Dear sir/madam,
as the Irish people existentially and philosophically prepare to exercise their unequivocally constitutional right to self-determine the direction of our society, and while we may all wish we did so on a more than a few of the more ever-so-slightly-multi-generational-handicapping decisions made by Dr Bertie and not-so-Mini-Me-Cowan, please consider the following thoughts, in the context of the following media articles...
http://www.irishtimes.com/newspaper/breaking/2012/0315/breaking153.html
"You could take it that the ECB were never particularly happy with the level of collateral provided by the promissory notes and would like stronger collateral," said Minister for Finance, Michael Noonan.
http://www.irishtimes.com/newspaper/breaking/2012/0314/breaking70.html
"pacta sunt servanda"
Folks,
So, while the Irish people have repeatedly been instructed that the Anglo Irish Bank promissory notes are de facto (yes Ollie, there are some Irishmen who have some Latin) Irish sovereign obligations which Ireland must honour, the ECB tells us that the collateral backing them up (eh... Ireland) is insufficient, and that therefore they will not accept them as eligible for ECB repo financing. Meanwhile, the same ECB is throwing 100's of billions of Euros in 3-year repo finance facilities for any residential mortgage, corporate loan, or sovereign exposure that absolutely any bank in the Euro-zone can throw at them. All of which begs the question of why the Anglo/INBS (IBRC) prom notes aren't given the same laissez-faire treatment. If Ollie Rehn thinks so highly of these 'obligations' that he feels compelled to deliver a free lesson in Latin phraseology, one wonders if the ancient Greek equivalent includes a clever sub-clause in the event that one only feels like honouring about 30% of it's obligations.
Seeing as the ECB wont accept these prom notes as eligible collateral, IBRC has to use the more expensive ELA repo facility from the Irish central bank. This ELA funding has already been universally described as "significantly" higher in cost to the equivalent ECB facility by all of the Irish covered banks. At first glance this sounds harsh however, when we consider that this "significantly" more expensive cost to IBRC was already considered egregious even before the creation of the magic ECB 3yr super-mario-willy-wonka-magic bean-LTRO, then we begin to see how this situation impacts on a work-out institution who's past sins have been punishing the average Irishman for a number of years now. After all that, when one concedes that this super-expensive structure was especially designed to support this ICU patient of a 'bank', and support the fundamentally sacrosanct european belief in senior bank bonds, it is slightly confusing as to why it has been deliberately kept at arms-length by the ECB.
Now, even if we were to disregard the higher cost of such an arrangement this scenario smacks of a duplicitous treatment of ireland by the ECB. They will crack the whip on senior unsecured Anglo bonds to be repaid but, they won't accept as collateral, the single biggest asset keeping the same zombie bank artificially afloat. So, as institutional European investors get paid pack at par for senior unsecured Anglo bonds on the ECB's order, the massive prom notes which facilitate these windfalls are considered substandard collateral by the same institution. Anyone else feel like they are being taken for a ride..?
So, if Ollie Rehn says the prom notes are sovereign obligations, but the ECB won't accept them as eligible collateral for repo funding, there would seem to be a serious disconnect with regard to the orders that the (Ollie Rehn) Troika bark at Ireland, and the solidarity which the ECB is willing to extend in return. Clearly, what's good for the goose, is not so good for the ECB, ahem gander.
Solidarity brother..? Don't make me laugh.
The Euro-zone fiscal compact treaty is based on the concept of a collective responsibility for the honourable stewardship of the EU. It's requirement is undisputedly realised as joint admission of the flaws of excess which caused the current debt crisis.
The troika need to acknowledge the massive €3.1bn-Anglo-Irish-Bank-prom-note-payment-shaped elephant in the corner of the room. If the Troika continues to treat Irish taxpayers with the same arrogance as Ollie Rehn, then the EU will get the no vote it deserves. Climbing the EU ivory tower and pontificating to the one country which is genuinely trying to pay it's dues, including an obligation which you refuse to take any risk on, less than seven days after negotiating another country's free-pass on about 70% of it's obligations, is at the very least.... Baffling. The EU is simply taking advantage of misguided Irish honesty.
God bless Bunracht na h'Eireann,
Waldorf.
