Maverick No 2

30 October 2009 – Maverick No 2

Lloyds Banking Group is starting to mimic Barclays in the maverick stakes. Not in terms of declining the taxpayers shilling (much too late for that) but in shedding the handcuffs of the Asset Protection Scheme (APS). It has been a long time in coming and it will cost but the European competition commissioners, the UK Government and the tripartite authorities have given permission for Lloyds BG to go fund-raising and asset divesting to avoid the expensive APS insurance.

To reach today’s point has been a bumpy ride for the long-suffering long-holding shareholders. Over the past 52 weeks, the share price has ranged from 210p down to 40p at the nadir. As recently as the end of September 09 the shares were priced at 110p before falling as worries about the fund-raising escalated to touch 80p a few days ago. Now as the thinking is that the rights issue discount could give an issue price as low as 30p, the shares are touching 87p on a volume of 106 million shares and that two hours before the market closes.

Obviously, the potential capital strength of Britain’s second biggest bank has held sway in favour of a break-up such as will happen to Dutch bank ING. The sell off of bits such as the old TSB branches in Scotland, Cheltenham & Gloucester BS and Intelligent Finance are not viewed as great events in the scheme of things.

At 30p, any new shares I am allowed to buy will do wonders for my average holding price and so say all of us and good riddance APS.

The Brains Behind

The brains behind

What really encourages me, now that we have just about reached the second anniversary of the Northern Rock disaster, is not the decision to split that business into two bits of deemed “good” and expected “bad” or even the European endorsed motive of increased competition. Rather, it is the talent lurking in Britain today. Wherever it has come from, what is evident is that there are some first-rate brains at work and we should be pleased about that.

The work that must have gone into this plan and others in the pipeline is an example of a high-level service industry that can and does serve Britain well. In the historical cycle of things, it was inevitable that much low skill manufacturing would migrate to the emerging nations. That is not to say we cannot add value with brainpower. Wish I was still in the swim.

What Goes Around Comes Around

26 October 2009 - What Goes Around Comes Around

As time passes so I believe the old adage that what goes around comes round is true. When I was growing up on a small farm (see Derbyshire born –www.jgwalkersmith.co.uk) farmers were a very important section of society. Many of my generation can trace their roots back to the land. The last fifty years has seen such a reversal that farmers are invisible and farming is never spoken of.

A report by Standard Chartered “The end of cheap food” says in relation to indigenous food production that North Africa and the Middle East has already turned negative. The same is nearly true of China. Topsoil is so weakened by intensiveness that clouds of dust are spreading over Asia, parched land becomes desert and rivers run dry. It seems that China has lost 1,400 square miles to desert each year of the last decade. Urban sprawl covers fertile land in China’s east territory whilst the Himalayan glaciers are ebbing and the Yellow River no longer reaches the sea for 200 days a year. Northern Indian has a similar plight.

Either Russia, the Ukraine and Central and Southern Africa will fill the void or else your local farmer will become very important and very rich once more. Hope I live to see it. In our local community only farmers work all hours and every day. Others might claim to but farmers actually do.

Fascism - Really??

Fascism - Really?? – 24th October 09

In my latest bit of aftermath to the credit crunch diary year, dated 24th October 09, I suggested a mild bit of revolution regarding the economic team running the UK. On the same theme of revolution, the first poll of a sample nation following the anti-climactic BBC Question Time programme suggested that 20% of the populous were “thinking about” voting for the BNP.

Think black shirts, think Mosley, think about a small island called Singapore (refer to my book Violets, Chapter 11, page 171) that just twenty years after being ripped apart by Japanese troops, pulled itself up by its own bootstraps with as diverse an ethnic group imaginable all pulling together for a common good.

May daylight shine in the darkest corners. Think on you 20%.

Great expectations

24 October 2009 – Great expectations

Dashed. I know of no leading economist or respected economic institution that did not think that the UK economy would pull out of recession in the third quarter of 2009, that is, as ended on 30th September. But it was not to be unless later revisions change the figures. The economy shrank by 0.4% in that quarter to bring total output down nearly 6%.

According to The Office for National Statistics, every sector contracted except for a “flat” public sector. The big surprise was a further decline in the most important services sector not least due to the rampant time investment banks are known to have been experiencing. Management consultancy has been doing well too. One assumes it is the professional services associated with the construction and related areas that still pull down the overall services sector average.

What are the consequences of the surprise failure to move back into the black?

• Sterling weakened closing down 2.4 cents against the dollar at $1.6338 wiping out earlier gains. This should continue to help exporters but also led to Britain slipping down to seventh place in the economic nation league table

• The yield on gilts fell sharply on expectations that the QE programme will be increased beyond the £175bn current threshold

• The equity market continued to shrug its shoulders with the FTSE 100 closing up 35.2 points at 5,242.

