Flashback : Brown 2005 Speech on “Light Touch Regulation”

Today’s speech will no doubt include a section about how he for many years had, with great insight, been calling for global financial regulation. His speech in 2005 to the CBI however was pure New Labour neo-liberalism, praising enterprise, free markets and globalisation. He promised the corporate class deregulation, a “new risk based model of regulation” for financial services

“no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch.”

So there was no risk-based reason to clamp down on Northern Rock?

Osborne in the Indy catches Balls at it as well

“But the real prize for memory loss must go to Ed Balls. On Monday he said that those who had advocated “light touch regulation” had been, in his words, “routed”. This is the same Ed Balls who as Chief Economic Adviser to the Treasury for eight years boasted about the “light touch” regime of City regulation he had designed. This is also the same Ed Balls who then as City Minister called for “a light touch approach at the global and EU level”. The star player of Labour’s football team has scored a spectacular own-goal.”

Do they really think that Labour supporters are too stupid to notice the about turn?

UPDATE : Maybe not, LabourHome is mocking Balls’ conversion.

Peston “Fisks” Marrs Brown Interview

The BBC’s business editor Robert Peston, currently the object of the frustrations of a substantial number of City fund managers who think he should be done for creating a false market in HBOS, has fisked yesterday’s Marr interview with Gordon.
Implicitly critical of Marr for letting Gordon off the hook, Peston makes some good points:-
  • Gordon said it is the right time for the government to borrow – as if he had a choice – the PSBR could reach £100 billion. Double the budget estimate.
  • Gordon took the credit for the FSA’s banning of short selling. Does he take the credit for the FSA’s failure to monitor Northern Rock’s liquidity problems as well?
  • Brown blamed global problems and everyone else, as if he was blameless.
  • He misrepresented the real reason for Bank of England’s flood of liquidity.
Brown rightly resisted EU regulation of London’s financial services, he now says he wants international regulation. Gordon says Britain’s regulation was better than America’s regulation. The FSA allowed Northern Rock to lend 125% against the asset to borrowers. Was that best practice? Peston, Gordon’s biographer, says he is exhausted by the twisting of Brown.

Since You Asked….

Yes, Guido’s FTSE short got whacked. Had a stop-loss at 5200, so the pain ended some 250 points after the Mother of All Bail-Outs was announced by Comrade Paulson. Don’t shed too many tears for Guido, the short was put on at higher levels the Monday after the weekend Alistair Darling told us we were doomed and was traded in and out of (unproductively). The gold long is good, the EUR against GBP trade is flat.

Who really expected the wholesale bailing out of Wall Street? The Sovietisation of the Street by Paulson, the former Goldman Sachs CEO, means that never again will the U.S. be able to preach the advance of free markets to developing countries with authority. These extraordinary times have seen Treasuries bonds with zero-yield, effectively you might as well put the money under the bed.

Anyone familiar with Ayn Rand’s novel Atlas Shrugged will be able to see the coming consequences, the end of free capital markets. The voters forget at their peril how and who finances the billion-dollar chip manufacturing plants, the satellites, the billion dollar pills from high risk bio-technology that will cure disease, the multi-billion dollar networks that make us such an inter-connected globe. There will be new regulations galore, the taxpayers will be raped as they have never been raped before, it seems this is the price the U.S. authorities think has to be paid to stave off financial meltdown and a recession that could turn into a depression. The latter prospect seems a product of panic rather than reason.

The investment banking model since the 1990s was flawed not by lack of regulation, it was flawed because of poor governance. Traders and management were incentivised to take risk for reward with minimal personal downside. Bank shareholders have lost money hand over fist whilst their hired employees have been paid hundreds of millions. The complex derivative structures that underpinned sub-prime lending were opaque to the point of incomprehensibility.

The banning of short sellers is a side show, it is merely populist politicking. It will make conservative hedging very difficult, it raises the cost of capital to corporates and it will not change the underlying fundamentals. It will also create liquidity problems and a whole host of technical difficulties.

Are banks safer because it is illegal to short them? Has liquidity returned to the money markets? Are mortgage assets recovering? No, no, no. Unless Paulson announces a plan to put U.S. taxpayers on the hook for billions of dollars in risky sub-prime mortgages this weekend, this stock rally will come completely unstuck… and Guido will be short stocks again.

Gordon Brown’s Sky interview, where he blamed investment bank’s off-balance-sheet liabilities for the credit crunch, was an unconsciously revealing moment. What is the trillion pounds of debt in PFI contracts and unfunded state pensions if not Gordon’s very own off-balance-sheet liability? Gordon and Ed Balls designed the world’s biggest off-balance-sheet structure to massage the PSBR, it will have to be paid down by generations to come. Brown’s legacy will be that British children, and their children also, will be paying off Gordon’s debt bubble.