Thursday, 15 March 2012
Monday, 4 May 2009
Sandy Lane Cheekenomics
Last week, an oft-celebrated, moustachioed superstar of the late great Celtic Tiger club, suggested that since the toxic assets on the balance sheets of Irish banks were so difficult to value, they should simply be "parked" somewhere, with no loss to anyone. This basically means that they should continue to be funded by the Irish taxpayer and that the shareholders of Irish banks should take no loss on them. Given Dermot Desmond's Gibralter-domiciled tax status, the suggestion to "park" the toxic detritus of Ireland's reckless property-development financing was nothing short of offensive towards the average-Joe tax payer in Ireland. Whatever about the ill-advised grandparents of Ireland who invested their 2d and 6p in Irish banking stocks with no real understanding of the business model, sharks like him should definitely pay the heavy price of losing their whole investment in this sorry mess.
Many people are very rightly concerned and suspicious about the €90bn question that faces the chosen ones given the dubious honour of directing operations at Nama. Various percentage discounts have been randomly bandied about, regarding the average price that NAMA should pay for these loans. Many have said they are probably worth only 50% of their original value, while some mischievous suggestions from interested parties such as Goodbody Stockbrokers (a wholly owned subsidiary of AIB) have campaigned an astonishingly optimistic 15-20% range. However, as someone pointed out to me this week, a 33% discount on an 85% original LTV loan, that has already been marked down by 10%, gets us to a 50% devaluation of the asset in question. Quite correct, however, I think the underlying assets are, in many cases, worth even less. An average purchase in the 33% territory, that most commentators are calling for, would completely wipe out the equity capitalisation of all the Irish banks concerned and so, require government investment. However, why keep investing in the equity and give the existing shareholders continuing participation (however decreasing) in any upside that a recovery would bring..?
Also, let's ask ourselves what that main Irish banks are doing themselves to assist in the crisis and, to alieviate the wider problem. AIB are, in fairness biting the bullet and selling €1.5bn of invesetments in non-core assets like its 24% stake in stateside M&T, and its 70.5% stake in Poland's Bank Zachodni WBK. The cash raised will help AIB's Tier 1 ratio increase to 10.5%, when added to the €3.5bn promised by the Irish government. However, while these positive steps are being taken, AIB is still throwing good money after bad at Irish property developers. In mid-March Allied Irish, alongside Bank of Scotland Ireland, pumped another €7m (each) into Liam Carrol's main Irish holding company, Danninger. This is the same company that AIB has, this past weekend, decided to take another impairment charge on its loans. Does extending more credit to a company, that you then consider a worse credit risk only weeks later, seem prudent to you? This type of move smacks of a mischievous attempt to buy time ahead of the NAMA loan transfers. Having a large exposure like Daninger unravel ahead of the loan transfer, would weaken AIB's hand dramatically when it comes time to deciding upon the value of these tosic assets to be transferred to NAMA. Meanwhile, Liam Carrol has taken this €14m and offered his unsecured trade creditors a 70% settlement of their due money. This is almost like robbing Peter to pay Paul. Problem is, Peter is being propped up by the Irish taxpayers. Paul, in this case, is the public pension of every man, woman and child in the Republic of Ireland. Given the standard of reprehensible statesmanship exhibited by Sean Fitzpatrick, when supposedly one of the leading stewards of Irish enterprise, I have very low expectations regarding the motivation of those in charge at Allied Irish Bank when it comes time to 'fess up' and acknowledge the true value of the business model they've been the architects of, and which will be their destructive legacy to the next generation.
Given the choice of properly writing these assets down or funding Dermo's punt, I would take the inevitable nationalisation of these banks that the resulting equity capital erosion would spell. Whether these loans stay on the banks' balance sheets, or not, is actually irrelevant. They will end up as state liabilities either way. Allied Irish Bank stock is worth zero - bottom line. If you still own some, hit the bid, cut your losses, and consider yourself lucky. Whoever you sell it to will get nothing, and deserves even less.
Many people are very rightly concerned and suspicious about the €90bn question that faces the chosen ones given the dubious honour of directing operations at Nama. Various percentage discounts have been randomly bandied about, regarding the average price that NAMA should pay for these loans. Many have said they are probably worth only 50% of their original value, while some mischievous suggestions from interested parties such as Goodbody Stockbrokers (a wholly owned subsidiary of AIB) have campaigned an astonishingly optimistic 15-20% range. However, as someone pointed out to me this week, a 33% discount on an 85% original LTV loan, that has already been marked down by 10%, gets us to a 50% devaluation of the asset in question. Quite correct, however, I think the underlying assets are, in many cases, worth even less. An average purchase in the 33% territory, that most commentators are calling for, would completely wipe out the equity capitalisation of all the Irish banks concerned and so, require government investment. However, why keep investing in the equity and give the existing shareholders continuing participation (however decreasing) in any upside that a recovery would bring..?
