Vericool Finance

Seeds Of Hope

Careless talk of green shoots can cost, if not lives, then certainly reputations.  Eighteen years after authoring the phrase, former chancellor Norman Lamont still feels obliged to defend it – protesting that he meant “shots not bushes”, and that the economy began to stabilise soon after.  We are not there yet.  But there are straws in the wind that suggest the economy may indeed start improving more rapidly than seemed possible even a few weeks ago.

There are signs of life in both the housing and stock markets, more optimistic news on the manufacturing front and – most significantly – evidence in the Bank of England’s latest Credit Conditions Survey that the money markets are easing.  It’s too early for green shoots, but there are “seeds of hope”.

Gordon Brown’s luck was certainly in.  He wound up the summit on a day when there was a raft of pleasing news around the world – and investors were determined to see the sunny side.  To be fair, the markets were also cheered by the G20 agreement itself (even if the figures owed something to Mr Brown’s talent for inflationary arithmetic).  The IMF cash boost was particularly welcome in alleviating fears of a further meltdown in emerging economies.

The hope in markets is that the worst of the crisis has passed.  The reality, of course, is that the world remains hostage to the health of the financial system. It is highly possible that the meeting might mark a turning point.  But the big fear the G20 didn’t address was the state of US banks.  Faith in Treasury Secretary Tim Geithener’s plan is paper-thin, and it may yet reveal that the banks’ balance sheets are still not telling the truth.  Moves to change the mark-to-market accounting rules may makes the values of toxic assets look better, but they won’t do much for investors’ faith in numbers.

The G20 hyperbole, complete with the “relief rally” on global markets, is pure escapism.  It’s the real-life equivalent of ‘soma’ - the mind-bending drug used for mass thought control in Aldous Huxley’s Brave New World. Our leaders need to snap out of this entrance and face reality.  UK growth fell 1.6% in Q4 last year.  We’re now looking at a possible 4% decline in 2009 and a further contraction next year.

It’s far too early to build up on hopes.  There are glimmers of light, but many dark indicators too - not least the worrying spectre of unemployment.  The pace of decline might be slowing, but we’re a long way from digging ourselves out of this slump.

Obama, Car Dealer In-Chief

Ronald Reagan must be spinning in his grave.  In 1984, the champion of the free market knocked out his big government “dirigiste” challenger Walter Mondale by 49 states to one.  A quarter of a century on, the current occupant of the White House is all but running the US car industry.

President Obama has rejected the survival plans submitted by General Motors management, gave it 60 days to work out new ones, sacked Rick Wagoner as GM boss, gave Chrysler 30 days to merge with Italian suitor Fiat and is even set to decide what brands live or die.  In effect, he’s saying that what’s good for America will have to be good enough for General Motors.  His power to do this comes not from statute, but from taxpayers’ cash – GM’s last hope of staying afloat – and Obama made clear he will force GM into a quick managed bankruptcy if it looks like the fastest way to remake the company.

Chapter 11 Bankruptcy is, in fact, Obama’s preferred route.  The car makers could use it to purge their biggest problems, enabling them to renegotiate terms with their creditors.  (The new scheme for guaranteeing car warranties will make it easier to take this route without poleaxeing sales.)  But if that’s his endgame, the big guy has badly miscalculated.  We can forgive Obama his daft, dewy-eyed rhetorical guff about the auto industry as an emblem of the American spirit – that kind of silliness is expected from politicians.  The problem is that he really does have too rosy a vision of Motown.  He and his car quango seem to think that short sharp shock of bankruptcy filing would be a cure all.  They’re wrong.

Detroit’s problems go much deeper than Obama understands.  This is not about leadership, it is about huge legacy costs in pensions, healthcare, uncompetitive working practices and inflated wage rates.  And it is sensationally bad politics from the new president.  By getting too intimately, involved, Obama and the Democrats are now completely implicated in the coming GM wreck - and have made it likely that March’s “menacing threat” will soften into June’s “wobbly wiggle-out”.

With or without a formal bankruptcy, expect backdoor subsidies forever and the world’s most expensive jobs programme.  For better or worse, Obama is now on the hook.  Stand by for “Joe Biden doing car commercials within weeks”.