See If Gordon’s Sums Add Up

Give it a go here.

“Hello is That the FSA?”

If Lloyds Bank’s Victor Blank was talking to Gordon Brown about take-over plans for HBOS at a cocktail party wasn’t he breaking the takeover code’s strict rules on secrecy? Shouldn’t somebody report them?
Yesterday the headlines said “Gordon Brown orders Lloyds takeover of HBOS”. Does Brown think he can order Lloyds shareholders to vote for the deal? This is a Class 1 transaction, shareholders will decide, not Gordon.

The FT agrees with Guido, is it now official government policy to have the regulators lie to the markets via the media? If the FSA itself is now lying and breaking the laws it is supposed to enforce, is there any point reporting law breakers?

+++ Despite Central Banks FTSE Closes at New Low +++

Despite a $180 billion coordinated global liquidity flood by central banks the FTSE still closed lower at 4,880. Huge blue chip U.S. investment bank Morgan Stanley is rumoured to be in trouble and is losing clients worried about the security of their deposits. A Chinese investment fund is a rumoured buyer…

Perils of Tripartite Regulation

A co-conspirator points out just how brilliantly the tripartite authorities (HM Treasury, Bank of England and the Financial Services Authority) are doing joint up regulation.
Commenting on the soundness of HBOS the FSA yesterday morning said it was:

“a well-capitalised bank that continues to fund its business in a satisfactory way”

Alistair Darling this morning:

Alistair Darling added that without the deal the outlook was “very bleak indeed…We were onto their (HBOS’s) problem for several weeks. It didn’t just suddenly happen…”

So who was lying?

The architecture of City regulation is a mess. The FSA is despised and nobody in the City respects it. The Bank of England has been undermined deliberately by Gordon because it was a threat to his authority. The FSA should change remit and look after exclusively retail customer’s interests and the Bank should keep an eye on the City and re-take control of the Debt Management Office. The Treasury and the Bank should swap staff regularly and be on friendly terms, with the Treasury executing political influence through the Bank. The Bank is closer to the markets than the Treasury and so it should be to inspire confidence in the City…

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.

+++ 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….

Pensions Plundered, Stocks Slumping, Gordon’s Dead-Hand

Some commentators (who should know better) warn that in these times of economic turbulence we should keep Gordon at the helm. It is a desperate line seized on and spun by his few remaining supporters. Who, they ask, knows the economy better than Gordon Brown? This is repeated so often you would think it a truism. Fraser Nelson pointed out some time ago that all Gordon knows about the economy is how to tax it. Look at how the stock market has performed during his chancellorship. Guido has pointed out before how much better other G7 stock markets have performed in comparison. Gordon’s plundering of our retirement pensions to fund his profligacy has sucked capital out of pensions to pour into his social engineering.

In the ten years prior to May 1997 before Gordon got his hands on the levers of the economy the FTSE rose from less than 2000 to more 4000. After a decade of Gordon’s stewardship of the economy the stock market has gone nowhere. Pensions have had no capital gains, what gains they have made have been taxed. During his time we have had the first run on a bank for a century. As the FTSE teeters at the 5000 level those who are retiring soon have a terrible future ahead, whereas at one time the British private pension system was a model for other countries. UK stocks under performance compared to other countries is partly due to Gordon looting pension funds to pay for current spending.

To the Sceptics of the Jonah Brown Curse

Some dare to question the accursed power of the one eyed son of the manse. When Guido pointed out that Lehman’s HQ was doomed from the moment Gordon performed the opening ceremony some questioned if these events were really related. Take note of this morning’s Times City Diary:

…the writing was on the wall for Lehmans after they moved to Docklands and got Gordon Brown, whose presence at any sporting event seems to guarantee a home team defeat, to open the new building for them. He performed the same function at the new Gresham Street HQ of Dresdner Kleinwort. They went under a few weeks ago.

As if further proof were needed.

Some Numbers for Gordon

Gordon is off to read out tractor statistics to the Scottish CBI, here are some taken from that OECD report. This speech is rumoured to have an element of mea culpa…

Falling worse than most in Britain…

Lately we haven’t heard Gordon spin that Britain is “best placed economically” to weather the next 12 months or that he is making “the long term decisions” needed. He seems to be making decisions determined by his need for short term survival….

UPDATE : Based on Halifax figures the last 12 months have seen the biggest house price falls ever – the previous biggest 12 month fall was 8.5% in October 1992. House prices have fallen 12.7% year to date. It took four years from May 1989 to February 1993 for house prices to fall 12.97% that far last time.

