that it was (and is) easy to miss the crucial detail. We looked at it on the day, and several times afterwards, and missed its significance – as was no doubt intended.
Interestingly, this was accompanied by an opaque memorandum, which was very obviously part of the plan. This purported to deal with the changes the commission wanted to make. It was set out in the form of a "frequently asked questions" explanatory note. But it made no direct reference to commission's changes. Instead, it told a direct lie. "The proposals to change the banking rules," it said:… may be useful for strengthening market confidence and institutional resilience in more stable periods. However, the proposed measures will come into effect in about two year's time and will be way too late to have any impact on the current meltdown of the financial system.
Only later, on the official "Single Market" website did we finally see the commission declaring, with unexpected candour, the real nature and reason for the amendments. This was set out a little way down the page (screen-grab below):
In text, this read: "The Commission has adopted a proposal to amend the CRD in certain key areas. These amendments address the shortcomings in the current regulatory framework and are a direct response to the financial turmoil."
It is the "explanatory memorandum" to the draft Council and Parliament directive, however, which completely gives the game away. It states: "The revision … has been prompted by the financial market turbulence that started in 2007 and is aimed at ensuring adequate protection of creditor interests and overall financial stability."
As to the other two draft Commission Directives, "Amending certain annexes to directive 2006/49/EC of the European parliament and of the Council as regards technical provisions concerning risk management," the very titles tell you what is going on. This is what has been the problem all along – the "risk management" model associated with "mark to market" that artificially under-valued sound assets, drastically reducing the liquidity of the banks.
If there could still be any doubt, but one part of the main amending directive nails the nature and purpose into place with "point 6.4.5" on "Liquidity risk (Annexes V and XI of Directive 2006/48/EC)". It tells us that:The current market turmoil has highlighted the fact that liquidity is a key determinant of the soundness of the banking sector. The proposed changes implement the work conducted by CEBS and the Basel Committee on Banking Supervision to develop sound principles for liquidity risk management…
This section, in particular, addresses exactly the current problems with "mark to market", not in respect of the actual system of calculating "fair value" but in the risk assessment model, and the way the accounting system is implemented.
Giving the lie to the claim that "the proposed measures will come into effect in about two year's time and will be way too late to have any impact on the current meltdown of the financial system," the press release itself notesthat the proposed amendments are, in part, "a response to the recent recommendations of the G-7 Financial Stability Forum."
It further notes: "The European Council has expressed a strong sense of urgency emphasising that the measures should be adopted by April 2009."
The amendments have been sent out for consultation with a closing date of 15 October – an incredibly short period for such complex documents - totalling over 200 pages of highly technical detail and, with an adoption set for April 2009, this in EU terms, is moving at warp speed. The measure is clearly being fast-tracked through the system, to emerge in what is probably the shortest period that it can get through the labyrinthine procedures.
All the evidence is, therefore, of an emergency measure being rushed through at breakneck speed (in EU terms) to "address the shortcomings in the current regulatory framework" in "direct response to the financial turmoil."
Finally, the "impact assessment" puts to bed any lingering doubts anyone might have about the role of EU law in the implementation of the Basel II agreement. The history is all set out:Financial markets are crucial to the functioning of modern economies. Their integration is critical for the efficient allocation of capital and for long-term economic performance. Enhancing the single market in financial services is a crucial part of the Lisbon Strategy for Growth and Jobs and essential for the EU's international competitiveness.
Yet never once has the commission, any commission official, or the government of any member state – and especially Gordon Brown and his chancellor, Alistair Darling - ever openly admitted the depth of EU involvement in our financial regulatory system.
The Financial Services Action Plan 1999-2005 (FSAP) aimed at reinforcing the foundations for a strong financial market in the EU by pursuing three strategic objectives:
Together with some other 40+ measures of the plan a review of the legislation governing the capital framework for credit institutions (banks) and investment firms was undertaken in order to align it with market developments and work of the G-10 Basle Committee on Banking Supervision (the Basle Committee).
The then existing European legislation, the Consolidated Banking Directive 2000/12/EC and the Capital Adequacy Directive 93/6/EEC, was based on the Basel I Accord of 1988 and the Basel market risk amendment of 1996. To keep up with the developments in the market, the latter were updated with final proposals for the Basel II Framework in June 2004 and the Trading Book Review in July 2005.
