Thursday, September 18, 2008

The Greatest Capitalist versus the Geeks of Capitalism

As the enemies of capitalism declare the death of the greatest and most productive form of organisation that humanity has ever achieved, it seems appropriate to quote what Warren Buffet, the greatest capitalist of our age, warned about mortgage derivatives in his annual Berkshire Hathaway letter of 2002:
… derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Six years after his warning those financial weapons of mass destruction have exploded. AIG, Bear Stearns and Lehmans were full of financial geeks, the highest paid mathematicians on the planet, completely lacking in sense. The pre-cursor Long Term Capital collapse showed that even nobel laureates can be idiots.

Derivatives have their place in the financial markets. They are great tools for hedging and re-distributing risk. However when the PhD wielding geeks started designing derivatives that even the Sage of Omaha could not understand, the boards of the investment banks should have asked what was happening down in the dealing rooms. That they didn’t is why they have now collapsed.

When the investment banks were owned by partners who had all their capital in the firm, the partners were keenly incentivised to control risk. When the investment banks became shareholder-owned global behomeths managed by annual bonus incentivised executives, that risk control was lost. Being fired is not as feared as being totally wiped out financially. That is a crucial difference.

Capitalism doesn’t need to be regulated for risk, it needs more capitalists like Warren Buffet who keenly feel the risk and reap the profits and losses that flow from that risk taking.

Wednesday, September 17, 2008

Live Blog : Capitalism – Will it Survive Newsnight’s Judgement?

The show that can’t report the market close correct wants to pass judgement on capitalism tonight.

+++ TORIES BREAK THROUGH TO 52% ++++++ FTSE CLOSES BELOW 5000 +++

MORI tomorrow will have a poll putting the Tories on 52%, Labour on 24% and the Lib Dems on 12%. Total political meltdown.

The FTSE has crashed to new lows and closed at 4912, well below the psychologically important 5000 level. Economic meltdown.

UPDATE : According to Electoral Calculus, this would give the Tories 493 seats, Labour 121 and leave the Lib Dems on 8 seats.

+++ FTSE Hits New Low +++

HBOS Collapse : Jonah Brown Was There Again

The refurbished Bank of Scotland head office on “The Mound”, was formally opened by the Chancellor, Gordon Brown, at a gala reception on September 7, 2006.

Comrade Mason Replies

After the kerfuffle about the mixed up market report last night this (presumably genuine) communication from Newsnight’s business reporter and trade union leader has come in:
Guido – I should probably have said the value of its shares fell 48% in after market pricing, or some similar gobbledygook. As your other commenters point out the issue of whether there is a futures “market” is philosophically moot. Unfortunately the words “futures market” were in a piece of paper printed off into my hands literally as the 5-strong team of makeup women and masseurs was prepping me for my live appearance and seconds before we went on air. The words “futures market” entered my brain while I was puzzling whether the 48% fall really mattered in such an illiquid market. But hey, guys: if you think I sound like a hysterical Trot, you should listen to McCain!

Fair enough. Guido is in no position to criticise someone for screwing up live on Newsnight…

Incidentally, that last sentence is an interesting point, Guido will only note that the lead piece on the show tonight is scheduled to be “Does capitalism still work?” Producers with a sense of humour…

Clegg Speech : Tax Cuts and Social Justice

He also said the Labour Party was finished. Not a bad speech.

Who Told Peston?

If as many suspect the Treasury panicked and tipped Peston off about the HBOS bid in order to stem the collapse we could be looking at serious consequences.

This is a clear breach of the Take Over Code:

2.2 WHEN AN ANNOUNCEMENT IS REQUIRED

An announcement is required:—

… when, following an approach to the offeree company, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price;

when, before an approach has been made, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price and there are reasonable grounds for concluding that it is the potential offeror’s actions (whether through inadequate security or otherwise) which have led to the situation

It is doubly serious, because he said the price would be near £3, then said it would be nearer £2, millions have changed hands on the basis of false information…

UPDATE : Informed City co-conspirator emails

What is more significant is the fact that at least one city law firm is in the early stages of rounding up plaintiffs among the fund community for an action relating to the price manipulation of HBOS shares this morning.

Peston admitted “over-egging” the price while the panel stood by and the companies made no announcements. No suspension of trading either.

Funds who sustained losses stopping out short positions entered at around 180 – the key level that broke down on volume over the past couple of days, will be placing the blame fairly and squarely with the entirely false idea given cynically to retail punters by the bbc that the price would be set around the 300p level.

This is going to get very interesting indeed.

UPDATE : Peston now says on his blog “I am hearing that this deal has been negotiated at a very high pay grade level, with the Prime Minister, Gordon Brown, talking to Sir Victor Blank, chairman of Lloyds TSB, about how helpful it would be if Sir Victor could bring himself to end the uncertainty hanging over HBOS by buying it.” He also says the deal is an all share deal which, wait for it, will be worth near £3!

UPDATE II : Have just been reminded that Peston wrote Brown’s biography Brown’s Britain.

+++ HBOS Collapses 38% +++

UPDATE : Rumours circulating that Lloyds are looking to buy HBOS on the cheap. HBOS slumped 51% at one point, now bounced to off 19%. FSA has released a statement saying HBOS is well capitalised…
UPDATE II : Robert Peston’s reporting has been, errm, interesting. He said earlier this morning that Lloyds was looking at paying £3 for HBOS. This seems suspiciously toppy.

Peston should have known that the disastrous HBOS rights issue in late July was priced at £2.75. The market shunned it with the underwriters getting stuffed and left holding two-thirds of the £4 billion offering. So why would Lloyds want to pay more than the price which was shunned two months ago when conditions have deteriorated? Doh! He now says it will be nearer to £2.

Peston needs to be careful that he doesn’t get accused of creating a false market. There are laws and a Stock Exchange Regulatory New Service for market moving news!

+++ FTSE Drops Despite AIG $85 Billion Bail-Out +++

FTSE looks set to fall below the psychologically important 5000 level….


Seen Elsewhere

Jonathan Jones is a Tw*t | Iain Dale
Second Scotland Poll Suggests Labour Wipeout | Times
Paedo Probe Boss Urged to Quit | Sun
Keynesian Tories Won’t Eliminate Deficit | Tim Montgomerie
Whitehall Doesn’t Work | Dom Cummings
Russell Brand’s Tax Avoidance Firm | Sun
1 in 7 Young Britons Back ISIS | Times
Apple’s Tim Cook: iGay | Techno Guido
Insurgent Parties Plunge Labour Into Crisis | Alex Wickham
Mind-Bending Politics of Drugs | Mark Wallace
PC Worries Prevent Police Protecting Young Girls | Jill Kirby


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