Crash Gordon Now Copying Failed Old Tory Ideas

Lamont told Sky News last night “Far be it from me to criticise myself, but I do not think that the Stamp duty holiday we introduced made any difference at all”. Quite, why would anyone hurry to save 1% on Stamp Duty when they can wait and save even more.

Property is down 10%, falling at 1% a month, it could easily be down another 10% next year – why catch a falling knife? The graph below (via Stumbling and Mumbling) shows the negligible effect of the Lamont Stamp Duty holiday.The left-of-centre Chris Dillow has a surprisingly laissez faire conclusion – let prices fall. The market will find equilibrium.

“I will not allow house prices to get out of control and put at risk the sustainability of the recovery.”
Gordon Brown, 1997 Budget Statement.

Unfortunately Gordon has to do something, he promised an end to the economic cycle, he promised endless growth, low unemployment, low inflation and a new Britain.

The economic cycle is back, the benevolent economic circumstances not of his making have gone and we are, according to the OECD, the worst positioned Western industrialised nation to weather the tough times. Inflation is rising and unemployment is hitting Thatcherite levels, your economic plans have crashed, Gordon.

Crisis, What Crisis?

Sterling is down 14% against a basket of currencies since Gordon Brown became PM and Alistair Darling took his old job as Chancellor. Oil is priced in dollars…

Flashback : Labour Government Sterling Crisis

If Britain, as a result of Gordon’s financial genius, is so well placed to weather the international financial storm, why is the pound at an all time low versus the euro? Why is it falling against a broad basket of currencies? Sterling was even down against the Pakistani Rupee last week…

“It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.”

Prime Minister Harold Wilson, 19 November 1967

Harold Wilson came out with that famous statement after the pound was devalued 14% against the dollar. The pound is down some 28% against the euro since the launch of that currency. unemployment is heading towards two million. The seventies are back under Brown. After a run on a bank, we now have a run on the currency. Could we see the return of flared trousers and exchange controls?

+++ S&P Predicting UK Housing Market to Fall 30% By 2009 +++

Bloomberg TV is tonight reporting the Standard & Poors credit rating agency predicting a fall of 30% in UK house prices (from 2007 peak) in 2009.

Back in April Charles Bean, the Bank of England’s Chief Economist, gave an under-reported speech that shook up the Gilts market. It should have shaken up everyone. According to Mr Bean the Bank’s research found that 5% of mortgagors had less than 20% equity in their home. That is equivalent to 650,000 homeowners.

A 30% fall would see more than a million homeowners better off giving the bank the keys to the front door. This could be some bust…

UPDATE : Pound is tumbling as Asian markets open tonight. The pound is now at the weakest it has ever been against the Euro, tumbling against the Swiss Franc as well. Guido is short…

Osborne : Is it Brown or Darling Who Is Telling the Truth?

The Chancellor’s candid confession that the economy is tanking worse than previously admitted has been seized on by his shadow. Osborne asks

Who is telling the truth at the top of Government? The Prime Minister says the economic situation isn’t as bad people think and that Britain is well placed to weather the economic storm, but the Chancellor says we are at a 60 year low. Gordon Brown has briefed out stories that he has an economic recovery plan all worked out, meanwhile the Chancellor says the downturn will be more profound and long-lasting than people thought.

Mulling over whether or not to bet the shop against sterling…

UPDATE : The Chancellor in the interview does appear to know the price of eggs. We can relax. Phew.

U.S. Growth 3.3% v U.K. Growth 0.0%

If all our economic woes are made in America as Gordon claims, why is that their economy is showing healthy growth (despite high oil prices) and the U.K. economy is flat-lining?

Could it have something to do with George Bush’s timely $150 billion bi-partisan growth stimulus package in February? Both the Democrats and Republicans are running on tax cutting platforms. We have bi-partisan tax and spend sloth policies. Guido understands the politics of it, the economics of it are what disappoints. The Finkelstein “you can’t win promising tax cuts” approach was always timid, it is now the wrong strategy at the wrong time. The voters have moved on, they recognise the economy needs tax cuts to grow.

Vince’s Naivety on Nationalisation

Vince Cable is with some justice blaming almost everyone for the Northern Rock disaster:

“Taxpayers have every reason to be angry: with the private-sector managers and directors who behaved appallingly and have never been brought to book; the company auditors who passed last year’s accounts without spotting the big holes in the company books; the regulators (the FSA) who also gave the Northern Rock a clean bill of health; and the government, which was at best naive and at worst dishonest when it claimed to have secured the government’s loans.”

What about the naive politicians Vince, who welcomed the nationalisation, without having done any due diligence on behalf of the taxpayers?

[…] Read the rest

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