This is an insight by a Chief Investment Officer of a leading private bank, into what is happening and why nothing gets better.
Here I have published endless pleas from Liam Halligan that banks should get no more money until they have ‘fessed-up’ their bodgy lendings in total and in detail.
It’s instructive
Christina
Kleinwort Benson private banking 5.11.09
The Monthly Musings of a CIO – November 2009
Big Banks, Bonuses but few Bankruptcies
The behaviour of the large banks in the UK has been hitting the headlines recently. The third quarter results season has seen enormous profits for those banks who are heavily engaged in trading in financial markets. As a result of monetary policy it has been possible for the large banks to borrow just about as much money as they could wish to from the Bank of England, and use that money to invest in the booming financial markets, mostly in fixed income securities, which both have a higher income yield than the 0.5% they are paying to borrow the money and are yielding capital gains as the vast amount of buying has pushed the prices of these securities higher.
As a result, trading profits in the banks have been astonishing. This was always likely to be the way in which Quantitative Easing was going to work, in that the authorities allow the banks to make large gains in securities in order to bolster their weak balance sheets, and so bring forward the day when the banks would be able to lend again and support economic growth.
If the banks public relations machines had focussed on this in their results announcements, they may survived public criticism – however, the fact that most banks instead put aside very large amounts for bonuses in the light of these large profits (courtesy of government policy in order to save them) has triggered a further round of public loathing, such that even the Conservative Shadow Chancellor has called for cash bonus caps of £2,000 for bankers. Banks and bankers have once again become synonymous with greed.
Separately, one of the key economic surprises in the UK this year has been the lack of foreclosures and bankruptcies. This has meant that unemployment has not risen as fast as had been expected and that there have been almost no distressed sales of commercial or residential property – this lack of supply in the real estate markets has been a major reason for these markets both falling less than had been expected and indeed beginning to see higher prices as cash-rich buyers seek to put their funds to work. By not foreclosing on the debts of companies and individuals that could not meet their interest payments, they have protected the economy from the worst of the recession. Indeed there are many anecdotes of banks appearing very keen to do anything to avoid taking possession of collateralised assets and having to sell them at market prices. However the other side of this coin is that by not taking these actions they also avoid having to recognise bad loans on their balance sheets. By adding unpaid interest to loans, extending loan maturities, ignoring the fact that the loans exceed the current value of the security, or in the worst cases, converting their loans on a bankrupt company into unlisted equity in the resultant debt-free company, fair market values are not established and they can pretend that the true value of the loans does not need to be written down.
In the short term this may appear noble and even patriotic, an attempt not make things in the economy even worse. In the long term, however it means that markets do not clear, the economy loses confidence in its ability to recover and the banks themselves become even less inclined to lend – this is exactly what happened in Japan in the 1990s, and should be acting as a warning. Shorter-term political considerations, the imminent General Election, mean that this is being ignored. Banks in the UK show no inclination to lend despite the exhortation of politicians, because the bankers have a shrewd idea that their current loan books are not healthy and they have no appetite to lend and lose more in difficult economic conditions.
This note is intended to give an insight into the thought processes that lie behind our investment views and our investment strategy. They do not necessarily reflect the current investment policy of Kleinwort Benson. This note is intended for information purposes only and does not take into account the investment objective, the financial situation, or the individual needs of any particular person. Investors should obtain independent advice based on their own particular circumstances before making investment decisions.
Posts