Also, let's ask ourselves what that main Irish banks are doing themselves to assist in the crisis and, to alieviate the wider problem. AIB are, in fairness biting the bullet and selling €1.5bn of invesetments in non-core assets like its 24% stake in stateside M&T, and its 70.5% stake in Poland's Bank Zachodni WBK. The cash raised will help AIB's Tier 1 ratio increase to 10.5%, when added to the €3.5bn promised by the Irish government. However, while these positive steps are being taken, AIB is still throwing good money after bad at Irish property developers. In mid-March Allied Irish, alongside Bank of Scotland Ireland, pumped another €7m (each) into Liam Carrol's main Irish holding company, Danninger. This is the same company that AIB has, this past weekend, decided to take another impairment charge on its loans. Does extending more credit to a company, that you then consider a worse credit risk only weeks later, seem prudent to you? This type of move smacks of a mischievous attempt to buy time ahead of the NAMA loan transfers. Having a large exposure like Daninger unravel ahead of the loan transfer, would weaken AIB's hand dramatically when it comes time to deciding upon the value of these tosic assets to be transferred to NAMA. Meanwhile, Liam Carrol has taken this €14m and offered his unsecured trade creditors a 70% settlement of their due money. This is almost like robbing Peter to pay Paul. Problem is, Peter is being propped up by the Irish taxpayers. Paul, in this case, is the public pension of every man, woman and child in the Republic of Ireland. Given the standard of reprehensible statesmanship exhibited by Sean Fitzpatrick, when supposedly one of the leading stewards of Irish enterprise, I have very low expectations regarding the motivation of those in charge at Allied Irish Bank when it comes time to 'fess up' and acknowledge the true value of the business model they've been the architects of, and which will be their destructive legacy to the next generation.
Given the choice of properly writing these assets down or funding Dermo's punt, I would take the inevitable nationalisation of these banks that the resulting equity capital erosion would spell. Whether these loans stay on the banks' balance sheets, or not, is actually irrelevant. They will end up as state liabilities either way. Allied Irish Bank stock is worth zero - bottom line. If you still own some, hit the bid, cut your losses, and consider yourself lucky. Whoever you sell it to will get nothing, and deserves even less.
Saturday, 31 January 2009
Change the lightbulb, don't curse the dark....
The seedy world of journalism is much like toilet paper. Readily available in most retail outlets, cheap, unreliable at times, and uplifting at others but, impossible to live without. One thing you can count on when it comes to journalists is, that you can never rely upon them to bail you out when the chips are down. They are there to sell newspapers, and that's it. The only thing you can do is make sure you your house is in order and there are no skeletons in the closet. There are many examples in the world of celebrity who can attest to this.
If you are going to solve a problem like the banking crisis, first of all there are two basic directions you can go down - public, or private. Do you maintain a bank's public equity listing so that access to global capital markets and potential funding in the future is preserved? Or, do you pull the bank off the stock market, nationalise it, and take it under the protective wing of the country's sovereign credit rating..?
If you privatise (nationalise) a bank, you remove it from the hyperbolic gaze of press hacks and so, the whims of the stock market forces. The cheap tabloid tattle that sells newspapers is fundamentally speculative in its nature but, feeds off smoke that can be portrayed as indicative of a real fire. Therefore your choice is to either make it absolutely clear that there is no fire or make sure no one even sees the smoke. A nationalised bank has no publicly quoted equity price and so, is not compelled to provide the level of public disclosure that endeavours to make the stock market as transparent as possible. As we all know, a little bit of knowledge is a dangerous thing and so, without this forced disclosure, it is also spared the blind panic that accompanies a volatile stock. Is the financial strength of a bank determined by its stock price or, is the stock price determined by its financial strength..? Far too often lately, in the global equity markets, the tail has been wagging the dog.
That said, a nationalised bank completely undermines the reasons for having a banking system in the first place. A banking system is designed to enable a free market economy and promote private enterprise. Government control and stewardship of such a system removes the Darwinian premise that ensures survival of the fittest. So, if you can't hide the smoke, you gotta put out the fire.