The political take on the economic news is interesting. There would seem to be a difference of opinion. Our laid back, one hesitates to use the word moribund, Chancellor Alistair Darling ( a Darling was a deer hunter by the way) said “I’ve always been clear that growth will return at the turn of the year” whilst his shadow George Osborne replied “Britain urgently needs new economic leadership.”

I have a new team in mind. Mervyn King for PM and our Vince for chancellor. The revolution starts right here.

Let's Just Pretend For A Moment....

Let’s pretend I’m a financial director. I go to this month’s board meeting with figures showing last month’s sales down 6.3% and costs up 4.9%. The company’s borrowings in the half year ended last month are 128.7% higher than in the comparative period. The trend line of borrowings indicates a year-end figure of about 220 against the budget I submitted to the board at the start of the year of 175 or an increase of 25.7%. Furthermore, the price of the debt is high relative to a 0.5% bank rate and stretching out until the year 2060.

My questions are these:-

• Will I be sweating or calm as a cucumber with eyebrows a different colour to my head of hair?

• Will I be challenged by my MD for competency and pressurised by the whole board to step down?

• Does it matter that I am at odds with the big bank manager who publicly proclaims a solution to the debt problem different to the one I have put to the board?

By the way, the company is UK Ltd and the numbers shown are in £billions.

Whirligig!

Whirligig is a wonderful word, I use it a lot. It is almost, but not quite, onomatopoeic. Whirligig is old, according to the Collins dictionary it is 15th century “whirlegigge” made from whirl and gig. Literally it is any spinning toy, such as a top. Another name for merry-go-round. Anything that whirls about, spins or moves in a circular or giddy way.

For the actual numbers quoted here, I am indebted to an article called “Buy equities, sell bonds” by Ian Mc Diarmid in Shares magazine.

By 1st October 09, the Bank of England had completed £158bn of its allotted £175bn asset purchase programme and of this 98% has been gilts. That is to say, government debt with a prescribed coupon maturing at a prescribed date. This exercise has been termed quantitative easing (QE) or more colloquially “printing money”. Neither lending by the big banks nor M4 – broad money supply – has increased very much notwithstanding this huge injection of funds into the gilt market. Rather, the banks in a drive to rebuild their balance sheets have held on to the proceeds of the gilts they have sold to the central bank. When these banks have large surplus cash they pass it for save keeping (and a bit of interest) to the Bank of England.

So there we have it. The Bank of England prints money and uses this paper to buy gilts from banks who then return the cash so received to the Bank of England. Oh what a tangled web we weave. Whirligig.

Incidentally, the net issuance of all gilts in the years 06/07 and 07/08 averaged £30bn or about 20% of what has just been bought in.

Much more on my Website

Would Anyone Appear On TV If They Didn`t Have A Book To Plug??

My director was reading from an appraisal form. I was stung “But Henry, that is just not fair.” He paused. “No John, life isn’t fair.” Henry is long since dead. Life goes on.

Sir Ranulph Fiennes is a great man. No cynicism intended. But there is something very unfair about a slot on breakfast TV to plug his latest book. Something very unfair about a national book retailer taking full-page adverts to plug the books of five “celebrities” and then fill their window display with the publicity material to back it up.

I am not saying that my book “Violets” is a literary masterpiece but it would stand up against these six works except of course it will not since no-one knows about it.

Much More at: http://www.jgwalkersmith.co.uk

Turn Again Whittington

16 October 2009 – Turn again Whittington

The famous Christmas pantomime is supposedly based upon the story or Richard Whittington, a medieval man from Gloucester, who found fortune (with his cat) when he turned to London to find the streets paved in gold. So did the aptly named Goldman Sachs. The biggest investment bank is the leading lady in a pantomime only too familiar to chief executives needing to raise capital (due largely to the consequences of the credit crisis), re-finance generally, re-structure or do a spot of merger or acquisition work.

The fact is that in this recovery period, competition for the big financial services has reduced significantly. So what? Well, one can widen the spreads, up the margins and push service charges through the roof. Risk has not gone away and if you want those shoes mending, the monopoly cobbler can charge more. Simple as that. The fact is that markets cannot be regulated away and the regulators and controllers cannot do what has to be done themselves.

The likes of Goldmans are actually needed. If that golden goose is maimed, another egg will surely be laid someplace else. In the third quarter of 09, Goldman’s revenues increased by 105% on the comparative period to reach $12.3bn. From a UK economic viewpoint that is excellent news since about 43% of revenue is paid to its staff and the treasury takes a top-slice 52% of that. It also takes a whopping chunk of profit in corporation tax. For a full current year, it is thought that the UK taxpayer will pull back about £2.5bn just from this one business. That will pay for a few dolers.