Mob Rule In Washington

Spring has come to Washington and, with it, the sickly sweet smell of scandal.  Or was that the smell of blood?  The public outcry over the sickening $165m in bonuses paid to AIG executives is certainly justified:  some of the recipients – particularly those working in the specialised London unit whose creative gimmickry effectively sank the company – are more worthy of jail cells… than new vacation homes.

At $182bn and counting, they’ve cost the US taxpayer dearly.  Yet the tabloid-fuelled outrage came dangerously close to becoming the lynch mob.  Several executives reported death threats (one involving piano wire), and the mood was scarcely less violent in Congress, where one senator said he hoped executives would follow the Japanese example and “go commit suicide”.

That remark was later laughed off as rhetoric, but Congress was deadly serious in its quest for revenge.  In its bipartisan rage, the House saw fit not merely to punish the employees of AIG’s financial products unit, but to vote in a 90% tax on the bonuses of anyone at every bank receiving $5bn in taxpayers money who earns more than $250,000 a year.

A draft Senate version of the bill is even broader.  Never mind if the bonus was earned last year or earlier, or under a legally binding employment contract.  The confiscatory tax will apply ex post facto. It is certainly one of the more amazing and senseless acts of political retribution in American history.  Few stopped to debate the potentially ruinous effect this might have on the financial system, let alone the rule of law.  Obama needs to face down the AIG mob, or his presidency may become the next victim.

Obama is clearly uncomfortable with the legislation, but he should do more, and actively oppose it:  not least because his Treasury Secretary, Timothy Geithner, desperately needs the private sector to support his new bank rescue plan.  What’s the incentive for private investors to risk buying toxic assets if any gains are later confiscated?

The situation was partly defused when AIG reported that most executives had handed back their bonuses.  But the stakes remain high.  The Treasury plan assumes that the basic problem is one of liquidity: it aims to create a market for securities that are currently not trading.  But if the problem is really one of solvency – that these assets are worthless after all – all bets are off.  Emotion is high on both sides.

Wall Street is raging against the dying of the light and Congress is responding to populist rage.  Those emotions could yet derail this plan.

A New Financial Blueprint

The gumshoes at the US securities and Exchange Commission are none too impressed by Allen Stanford’s knighthood.  They have accused the flamboyant Texan billionaire and cricket impresario of perpetrating a fraud of shocking magnitude.

But even if the title, bestowed by Antigua and Barbuda, is pukka, it may be the only thing about Stanford that is.  He is alleged to have run the Stanford international bank like a piratical Caribbean enterprise, gulling some 30,000 investors out of an estimated $9bn.  If the accusations stand up, it will be a severe blow to a fund management industry still reeling from Madoff.

The affair is also a kick in the balls for English cricket.  The England Cricket Board, which immediately severed relations with Stanford, insists it ran exhaustive checks on the tycoon before he lured the England cricket team into a circus of Twenty20 pyjama cricket with his own team, the Stanford Superstars.  Stanford was rebuked for the tacky quality of his competition, which offered $20m purse to the winning team, and for the inappropriate attention he paid to the cricketers’ wives and girlfriends.

But ultimately the ECB was swayed by his promise to counter India’s growing dominance of the commercial game.  Still, alarm bells should have rung from the moment that Stanford – a man with self-confessed loathing of Test cricket – touched down at Lord’s in a gold plated helicopter,.  Rumours of money-laundering had long been rife and it was clear to any sane observer that this was a tawdry business.  This affair has brought out the worst in English cricket and the men who run it. They have got exactly what they deserved.

The same cannot be said of the residents of Antigua, where Stanford has established himself, in colonial style, as the biggest private employer and business force.  His personal fortune dwarfs Antigua’s $1bn GDP and, if he goes down, the island’s economy could sink, too.

Yet Sanford’s other investors are not entirely blameless.  In the usual triumph of greed over fear, they missed a parade of red flags:  notably the promise that a unique investment strategy would consistently deliver double-digit returns from ostensibly low-risk investments.  The SEC, which was alerted by a whistle-blower, is yet to track down 90% of the portfolio, which it claims resides in a “black box” shielded from independent oversight.

It will have to do better than that.  The watchdog must now act urgently to address investor panic about how many more multi-billion dollar frauds have yet to be unmasked.