The current strategy of recapitalising bank balance sheets without dealing with the underlying problems, caused by the toxic structured assets on their books, is a muddled approach and lacks any clear understanding of what the government bailout plans are trying to achieve. As long as doubt remains as to the true value of the toxic assets on every bank's balance sheet, there will be smoke for the tabloid journalists to feed the panic on the stock market trading floors. This means that until these problem assets are removed or their true recovery value is determined, they will continue to weigh on the banks' stock prices and so, undermine their capitalisation ratios. Seeing as the crystal ball has not been invented yet, they must be extricated from the bank balance sheets. Until that is done, any public money used to purchase bank equity is a complete waste.
Greed is a fundamental human trait and not even a depression can completely eliminate it. If banks are cleansed of these cancerous tumours, they can then be 'encouraged' to turn the credit tap on again for viable private enterprise. It is fundamentally impossible for a state to directly finance entrepreneurial activity in its economy. A strong banking system is vital, and a national asset purchase program to fix bank balance sheets is the only solution.
As long as there are people living and breathing on this planet, there are opportunities for making money. Its now our job, collectively, to make sure we can identify the product or services that will be needed in this cycle. The ability to adapt and retrain so that we can take advantage of the next wave, is the real challenge that lies ahead. However, if there is no ability for the entrepreneurial minds within our economy to act on their foresight, someone else in another part of the world will - and their economy will reap the benefits that follow. Identify the demand, provide the supply, and everything else will follow. Simple!
If you are going to solve a problem like the banking crisis, first of all there are two basic directions you can go down - public, or private. Do you maintain a bank's public equity listing so that access to global capital markets and potential funding in the future is preserved? Or, do you pull the bank off the stock market, nationalise it, and take it under the protective wing of the country's sovereign credit rating..?
If you privatise (nationalise) a bank, you remove it from the hyperbolic gaze of press hacks and so, the whims of the stock market forces. The cheap tabloid tattle that sells newspapers is fundamentally speculative in its nature but, feeds off smoke that can be portrayed as indicative of a real fire. Therefore your choice is to either make it absolutely clear that there is no fire or make sure no one even sees the smoke. A nationalised bank has no publicly quoted equity price and so, is not compelled to provide the level of public disclosure that endeavours to make the stock market as transparent as possible. As we all know, a little bit of knowledge is a dangerous thing and so, without this forced disclosure, it is also spared the blind panic that accompanies a volatile stock. Is the financial strength of a bank determined by its stock price or, is the stock price determined by its financial strength..? Far too often lately, in the global equity markets, the tail has been wagging the dog.
That said, a nationalised bank completely undermines the reasons for having a banking system in the first place. A banking system is designed to enable a free market economy and promote private enterprise. Government control and stewardship of such a system removes the Darwinian premise that ensures survival of the fittest. So, if you can't hide the smoke, you gotta put out the fire.
The current strategy of recapitalising bank balance sheets without dealing with the underlying problems, caused by the toxic structured assets on their books, is a muddled approach and lacks any clear understanding of what the government bailout plans are trying to achieve. As long as doubt remains as to the true value of the toxic assets on every bank's balance sheet, there will be smoke for the tabloid journalists to feed the panic on the stock market trading floors. This means that until these problem assets are removed or their true recovery value is determined, they will continue to weigh on the banks' stock prices and so, undermine their capitalisation ratios. Seeing as the crystal ball has not been invented yet, they must be extricated from the bank balance sheets. Until that is done, any public money used to purchase bank equity is a complete waste.
Greed is a fundamental human trait and not even a depression can completely eliminate it. If banks are cleansed of these cancerous tumours, they can then be 'encouraged' to turn the credit tap on again for viable private enterprise. It is fundamentally impossible for a state to directly finance entrepreneurial activity in its economy. A strong banking system is vital, and a national asset purchase program to fix bank balance sheets is the only solution.
As long as there are people living and breathing on this planet, there are opportunities for making money. Its now our job, collectively, to make sure we can identify the product or services that will be needed in this cycle. The ability to adapt and retrain so that we can take advantage of the next wave, is the real challenge that lies ahead. However, if there is no ability for the entrepreneurial minds within our economy to act on their foresight, someone else in another part of the world will - and their economy will reap the benefits that follow. Identify the demand, provide the supply, and everything else will follow. Simple!
Saturday, 24 January 2009
Fractional Ownership & Bank Timeshares
If the origins of the current economic crisis could be encapsulated by one word, that best candidate would be leverage. The explosion of debt that over-extended every consumer and business in the western world has led us to a massive hangover now that the party is over, and morning has broken. The house party got out of control and now, in the cold light of day, our home is trashed. We can now either crack open another can and carry on or, pull on the marigold gloves and get busy with the vileda supermop.
