Reports Of My Death Have Been Greatly ExaggeratedI attended a briefing on the economy and markets last week. Some of the content was good if gloomy (maybe realistic!).
However, one speaker blithely said that "the originate to distribute model is dead". I had to take him to task about this-the word I used was "superficial". No doubt one of his ancestors in the early 1720s was going around telling anyone who would listen that "the joint-stock company model is dead", in the aftermath of the South Sea Bubble.
The plain fact is that both the joint-stock company and securitisation are useful techniques which have advantages for many parties. The abuse of something does not negate the value of the thing itself. 3,000 people die in road accidents in the UK every year. So if we go back to 19th century transport and banking, we'll all be much better off. Won't we?
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It's not often I speak up in defence of big banks-what's the mission of Robin Hood Finance after all?-but the attitude of the government and the press to rate cuts is not, shall we say politely, very intelligent or considered. "Banks Fail to Pass On Rate Cuts" thunder the papers, and not only the red-tops.
The reality is that banks don't fund at base rate, but at deposit or wholesale rates. A quick look at The Times' best buy easy access accounts today shows rates from 4.5 to 6%. 3-month Sterling Libor, the commonest benchmark, closed last week at 3.38%. And that's if banks can get funding in this maturity. They would be delighted to have unlimited funding at 2%.
The real problem is not interest rates, but the availability to banks' customers of funding at any price. Banks are constricting lending where they can, which is individually rational, but collectively disastrous.
Small businesses are not concerned whether Base Rate is 3%, 2% or lower, but are very concerned about having enough funding to ensure their survival.
RHF is currently working on a project to help smaller/medium sized businesses by raising funds against their trade finance receivables. This looks like a virtuous circle of profitability and helping businesses and the economy. It is this sort of basic approach which is needed now.
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I worked for this bank with the strange name in the 1980s. Of course, it didn't manufacture anything, and wasn't based in Hanover. What brings it to mind is that fact that it was brought low over 20 years ago because of exposure to bad assets. ("Bad" has somehow become "toxic" over time). The bad assets in question were mainly South American sovereign debt. "Countries don't go bust" was the slogan at the time. True in a way-but if they don't pay their bills, the effect is the same.
So there were many billions of unloved, illiquid bonds weighing down banks' balance sheets. Sound familiar? One solution which proved successful was the Brady bond, named after the eponymous US Treasury Secretary. These came in many forms, but often had their principal guaranteed via zero-coupon government bonds.
Sir James Crosby's government-commissioned report, published yesterday, recommends that mortgage-backed securities should be covered by government guarantees. Would not the proven Brady structure, where risk is shared, be a better bet?
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I have received a headhunter's email. They are looking for a Head of Research for Commercial Mortgage Backed Securities. Amongst the requirements are a PhD and 15 years of research experience, plus a load of stuff about publishing, publishing...
This would be understandable if the headhunter were trying to fill an academic post. But this is a commercial organisation. Why not ask applicants to submit their research in this area over the last five years, and compare it to what actually happened?
Even after all we’ve seen in the markets, people are still going down the “more of the same” path. It’s a bit like those Englishmen abroad who think they just have to shout louder if the foreigner doesn’t understand.
PhD? LTCM did much better than that-they were brought down by the work of two Nobel laureates they had on the Board.
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"How do you give God a good laugh?" "Tell Him your plans!".
That was told to me as a child, and I have never forgotten it. There have been plenty of illustrations of hubris throughout the ages, from the mythical-Icarus flying too close to the sun-to the fall of the multi-Nobel-prizewinner-toting hedge fund Long Term Capital Management in 1998.
The current bunch of hedge funds seem to be coming a cropper too. They were premised on the unlikely proposition that they would perform in all market conditions. They didn't. Anyone who thought that clever people armed with equations and computers could create value ("absolute returns", "alpha"..."whatever", as my daughter would say) over and above the fat 2 [% per year] plus 20 [% of profits] in fees was suffering from what Dr Johnson said when he heard that a friend had married for a second time: "that, Sir, is a triumph of hope over experience".
It's the same problem as we have with securitisation: managing assets and structuring pools of assets are perfectly sensible. It's going too far (CPDOs/Subprime ABS/Funds of Hedge funds) which causes the problems, and ruins things for the whole market.
By the way, this is not "20/20 hindsight"-please have a look at my letter to the FT from October, 2004
http://www.ft.com/cms/s/0/ab6c40e0-2490 ... 511c8.html
My only disappointment is that no-one ever did advise me how to short these funds. Otherwise I might be writing this from my yacht. Bought from a fund of hedge funds manager.
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