The "new" Basel agreement was reflected in the EU as a new capital requirements framework that was adopted in June 2006 as the Capital Requirements Directive (CRD); this comprises Directives 2006/48/EC and 2006/49/EC.
Nor for that matter has leader of the opposition, David Cameron, given any clue of the presence of this "elephant in the room", despite many referencesto the Basel agreement, not least this one in March, where he correctly identified the problems associated with the agreement.
Crucially though, not only has the commission failed openly to mention that there were "shortcomings in the current regulatory framework", neither has the British government. Nor has it acknowledged the rush attempts by the commission to rectify matters. It had that opportunity on 8 October, when shadow chancellor George Osborne brought up the issue of "mark to market"in Parliament - when he was obviously unaware that his concerns were being addressed by the commission, albeit with glacial speed.
The point, of course, is that had the original Basel II agreement been implemented directly into the British legal code, rather than through the medium of EU Directives, the "urgent" changes so vitally needed to clear the logjam in the banking system could by now be in place in the UK.
But, locked into the EU, we are trapped. Such is the complexity of the EU law-making process that, even despite the "strong sense of urgency" expressed by the European Council, it will be six months before the commission's proposals become EU law. It will then be some months more before the results can be transposed into British and other member state law.
Furthermore, the process itself, which led to these amendments being sneaked out on 1 October this year, was actually set in train on 9 Octoberlast year. It was then that the finance ministers of the 27 member states met to review the previous summer's market turmoil following the US sub-prime mortgage crisis.
The finance ministers then agreed on a "15-month road map" for "reviewing the bloc's financial rules" in order to avoid a repeat of that "market turmoil", a repeat they have singularly failed to prevent.
That the new proposals have been rushed out, not fifteen but twelve months later demonstrates with utmost clarity the desperate urgency of the situation, But, from start to finish, it will still have been well over 20 months before the vital changes are in place.
The tragedy is that we have suffered an entirely preventable financial meltdown, with the current legislation having magnified the effects of structural failures in the banking sector, turning a serious problem into a disaster.
The very worst of it all, though – apart from the commission's refusal to come clean about its own failures – is that, if we still had a sovereign government, even at this late state we could take corrective action. As it is, we have eight or nine months to wait, by which time the additional damage will be incalculable.
COMMENT THREADSaturday, October 11, 2008
Unfair to Tories!
Hard though it might be to admit, Simon Heffer is being grossly unfair to the Tories (well, a little bit unfair) when he slams into them inhis column today, under the headline: "Tories need to grow up to beat Gordon Brown".
He starts with the archetypal "man in pub" diagnosis of the current financial crisis, pinning – in true partisan style – all the blame on Gordon Brown, finishing his opening with this classic line: "He then failed properly to regulate those banks."
On that note alone, Jon Moulton could tell him how wrong he is and, withour analysis, it is clearly evident that Brown's failure to regulate extends only to the fact that he went along with the Basel/EU regulatory revolution which is largely responsible for magnifying this crisis and hampering our attempts to extricate ourselves from it.
But, while such subtlety is not Heffer's forte (never let facts spoil a good rant), he then does both Cameron and his shadow chancellor George Osborne a serious injustice.
This week's non-events in the Tory party, Heffer writes, "confirm my view, that they didn't seek the recall of Parliament because they had nothing to say. They couldn't bring themselves to attack the policies that exacerbated this mess because for the most part they supported them …".
He then further rounds on them, declaring, "they are not taking on the Government's handling of this crisis because they haven’t a clue what they would do differently,” then concluding: "It is not a very edifying or reassuring picture, and our democratic rights are being harmed by the Tories' inadequacy."
On that basis, he tears into George Osborne: "the shadow chancellor, isn't up to it. That becomes more apparent with each day that passes," he storms.
As it happens, though – had he bothered to look – Heffer would have found that Osborne had had something quite interesting to say in parliament. It is just that no one reported it. Specifically, he addresses the vexed issue of "mark to market", stating:Let me turn to the issue of liquidity. The increasing reliance of our banks on the overnight money markets is creating a hair-trigger effect which leaves individual institutions more and more exposed to events. That must clearly be undone, so we all support the Bank of England's decision to extend funding to the banks from tomorrow—it should address the urgent liquidity problem—but let us be clear about what is happening here. The Bank of England is becoming not just a lender of last resort, but the lender of only resort. Does the Chancellor agree that, in the medium and the long term, that is unsustainable? We need to address not just the symptoms of the crisis but the cause, and that brings me to the issue of capital.