But, before we start pouring salt on the red wine stain in the white shag pile, lets remember exactly what leverage is. Very simply (and please may those with even the most basic business knowledge humour me for a minute), leverage is the ratio of Debt to Debt + Equity for any enterprise or business. The debt portion of this ratio has got out of hand for almost every company and consumer in recent times and so, the fraction has exponentially veered towards the magic number 1 that signals insolvency, as the equity portion got dwarfed by cheap cash and easy finance. Now we are struggling to keep get this ratio back under control. The most high profile front in this struggle has been within the banking industry and the fight to control the capital ratios decimated by their highly leveraged balance sheets. Almost every country in the western world has furiously thrown money at their banks' equity and attempted to bolster this part of the ratio in order to recapitalise their balance sheets. This one way of doing it but, let's go back to 1st grade mathematics to see the other...
Fractions are a ratio of two numbers, a numerator on the top and, a denominator on the bottom. The ratio can be reduced by either increasing the denominator or, decreasing the numerator. In throwing billions of dollars/pounds/euros at their banks' equity, the US, UK and EU have obsessed about increasing the denominator. Raising more equity to recapitalise banks, does nothing to solve the root problem. Bank equities are exposed to the free market forces of the stock market which have simply pushed the equity valuation down further because the toxic debt instruments that caused the losses in the first place are still there and the problem hasn't been fixed yet. The equity portion of the bank leverage ratios is being eroded as fast as the government bail-out plans are pumping money into them. Call me crazy but, has anyone thought about reducing the numerator instead..?
In October of last year, the Swiss government pulled aside the UBS board of management for a bit of an honesty session, and the bankers revealed all the horrific skeletons in the embarrassing closet that their balance sheet had become. Once the beatings had finished, the government created the accounting equivalent of a toxic waste dump to stuff these illiquid debt securities into. This resulted in $60bn of damaged goods being transferred off the UBS balance sheet and into a Swiss-government-owned fund. In exchange, UBS invested $6bn in the equity of this fund, which would only generate a return if these assets recovered back above their transfer value. The $60bn of bad assets that were amputated from the UBS balance sheet would have been the most difficult to fund and so, the biggest strain on its capital ratios. Exorcising themselves of these troubled assets enabled UBS to eliminate the borrowings that were being used to finance these positions and so, dramatically reduce its leverage. This cleansing of the UBS balance sheet had the neat (not particularly my choice of adjective but that of the NY Times) effect of spectacularly reducing the numerator in its leverage ratio and also reassuring the equity market that the cancerous tumour had been successfully removed.
The beauty of this solution is in the value for money that the Swiss government has achieved in implementing this solution. They identified the root problems (toxic assets), isolated them (govt toxic asset fund), and gave UBS a new lease of life (clean balance sheet). This wasn't cheap but, it was very clean and definitive. The cost to the Swiss taxpayer (who are they anyway?) was capped ($60bn) and achieved exactly what they were looking for - a fresh start for Swiss banking. Removing the trouble-assets, and paying down the debt used to finance them, enabled UBS to reduce its dependence on the demon weakness that is leverage.
Let's compare this strategy to how Gordon Brown and Biffo Cowen have approached the crisis. The Irish government initially took the bold step of guaranteeing all the debt of the five major indigenous banks so that they could more easily fund the assets (good and bad) that sat on their balance sheets and then, the UK government began ploughing money into the equity of the UK banks. Both these approaches are basically an attempt to maintain the existing leverage ratios of the banks and hope that the problem sorts itself out. In Ireland, the hope was that by giving the banks easy access to cheap financing (in the shape of the government guarantee), the equity market would look favourably upon their equity prices and so, the denominator in their leverage ratios would cease to be impaired. In the UK, Gordon Brown simply decided to directly bolster the denominator in the banks' leverage ratio, by throwing money at the banks' equity. Both these strategies are flawed in that they simply seek to preserve the status quo rather than fix the root problem.
Effectively reducing a bank's leverage ratio (or even keeping it under control) is critically dependent upon stabilising one potentially very volatile factor - its equity price. This means that whatever strategy one employees, as long as the bank remains publicly quoted on a stock exchange, the value of its stock price (and so its equity market capitalisation) can fluctuate to reflect investor opinion of the strategy employed. The difference between tackling the top part of the leverage ratio and the bottom part is that the numerator (debt) is not open to outside influence so, any reduction effected is sustained. However, focusing on the bottom part of the leverage ratio by trying to bolster the bank's equity market capitalisation can be undermined directly by the equity market. The main problem with this strategy is that it leaves the onus upon the management of the bank to use the cash, given to them by the equity recapitalisation, to reduce debt and so, strengthen their balance sheet. However, within the UK at least, the banks are simply using the government bank guarantee to raise new debt and simply maintain the existing leverage, not reduce it. This mainly because the banks still can't face up to the real value of the toxic assets on their balance sheet. The indirect nature of this solution merely allows the banks to sustain the illusion and goes nowhere towards really solving the problem. Much like giving a junkie money to pay his dealer, the dependence remains.
