Monday, December 10, 2007

Blacker And Blacker

Heading our way

If you want to scare your own pants clean off, might I suggest a quick peruse of the FT Alphaville blog.

Just a few stories from this morning...

Takeover or breakup for Citi- the world's biggest bank on the ropes...

UBS boggles: $10bn of writedowns, £17bn in emergency capital- Swiss giant on the ropes...

CDO update: defaults to increase threefold in 2008: whizzo structured debt market in Big Trouble...

S&P calls the death of the SIV: whizzo off-balance sheet "virtual" banks heading for knacker's yard...

AAA moment of truth for the monolines: whizzo structured debt insurance companies trying on the skids for size...

OK, enough already: my pants have incinerated.

Of course, you're not affected because you keep your nest-egg in a low-risk building society account. They're as safe as... er... houses.

But at least they're properly regulated by the... er... FSA. And anyway, in a real emergency, they can call on lender of the last resort facilities from the... er... Bank of England.


As we all now see, in a hurricane like this, the much trumpeted Brown/Balls banking reorganisation of 1997 is the one-legged man at an arse-kicking party. Not only did the FSA totally fail to get on top of all that whizzo structured debt funding at Northern Rock (and everywhere else), even the long-established lender of the last resort facility didn't work as well as it always used to.

Indeed, the charge here is that the Bank used it so incompetently with the Crock, that it actually helped precipitate the very run it was meant to avert. The British Bankers Association (BBA), the bankers trade body, is hopping mad. It believes the Bank of England's actions- or lack of them- directly led to the panic on the High Street in September:

"The impression has been given that no one took overall charge of the situation and directed activity by the authorities in an energetic way. No one was clearly in the lead.

There appears to have been a lack of anticipation of how consumers might react to an announcement about the provision of facilities to the Northern Rock by the Bank of England.

While we recognise that the news that the facility was to be granted appears to have leaked out prematurely it does not appear that the authorities had thought through their communication strategy with regard to the announcement and, in particular, planned what they would need to do by way of communication in the event of an adverse reaction to the announcement or a leak. In particular there was a lack of preparedness by the Bank of England and the FSA to explain and communicate the Tripartite Authorities’ press release of 14th September on that day or for some days thereafter...

...the statement on 14 September that Northern Rock was obtaining “emergency” funding... was wholly detrimental. A situation has now resulted whereby the stigma attached to this facility renders it unusable."

That last sentence is devastating. As any economics undergrad knows, the lender of the last resort function is one of the essential underpinnings of financial system stability. If banks avoid it because they think it does them more harm than good, the consequences in a major crisis could be catastrophic.

OF course, the BBA has a book to talk. But we shouldn't imagine that's all we're getting: what they warn about actually seems to be happening.

A couple of weeks back, Alliance and Leicester- just like NR, under serious pressure from the closure of its key wholesale funding sources (including its SIVs)- arranged to borrow up to £10bn from a consortium of international banks led by Credit Suisse (see FT Alphaville coverage here). It was very coy about what it was paying, but strong market rumour reckons it was 1.6% over LIBOR. If true that would be an extraordinary margin for a High Street bank to pay- historically, 0.1% would have been toppy.

A&L of course is one of the names regularly touted as being the next Crock, but its willingness to pay a margin of 1.6%, with a significant impact on future profitability (see FT article), underlines just how toxic resort to the Bank of England has become (the Bank's penal last resort lending rate is only about half the margin A&L are said to be paying).

Of course, it's quite possible A&L management has simply lost the plot, and certainly their "lacklustre" share price would suggest that:

But when it comes to plot losing, they're far from alone.

Sleep well.


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