This is sensible, intelligent and well-briefed. It also gets to the heart of the current problem, making points which Heffer himself could usefully have explored. But, of course, the Great Man is far too grand for that.
The cause of this crisis is that we built an economy on a debt-fuelled bubble. Now the bubble has burst, and the debt is being called in. That leaves banks under-capitalised and their balance sheets weak. There are steps that can be taken now to stop, for example, the mark-to-market accounting rules adding to a downward spiral of falling asset values and restricted lending. The Chancellor's immediate reaction when we proposed that was to say that it would make "no difference". Many, many banks disagree with him, and so do many European countries. If he will not accept our argument, will he at least engage with theirs?
And neither is Osborne's boss, a certain Mr David Cameron, a slouch when it comes to exploring this problem. Apart from his speech at Birmingham, Cameron gave an intelligent and thoughtful speech in London, to a City audience last March where he explored the "pro-cyclical" effects of the Basel agreement under the heading, "capital adequacy". Like his comments in his Birmingham speech, his views went unreported.
Cameron even tried to raise the issue on the BBC's Andrew Marr programme on 27 April of this year. Cameron tells him that we have to look "at some of the causes of the problems we're in." He continues:And one of them is undoubtedly that bank lending has been incredibly free and we do need to look at the so called Basel rules, the Basel rules in terms of what banks can lend. And make sure we really are including all the different sorts of banks and all the different sorts of assets so we can try and avoid ...
Marr immediately cuts him off with an interruption, reverting to an earlier line of questioning which completely changes the subject. We hear no more of Basel.
And that, in a way, illustrates the problem. BBC journalists – like their print-media brethren – seem to have a "serious" filter implanted in them. Whenever a politician says something serious or interesting, they immediately shut down. Politicians quickly learn, therefore, that if they are to attract publicity, they must pander to the journalists and indulge in the tat, the trivia and the theatre.
This is something the political blogs could have done something about, looking "round the corner" for the more profound things that politicians do say – thereby encouraging them to do it more often. Some do try but, in the main, they ape the MSM, filling their posts with the same (or slightly different) tat, trivia and theatre.
In that sense, Heffer is attacking the wrong target. When Cameron addresses the "mark to market" issue – or the "Basel" problem - he is ignored. When he rails against "bankers' bonuses", he gets the headlines.
The problem, or some of it, lies with us all as a collective. As we observed earlier, we get what we deserve. We also deserve what we get. Swatting politicians in the angry way that Heffer does is not going to make it any different.
COMMENT THREADSome observations on regulation
I used to work for a Casino operator in London. I won't say which one, but it was good fun and good money.
My job was food hygiene advisor, a subject that the management tookvery seriously. Through a twist in the Gaming Act, the local authorities had found that, if the kitchens were not up to par, they could close down the whole operation. That was big money. It was the easiest job I ever had. In the catering operations, my word was law. Anything I said was needed, we got.
Anyhow, we had a problem. The company had leased a floor in a prestige London hotel to covert into a casino. That involved major and expensive structural works and, obviously, the gaming side took precedence. For the catering, we were given part of what had been one of the hotel corridors, blocked off at one end and equipped, ship's galley style.
It was perfectly functional and I OK’d it. In fact, I liked it. I've never gone for these big kitchens – the less space you have, the less you have to clean and the easier they are to work.
All went well until the local authority inspected. The kitchen was too small, they said. They only thing they would allow us was a sandwich and snack operation – no prime cooking or food prep. We pleaded with them, but they would not budge.
Now that was bad news – seriously bad news. In the business, a Casino lives or dies by its food operation. Gaming is regulated to within an inch of its life so the only competitive advantage we had was the food. I'll let you into a little secret. If you want the best food in London – and the cheapest – forget the "big name" restaurants. Join a casino. Don't use the tables – that's a mug's game … but use the restaurants.
Now, without a food operation, we were dead in the water. When a high roller, who might spend £5 million or more on a table in one night, asks for something to eat, he gets it … anything he wants. Or he goes elsewhere. We had to have that kitchen.