Okay now, Gordon & Brian, if you manage to read this, let me spell it out really simply. Remember the ratio I was talking about - leverage? Well, making the bottom bit bigger so that the top bit doesn't look so bad, ain't no solution. If you force the banks to reduce leverage by taking the problem assets off them, the resulting clean nature of their balance sheets will mean they can use the government debt guarantee in the right manner - to raise more cash to give out as new loans and mortgages to the man in the street. As long as the banks sell the assets at a realistic value, into the government fund, the taxpayer will not be forced to overpay and may even benefit from any recovery in their value. Even if they end up being worthless, the cost to the taxpayer is capped. Any drop in the banks' equity price due to the write-downs on the loans they transfer into this fund, will be limited because, the underlying problem will have been extricated. A kind of financial root-canal therapy.
The proof is in the pudding and, all one has to do is go back to October, last year, and look at how Swiss and UK fortunes have diverged since then. Switzerland spent $60bn on UBS, in the same week that the UK government invested £37bn ($64bn at the time) in RBS, HBOS, and Lloyds stock. Most of the UK's £37bn was pumped into RBS and, since then, the UBS stock price has outperformed the RBS stock price by a massive 20%. Much like a rogue trader would double-down on a bad bet, last week Gordon Brown announced another £50bn of investment in UK bank stocks and, in Ireland, Biffo has had to nationalise Anglo Irish Bank. If tax were considered an investment in a country's fortunes, we should all be considering a change of fund manger or moving our money elsewhere. Only question remaining is, when are we all moving to the Alps..?
But, before we start pouring salt on the red wine stain in the white shag pile, lets remember exactly what leverage is. Very simply (and please may those with even the most basic business knowledge humour me for a minute), leverage is the ratio of Debt to Debt + Equity for any enterprise or business. The debt portion of this ratio has got out of hand for almost every company and consumer in recent times and so, the fraction has exponentially veered towards the magic number 1 that signals insolvency, as the equity portion got dwarfed by cheap cash and easy finance. Now we are struggling to keep get this ratio back under control. The most high profile front in this struggle has been within the banking industry and the fight to control the capital ratios decimated by their highly leveraged balance sheets. Almost every country in the western world has furiously thrown money at their banks' equity and attempted to bolster this part of the ratio in order to recapitalise their balance sheets. This one way of doing it but, let's go back to 1st grade mathematics to see the other...
Fractions are a ratio of two numbers, a numerator on the top and, a denominator on the bottom. The ratio can be reduced by either increasing the denominator or, decreasing the numerator. In throwing billions of dollars/pounds/euros at their banks' equity, the US, UK and EU have obsessed about increasing the denominator. Raising more equity to recapitalise banks, does nothing to solve the root problem. Bank equities are exposed to the free market forces of the stock market which have simply pushed the equity valuation down further because the toxic debt instruments that caused the losses in the first place are still there and the problem hasn't been fixed yet. The equity portion of the bank leverage ratios is being eroded as fast as the government bail-out plans are pumping money into them. Call me crazy but, has anyone thought about reducing the numerator instead..?
In October of last year, the Swiss government pulled aside the UBS board of management for a bit of an honesty session, and the bankers revealed all the horrific skeletons in the embarrassing closet that their balance sheet had become. Once the beatings had finished, the government created the accounting equivalent of a toxic waste dump to stuff these illiquid debt securities into. This resulted in $60bn of damaged goods being transferred off the UBS balance sheet and into a Swiss-government-owned fund. In exchange, UBS invested $6bn in the equity of this fund, which would only generate a return if these assets recovered back above their transfer value. The $60bn of bad assets that were amputated from the UBS balance sheet would have been the most difficult to fund and so, the biggest strain on its capital ratios. Exorcising themselves of these troubled assets enabled UBS to eliminate the borrowings that were being used to finance these positions and so, dramatically reduce its leverage. This cleansing of the UBS balance sheet had the neat (not particularly my choice of adjective but that of the NY Times) effect of spectacularly reducing the numerator in its leverage ratio and also reassuring the equity market that the cancerous tumour had been successfully removed.