What is more, the ultimate risk-takers, the shareholders, got a 21.4% return in that third quarter. Admit it, you are just jealous.

Catching ones breath

Catching ones breath - 14 October 2009

The credit crunch diary poem dated 9th October was intended to summarise the key events of a very special year. A year in which the economic world was caught on the hop. A world of events that started in some remote distant place, like an earthquake in San Francisco, that sounds bad and must be horrible for those left homeless over there but will not, let’s face it, affect us.

Except this time the homeless will affect us because unlike an act of God, this event is an act of man. Man at his most avarice.

After a full year of commentary and blogging, it was time to retreat to a secret place where only sea and wind crash in as a harmless spectacle. Time to catch ones breath so as to climb a mountain and take in a spectacular view of what nature intended and man can not mess with.

So, the credit crunch diary, etched into my life between successive Octobers, has ended. I hope readers enjoyed it and appreciated the research and the asides. It will live again as a whole and be re-launched as a book. A historical record of the year. Watch the website for the birth.

Meantime, is it not incredible that the Magna saga lives on? Lord Mandelson has concluded (well, actually he didn’t, my old firm PricewaterhouseCoopers did) that the business plan has “shortcomings”. No kidding! It worked before with 25% of the UK Vauxhall workforce gone and now with no compulsory redundancies, how can it still work? You will recall form my diary that Germany was to disproportionately benefit from job cuts amounting to about 16% of their, admittedly much larger, manning level for Opel. But this is the new Europe and Neelie (not Nearly) Kroes, the European Competition Commissioner, thought that the four-and-a-half billion euros offered by the Federal German government looked a bit like a bribe. Like Britain, Spain, Poland and Belgium where none too chuffed either. Nevertheless, GM is going to do the deal with Magna (and Russia) and sod the European governments.

The spreadsheets in that business plan must look a bit wobbly, especially as a bolt-on to a Canadian car parts outfit. My wife would like a new Astra. Whether it will come from Ellesmere Port is still in doubt but we will keep tabs on events.

Violets - The Remarkable Story Of The Life And Times Of John Smith

That Was The Credit Year That Was

9th October 09 – That was the (credit) year that was

There were some poor folk across the pond

and a cold shiver is slowly wending

The Fed puts up the interest rate ‘cause

there’s been some very lax lending.

The credit checks were not that sound, housing

market collapses,

with assets bundled up and sold,

Sold in securitised packages.

If you’re the buyer, it’s not your fault

The world’s like a ram on the tup,

but some clever sods in some distant bank

just sold you the world’s biggest pup.

US bean-counters quickly make the great money bets

Although historical records will tell

that $700bn of green backs for bank toxic debts

went some place else, and a bit extra as well.

Back home in Blighty and in the Brown stuff

we’re a match for the old Yankee troopers,

£500bn of huff and of puff (37% of our entire GDP)

- Come on Europe, wake up, follow suit,

Don’t play the old party poopers.

But No 1 i.e. Germany is not on our side

Not that Keynesian you see,

Yet, by the time this year is played out,

as before, they are down on one knee.

Spain is a shame, the Costas are missed

We went there each year to get pissed,

But with apartments all built on sand

unemployment is now15% and the casa takes 65%

of that hard-earned cash in hand.

Ireland is green, and perhaps a bit green

to guarantee all bank deposits and bail out

its three biggest banks,

but, caught twixt a rock and a hard place

(in euros up to its shanks) since

it exports to us and to US

whose currency takes quite a slating,

so Standard & Poor think, ta very much Mik,

we’ll grab back your AAA rating.

The UK now enters the second dark ages,

its economists spout forth as if new-age sages,

but theory is theory and like lambs to the slaughter,

output drops by 6.4%, and in one single quarter.

Shopkeepers are we and we used to ride high

but gone dear old Woolworths, and gone MFI.

The Brown stuff awakes “try fiscal” says he

and knocks 2.5% (temporarily) of the VAT.

Shareholders are bleeding, bleeding faces like thunder,

Why? 2008, down 34% - The Footsie 100.

Ever a silver lining, here’s one little beauty,

UK Treasury is down £6bn as house sales pan,

down on insidious stamp duty.

We had four banks that now are two, so you would

think competition needs no more glue.

Though not so. The Brown stuff says “waive that aside, I’ve £17bn

riding the new Lloyds Banking Group’s backside.”