Structurally, there were no options. So yours truly came up with an idea. I told you it was fun. Unlike the classic kitchen (pictured) we put all the equipment on wheels – the gas cookers on flexi-hoses with bayonet couplings, etc. That way, everything was mobile. I usually rigged my kitchens like that anyway – they were so much easier to clean.
As it happens, we had a satellite food operation, and our own, radio controlled delivery trucks, conveniently equipped with tail-lifts. And so the plot was hatched.
We equipped the kitchen and ran a full food service. But, when the inspector came to call, we activated "plan A". Being a casino, security was very tight and the inspector had to come to the front door. Then we had to put out a call for an escort. Of course, that took a little time to arrange.
By the time the inspector got to the kitchen, we had called up one of our vans, wheeled all the equipment out the back, loaded it up and sent the van to drive round London for an hour. When the inspector had gone, we got the van back re-fitted the kit and went back to work. We were happy, the inspector was happy, the customers were happy. And my boss was veryhappy. I got a good bonus that year.
That is the point about regulation – be it food safety or financial services. There has never been a regulation invented yet that there isn't a way round – if there's enough money in it. The tighter the regulations, the more inventive and creative will be the ways of getting round them.
And that is what has been happening in the financial services industry. Invariably, the regulators are on the back foot. The faster they write new laws, the faster the "wide boys" find ways round them. The regulators can never catch up.
The problem is that the regulatory paradigm is wrong. The authorities, from Basel to Brussels to London, are all labouring under the illusion that, if you tie the industry up in ever-more detailed rules and procedures, with check-lists, tick boxes and "compliance officers" everything will be hunky dory. It won't – it never will be.
The old hands knew how to do it, but they've been sidelined, replaced by the wiz-kids, the mathematicians, the theoreticians and the bureaucrats. And the industry is running rings round them. But then, as Warren Buffett observed, it is very hard to teach new dogs old tricks.
These buffoons don't know the half of it and, the trouble is, they are so up themselves, they are quite incapable of learning. We could say, "they'll learn". But they won't. They are already in the process of writing new regulations, for the existing range of "unregulated" products. And by the time the regulations are in force, the industry will have moved on to something else, and we'll start all over again.
Sigh!
COMMENT THREADSmoking gun II - update
COMMENT THREADThe blind will not see
You really have to give it to Charles Moore in his column today. He has really excelled himself – in his blind, vapid, malign stupidity. It transcends all his previous effortsand stands as a towering monument to the blindness of our political classes (of which he is a fully paid-up member).
Compare and contrast – first Charles Moore:…the fact that the British authorities are able to put together a huge rescue package with the banks is a sign that our political condition is not as weak as we think. The same can be said of the Paulson plan in America. It has become commonplace to say how appalling it was that Congress argued over it for a week. Not at all. The elected legislators were duty-bound to ask difficult questions about what looked like the biggest transfer of wealth from relatively poor taxpayers to rich bankers ever undertaken.
Now read this, extracted from our earlier piece, contrasting events in the US with what happened over here. "Over here, what do we see?" I write:
The debate happened. Compromises were made. The Bill passed. The system worked. I hope Parliament will submit the Brown/Darling plan to the same level of scrutiny and correction, and then agree it.
In both cases, the countries involved are sovereign democracies. They have electoral legitimacy, proper institutions, the rule of law, and the capacity to act.As the crisis develops, the complaint arises of government "dithering" – reacting to events rather than taking the initiative with a pro-active strategy. The main action we see is a series of meetings with the European "colleagues" behind closed doors, poorly reported and completely misunderstood.
This indeed is the politics of denial and this is what is blighting our attempts to bring any rationality to the debate about the European Union. It is not that the evidence is not there – simply we are doomed by this wilful determination of our political classes to shut their eyes to reality and pretend everything is normal … nothing has changed.
Then, after the final, key meeting of Ecofin on Tuesday, we see action taken. Parliament is not consulted. There is no debate. Parliament is simply told what is going to happen. It is then allowed to discuss the issues. But there is no vote, no approval. None is needed. Your government has spoken – the government of Europe.
Therein lies the difference – on the one hand in the United States we see, with all its imperfections, a functioning democracy in action. Here, we see a cabal of rulers working behind closed doors, coming out into the daylight only to inform us what they have done and how much it is going to cost us.
Repeat after me, they say: "we are a sovereign democracy … we are a sovereign democracy … we are a sovereign democracy …". "Now, off you toddle, little man," they say in that infuriating, patronising way they have got down to such a fine art: "nothing has changed."