The beauty of this solution is in the value for money that the Swiss government has achieved in implementing this solution. They identified the root problems (toxic assets), isolated them (govt toxic asset fund), and gave UBS a new lease of life (clean balance sheet). This wasn't cheap but, it was very clean and definitive. The cost to the Swiss taxpayer (who are they anyway?) was capped ($60bn) and achieved exactly what they were looking for - a fresh start for Swiss banking. Removing the trouble-assets, and paying down the debt used to finance them, enabled UBS to reduce its dependence on the demon weakness that is leverage.
Let's compare this strategy to how Gordon Brown and Biffo Cowen have approached the crisis. The Irish government initially took the bold step of guaranteeing all the debt of the five major indigenous banks so that they could more easily fund the assets (good and bad) that sat on their balance sheets and then, the UK government began ploughing money into the equity of the UK banks. Both these approaches are basically an attempt to maintain the existing leverage ratios of the banks and hope that the problem sorts itself out. In Ireland, the hope was that by giving the banks easy access to cheap financing (in the shape of the government guarantee), the equity market would look favourably upon their equity prices and so, the denominator in their leverage ratios would cease to be impaired. In the UK, Gordon Brown simply decided to directly bolster the denominator in the banks' leverage ratio, by throwing money at the banks' equity. Both these strategies are flawed in that they simply seek to preserve the status quo rather than fix the root problem.
Effectively reducing a bank's leverage ratio (or even keeping it under control) is critically dependent upon stabilising one potentially very volatile factor - its equity price. This means that whatever strategy one employees, as long as the bank remains publicly quoted on a stock exchange, the value of its stock price (and so its equity market capitalisation) can fluctuate to reflect investor opinion of the strategy employed. The difference between tackling the top part of the leverage ratio and the bottom part is that the numerator (debt) is not open to outside influence so, any reduction effected is sustained. However, focusing on the bottom part of the leverage ratio by trying to bolster the bank's equity market capitalisation can be undermined directly by the equity market. The main problem with this strategy is that it leaves the onus upon the management of the bank to use the cash, given to them by the equity recapitalisation, to reduce debt and so, strengthen their balance sheet. However, within the UK at least, the banks are simply using the government bank guarantee to raise new debt and simply maintain the existing leverage, not reduce it. This mainly because the banks still can't face up to the real value of the toxic assets on their balance sheet. The indirect nature of this solution merely allows the banks to sustain the illusion and goes nowhere towards really solving the problem. Much like giving a junkie money to pay his dealer, the dependence remains.
Okay now, Gordon & Brian, if you manage to read this, let me spell it out really simply. Remember the ratio I was talking about - leverage? Well, making the bottom bit bigger so that the top bit doesn't look so bad, ain't no solution. If you force the banks to reduce leverage by taking the problem assets off them, the resulting clean nature of their balance sheets will mean they can use the government debt guarantee in the right manner - to raise more cash to give out as new loans and mortgages to the man in the street. As long as the banks sell the assets at a realistic value, into the government fund, the taxpayer will not be forced to overpay and may even benefit from any recovery in their value. Even if they end up being worthless, the cost to the taxpayer is capped. Any drop in the banks' equity price due to the write-downs on the loans they transfer into this fund, will be limited because, the underlying problem will have been extricated. A kind of financial root-canal therapy.
The proof is in the pudding and, all one has to do is go back to October, last year, and look at how Swiss and UK fortunes have diverged since then. Switzerland spent $60bn on UBS, in the same week that the UK government invested £37bn ($64bn at the time) in RBS, HBOS, and Lloyds stock. Most of the UK's £37bn was pumped into RBS and, since then, the UBS stock price has outperformed the RBS stock price by a massive 20%. Much like a rogue trader would double-down on a bad bet, last week Gordon Brown announced another £50bn of investment in UK bank stocks and, in Ireland, Biffo has had to nationalise Anglo Irish Bank. If tax were considered an investment in a country's fortunes, we should all be considering a change of fund manger or moving our money elsewhere. Only question remaining is, when are we all moving to the Alps..?
Friday, 16 January 2009
Civic Duties, Carrots & Sticks
Long before the beginning of the end of the dream-sequence that was the Celtic Tiger, there were many concerned voices within Ireland bemoaning an apparent erosion of traditional values and cultural fabric within the Irish community.