It looks bad, it feels bad, there’s no good, you’ll see,

and no good there was, for shareholders like me.

No tale of woe is complete without its rogues.

We heard the word Ponzi and sorry, what did you say?

I said pay out today what you got in yesterday.

It’s easy and simple, just bluff and don’t flaff,

Security regulation? You are having a laugh.

Madoff made off and guilty the plea

while Stanford played cricket with wives on a knee.

When folks stop buying – no new motor for me,

especially of the big American gas-guzzling three,

GM, Chrysler and Ford,

down on their uppers with just one accord,

the first lost its Europe, after Chapter 11 ashes

Chrysler found Italy to save a few blushes and Ford,

good old Ford, just about held its sway

but never again, the American way.

It’s important to learn how economies got sick

Tell you what I’ve learned. Learned how to get rich.

Bought a new press and, if you please,

I’m printing and printing to quantitatively ease.

Using new money to buy up their bonds

that have to be auctioned to finance the debt wood

created by filling a banking black hole

caused by securities packaged though not understood.

Whirligig, whirligig – big hairy beast,

Wealth has just tilted, tilted due EAST.

Jgs – copyright reserved

Pearl of the week

“I don’t think there’s any reason why everyone is going to suddenly feel much better. But I don’t think they’re going to feel much worse.”

Sir Stuart Rose – Executive Chairman, Marks & Spencer plc

Save It!

8th October 09 – Save it!

Desperately searching for good news in this penultimate entry of my (nearly) year long diary, I found it nestling amongst some soft undergrowth of green shoots courtesy of the Office of National Statistics’ latest quarterly bulletin. At any rate, those long-suffering loyal readers of my diary and blog will recognise it as good news from my perspective given the encouragement to consumers to spend and spend again, has never resonated with me.

Just as in business enterprises, culture is everything, so in private households is behaviour. Behaviour, habit, custom, the pattern of how life is lived. The economic crisis has produced a change. The statistical measurement of how much British people are putting under the mattress (seeing as how banks have lost all credibility for Joe ordinary saver) has risen to 5.6% of their earnings in the second quarter of 2009. This figure is the highest since 2003 and compares with 1.7% in the same period last year.

The savings ratio – incidentally mirroring figures from the US – was accompanied by a few bits of other comfort. The ONS’s final estimate for UK economic growth in the second quarter showed a slightly lower decline in GDP than previously at -0.6% from -0.7%. Surprisingly too was a registered increase in household income of 0.9% and a drop in consumer spending (hence the savings result).

To put the green shoots into some sort of perspective, the ONS said that compared with last year, the economy has shrunk by 5.5%, the biggest annual decline since comparable records began in 1956. To conclude my good news search, the Bank of England said that in July 09, home owners repaid £203m more than they borrowed, the first time lending has been negative since the Bank’s data began in 1993.

I cannot think of a better slogan (pity one of the political parties didn’t dream it up prior to the current conference season) “Save and get out of debt”.

More at: http://www.jgwalkersmith.co.uk

Road To Istanbul, And Back..

7th October 09 – Road to Istanbul, and back

On what is fast approaching the anniversary of this credit crunch diary, an even more important anniversary event is to be held in Istanbul. The International Monetary Fund (IMF) will unveil its “early warning system” designed to prevent future financial crisis of the magnitude catalogued in this diary. Istanbul (extremely aptly where the East meets the West) will witness the new set of models to become the centre piece of the IMF’s new post-crisis role in the economic world.

The future role of the IMF – agreed at the latest meeting of the G20 nations (refer back to the previous two diary entries) – is to ensure that financial bubbles do not build to threaten world economic stability. The crucial meeting is heralded as probably the most important in the history of the venerable body.

Hitherto, and has been reported many times in this diary over the past year in relation to specific nations, the IMF has been tasked to bail out economies struggling to finance themselves. Now it moves up a gear to actually monitor the health of the global financial system. This monitoring is of the extent to which the major economies stick to “balanced and sustainable growth.”

Julian Jessop, international economist at Capital Economics, said “This is a positive development. It would make sense to monitor the build up of financial instabilities. It will most likely focus its analysis on asset prices, and perhaps credit growth. To be fair to the IMF, it did lead the way in calling for a big fiscal stimulus early on in the crisis, so has a good basis for this role. It was quick to pick up on the scale of the problem and the need for a fiscal stimulus. In a sense it has had a good crisis.”

On balance and having learnt much myself over the past year, I concur with this view about the IMF. Wouldn’t it be nice if one day soon it relocated from Washington to (say) Istanbul. One might call it the half-way house in a changed world?