COMMENT THREADSmoking gun II
This blog has discovered incontrovertible evidence that the EU commission has known for at least a year that there have been disastrous "shortcomings" in its system of financial regulations. These include the measures for the application of the "mark to market" rules which lie at the heart of the current banking crisis.
The commission has also known that changes to the system were urgently needed to prevent a repeat of the "market turmoil" of the summer of 2007. Yet, despite a massive effort to produce new rules, it has only just been able to deliver drafts of the vitally needed changes.
In a carefully orchestrated deception plan devised to avoid having to take responsibility for the flawed rules that have done so much damage, it has slipped changes, unnoticed, into the regulatory system. The commission hopes to have new laws approved by April 2009, too late to affect the current crisis and perhaps too late to save much of the financial industry.
We are putting the final pieces of this complex story together and hope to publish in full by mid-late morning.
COMMENT THREADFriday, October 10, 2008
Courageous journalism
Read more on EU Referendum 2.Market value
At the end of the day's trading, in accordance with mark to market rules, the Group was re-named G-2.73, reflecting its current market value.
COMMENT THREADThat bad!
From The Times website. See the first line under "related links" - I only read that line. I should, of course, have read the whole thing, but you know how it is!
I know things are bad, but are they that bad?
COMMENT THREADThe driver quits the train
The real experts in the business seem to be saying that the thing to watch as this crisis unfolds is the inter-bank lending. It is, after all, the seizure of the credit market that is at the heart of the problem.
In this context, an index that, if we were honest, very few of us knew much about even a few days ago, suddenly assumes crucial importance – that is the Libor (London interbank offered rate).
If Brown's EU-approved bank rescue package starts to work, it is here that the first signs will be seen. Even before the package is fully up and running (which it is not yet) one would expect it to have a "halo effect" on that magical mystical creature "sentiment".
But bankers, when it comes down to it are an unsentimental lot – brutal, in fact. We saw yesterday that the immediate response was to mark up slightly the crucial three-month rate. And so it is again today.
In a headline that is horribly understated, Bloomberg reports: "Libor for three-month dollars rises as cash injections misfire."
That one word "misfire" is a deadly shorthand for saying that Mr Brown's (EU-approved) rescue package definitely isn't working. The rate climbed again today, this time by seven basis points to 4.82 percent.
"Central banks are trying to supply liquidity, and in many cases it just comes back to them," says Robin Marshall, director of international fixed income in London at NCL Smith & Williamson – cited by Bloomberg. "There's a real problem in getting people to put their money to work. The fear of counterparty risk is so intense that the only bank prepared to lend at the moment is the central bank," he adds.
"You just don't know whether the person you're lending to is going to be the guy that has the weak balance sheet and is going to fall over," says Sally Auld, an interest-rate strategist at JPMorgan Securities Australia Ltd in Sydney. "What markets are telling you is that it doesn't matter what central banks and governments do."
That last comment says it all. To a very great extent, governments seem to be bystanders in this unfolding crisis, the adverse sentiment being driven by the increasing realisation that they have lost control.
For those of us who are rank amateurs in the technicalities of this field, that itself is the most worrying thing. You don't have to be an expert to realise that, when the train driver leaps from the cab of the runaway train, we're all in trouble.
COMMENT THREADState aid
When, then, is state aid – which is illegal unless authorised by the commission – not illegal?
COMMENT THREADMr Darling writes
We need to shift the IMF's focus towards surveillance of the links between the financial sector and the real economy. It will identify risks in advance, co-operate with the Financial Stability Forum to design policy and regulatory responses and strengthen links between ministers, in the Group of Seven and beyond, to ensure effective follow-up. The world economy is changing. Sticking with the solutions of the past is not an option. Now, more than ever, we need new ideas.
"…It will identify risks in advance"?
Bit late for that isn't it? Or is Darling thinking in terms of "better luck next time"?
What's the market in soup kitchen futures like?
COMMENT THREADQuotes of the day
"This is panic... There's nothing left for us to trust," said Takashi Ushio, head of investment strategy at Marusan Securities. "Investors are scurrying to convert to cash. A lack of confidence is coupling with panic."
And, from Warren Buffett in 2002: "In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit."
Monday, 13 October 2008
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