Geithner’s Lousy Start

One thing that Hank Paulson learnt during his troubled tenure as US Treasury Secretary is that if you say you’re going to launch a bazooka, you’d better darn well do it.

Barely a fortnight into his new job, Paulson’s successor, Timothy Geithner, is in danger of repeating his mistakes. After months of ad hoc rescue plans, the markets hoped the new administration would deliver on its promise of a coherent, detailed plan to mend the financial system. What they got instead was strong on rhetoric, but offered little more than a bare-bone outline -and Wall Street threw its toys out of the pram.

The S&;P 500 fell 5% in the worst sell-off since President Barack Obama assumed office. Shares in Citigroup and Bank of America were hammered 15% and 19% respectively.

The chief problem with the $2trn bailout was that it fell between all the stools. It was neither well funded enough to recapitalise troubled banks, nor detailed enough to assure investors that the governmnet can solve the toxic asset problem - and there was a crucial lack of information about how each of these initiatives would work.

The reaction to the plan was a severe setback to the newly minted Treasury Secretary, who’d been hoping to gain some gravitas after a lengthy battle with Congress over his personal tax affairs, but there’s a good deal more at stake than Geithner’s reputation.

On some estimates, more than 1,000 US banks could fail over the next three to five years unless a credible plan emerges. Maybe the critics’ reaction to the plan was over-harsh. Who knows? This plan - once properly fleshed out - may end up working, but it would be unwise to count on it.

The lesson of all previous banking crises is that the problem isn’t properly lanced until the system is fully cleansed and suspect assets fully removed. Ideallogically, Americans are vehemently opposed to nationalism, even more than Britons. But when there is so much money already being used to prop up the banking system, what’s the difference?

Geithner now says he’s consulting to fill in the missing gaps. If that’s the case, why were we led to believe that a completed plan would be delivered this week?

The markets would forgive a delay caused by the desire to get the details right, but they don’t like being misled. Raising hopes and under-delivery may be standard procedure in the political sphere but it doesn’t fly in finance.

This was a catastrophic failure of expectation management that bodes ill for the new administration.

Knives Out In Davos

The chief complaint about Davos this year was that there weren’t enough bankers to bash. “I’d like to congratulate Stephen Green,” said Tony Blair at one session, gesticulating towards the HSBC chairman. “We must congratulate him for being one of the few bankers willing to come out in daylight hours.”

Nonsense, if it was bankers you were after, Davos had them in spades. Over there, that grumpy looking chap, that’s Gordon Brown. He’s got three - or is it four? - big british banks. And that’s Angela Merkel. She’s got a couple, and that man over there from the US - he’s got stakes in loads of them…

If the humour was dark, so, too was the mood. The hope was that politicians and business leaders would come together at the World Economic Forum to forge a common approach to shaping the post-crisis world. The reality came closer to common abuse. The Russians attacked the Americans, Turkey had a bust-up with Israel, the globalisers took on the protectionists, casual dressers sneered at the tie-wearers, and everyone had a go at the bankers.

What else could you expect? The annual event has long been the epicentre of globaloney, and now that these self-styled global governors are faced with a major crisis, most of it their own making, they are clueless. The best they could offer were vague calls for “better” regulation, “improved” institutions and “more pulling together”.

The overall effect was of a crash inquiry into an airline that intends to keep flying. There was no serious intention to rebuild in a different way. Davos Man was subdued, but still partying.

The knives are out, but if you don’t like what you’ve seen from Davos Man, wait till you see Nationalist Man get to work. We certainly got a glimpse of him. In the absence of any strong delegation from the US, this year’s cast list was dominated by a mix of journalists, academics and authoritarian leaders. As Russia’s Prime Minister Vladimir Putin remarked: “This is Davos under the Russian flag.”

Neither he, nor the Chinese premier, Wen Jibao, could resist having a pop at an unnamed country’s inappropriate macroeconomic policies. And the Chinese delegation was visibly displeased and alarmed by the suggestion of Timothy Geithner, President Obama’s newly confirmed Treasury Secretary, that China has been manipulating its currency.

For all the drama on display elsewhere in Davos, the tensions between the Chinese and Americans look to be by far the most significant in the long term.