More at: http://www.jgwalkersmith.co.uk

G20 Prognosticates And Procrastinates

6th October 09 – G20 prognosticates and procrastinates

The meeting of the G20 nations (which is to replace the G8 forum as the world’s leading economic master) in Pittsburgh – see yesterday’s diary entry – decided that their banks will be forced to more than double levels of capital reserves for the riskier parts of their operations. But, the meeting stopped short of placing specific minimum requirements for both liquidity and capital.

The Basel Committee on Banking Supervision will be asked to draft new rules on liquidity and capital reserves by the end of this calendar year. The stated objective is to strengthen the global banking system to withstand future shocks and make it less likely that sovereign government resources will be called upon.

The conduit for details was the Financial Stability Board (FSB). It’s final report said in relation to capital requirements that banks should be retaining profits now to meet future capital needs and to achieve this by a combination of:-

• Restricting dividends to shareholders

• Ceasing the practice of share buy-backs

• Limiting compensation packages for its top managers (see yesterday’s entry).

In relation to trading activities, banks were instructed to ensure that the capital held to cover positions should probably double by the end of next year. The outcome would be a greatly improved Capital 1 tier ratio. The Basel framework will also require banks to be counter-cyclical by building capital reserves in the good times to provide a buffer for the bad.

On bank liquidity, the Basel committee will draft rules for a minimum global liquidity ratio to be applied across international borders. There was more. Accounting standards are to be strengthened and over-the-counter trading is to be watched more closely. Also, a system of peer reviews of regulations and standards is to come into play.

Some commentators wondered how any of this would bear fruit without countries at least discussing the issue of conflicting currency levels. It seems poignant that in the final communiqué no mention was made of the imbalance between the Chinese yuan and the US dollar.

Procrastination is not only the thief of time but maybe of economic progress too.

More at: http://www.jgwalkersmith.co.uk

Delightful Damp Squib

5th October 09 – Delightful damp squib

Like so many long drawn-out sagas, it all ended like a damp squib and much to the delight of the London and New York non-retail bankers. It is another of these “us and them” stories that eke out from the intended reforms aimed at making sure the credit crisis never reappears. The “us” of course is the UK and US financial market interests so vital to overall GDP in Britain and America and the “them” are France and Germany who want Paris and Frankfurt in the toppling zone.

The long and winding road can be summarised as the two mainland European states wanting to hang the evil bankers from the nearest and highest yardarm whilst the UK and US want a brain industry largely in tact if somewhat shackled. And it’s ironic that the place of decision was founded in 1758, named after a British prime minister and not on neutral ground. Not a good omen for modern France and Germany.

The G20 group of nations meeting in Pittsburgh allowed city traders to avoid the threatened curbs on their remuneration and instead agreed to align compensation packages to long-term risk and not impose specific caps on bonuses. The final communiqué made a firm pledge to bring bankers’ pay in line with institutional performance and ensure that loss-making and government-backed banks do not continue to pay out large sums based upon short-term results. The three bans committed to were:-

• Multi-year guaranteed pay deals

• The inability to claw-back bonuses if future losses ensue

• Pay not aligned to risk.

If I was an erstwhile highly-paid city banker/trader, I would be shaking in my moleskin shoes and cashmere jacket. Implementation old boy, implementation.

More at http://www.jgwalkersmith.co.uk

Another Turning Point

2nd October 09 – Another turning point

The residential mortgage backed securities market (RMBS) has been closed since the financial crisis occurred. Or rather it has been until now. There has been a greater than anticipated demand from institutional investors for a sale by Lloyds Banking Group of £4bn of mortgage backed bonds.

The issue was more than twice oversubscribed and involved bonds backed by more than 513,000 prime UK residential mortgages written by HBOS before its merger with Lloyds.

Before the credit crisis began, RMBS provided massive funding for banks as lenders swapped mortgage assets for cash together with passing the risk of borrower defaults to investors in the money market. However as part of the failure of the sub-prime market, institutions turned their back on these increasingly hard to value bits of real estate that subsequently proved to have lethal risk. Asset backed bonds are one of the last parts of the credit market to recover from the economic recession. At deemed lower risk that housing, Tesco has just sold £564.5m of bonds backed by its property leases.

In a further sign that the asset-backed securities market is reviving, Volkswagen is selling 475m’s worth of euros debt secured by car loans.

Returning to the Lloyds Banking Group deal, it seems symptomatic of confidence returning to the wholesale money market, the UK housing market and the UK economy as a whole. Furthermore, the pricing was at 170 basis points (1.7%) above LIBOR. In other words, it is not the cheap money of the past.

Pearl of the week

“The UK data continues to exceed the Bank of England’s projections on the upside.”

Report by Goldman Sachs