While house prices in Dalkey sky-rocketed, and sales of boats/porsches/rolexes went through the roof, the youth in the working class communities of Dublin and Limerick flocked to organised crime and the drug trade. The root cause of this social polarisation could, arguably, be explained by the near extinction of any belief in the concept of civic duty. The Republic of Ireland is a young state and the immature nature of its socio-economic policy has undoubtedly contributed to our sudden fall from grace. A lotto-winner-esque selfish devotion to personal wealth can never build a legacy. Ironically, inspiring potential future competition is the only way the business glitterati can ensure their existence is sustained. Once the working class strata of society are convinced of their destiny to continue serving a social elite convinced of their perpetually privileged status, the economy fundamentally reaches its full capacity, and the only way is down.
Last June, I was lucky enough to visit the astonishingly beautiful hills and volcanoes of Rwanda. The first thing I noticed was the gushing pride that each and every Rwandan took in the appearance of the streets and countryside they lived in. There was not one scrap of litter or rubbish in sight. The patch of roadside in front of each clay and wattle hut that was home to the average Rwandan family is impeccably manicured and peppered with pretty flowerbeds. This remarkable civic pride is reinforced by innovative social policy that makes it law for every single Rwandan to spend the last Saturday morning of every month, picking up rubbish, cleaning-up public areas, weeding flowerbeds and re-painting walls in public areas. It is only one day a month but, the amazing sense of collective civic pride that it has engendered in a country that only 14 years ago was literally tearing itself apart, is nothing short of awe-inspiring.
I'm not sure if the world is capable of a seismic shift in its value structure that makes us all want to volunteer for the local soup kitchen. Unfortunately, the man in the street will always be predominately motivated by the filthy lucre. If ever we manage to get out of this mess, tax legislation will have to be structured towards financially motivating the 'haves' to give back to the communities that spawned them. Only then are those on the margins of society motivated to participate rather than opt-out and add to the ills of society. That's when an economic boom becomes a fundamental shift in a country's fortunes.
Capitalism does require winners and losers, 'haves' and 'have-nots' but, it is only sustainable if the passage from one end to the other of these polar strata is actually possible by following the rules of the game. If a young person from a working class community doesn't believe that they can rise to the ranks of the affluent upper-classes, no matter how hard they work, then society merely resembles a feudal state rather than a free market economy. Without this basic freedom to even influence one's destiny, bust will always inevitably follow boom.
The Chicago Boys, who masterminded General Pinochet's dismantling of Allende's socialist economy, had many admirers, including Margaret Thatcher who was then inspired to take on Arthur Skargill, and break the unions in the UK. The capitalist free-market ideology that they implanted into 1970's Chilean society was applauded widely in the western world and even resulted in one of the Boys, Robert Coase, winning the Nobel prize for economics. The subsequent discovery of the repressive nature of Pinochet's administration has since led to Coase's admission that the Chilean experiment was a failure. His conclusion was that a free-market economy cannot succeed without the free will of its people.
Socio-economic policy that guarantees status quo for the 'haves' and 'have-nots' can never create a truly free population that fundamentally believes in its individual ability to influence its own destiny. Until every member of society has the true choice to make something of themselves if they are prepared to work hard enough, there will always be an excuse for people to opt out. The downfall of every empire has its origins in the dissatisfaction of the masses with its share of the pie and, the paranoid ringfencing of the pie by the ruling classes. Thing is, if everyone could work their way towards a bigger slice, they would also make the pie bigger.
WNgC
While house prices in Dalkey sky-rocketed, and sales of boats/porsches/rolexes went through the roof, the youth in the working class communities of Dublin and Limerick flocked to organised crime and the drug trade. The root cause of this social polarisation could, arguably, be explained by the near extinction of any belief in the concept of civic duty. The Republic of Ireland is a young state and the immature nature of its socio-economic policy has undoubtedly contributed to our sudden fall from grace. A lotto-winner-esque selfish devotion to personal wealth can never build a legacy. Ironically, inspiring potential future competition is the only way the business glitterati can ensure their existence is sustained. Once the working class strata of society are convinced of their destiny to continue serving a social elite convinced of their perpetually privileged status, the economy fundamentally reaches its full capacity, and the only way is down.
Last June, I was lucky enough to visit the astonishingly beautiful hills and volcanoes of Rwanda. The first thing I noticed was the gushing pride that each and every Rwandan took in the appearance of the streets and countryside they lived in. There was not one scrap of litter or rubbish in sight. The patch of roadside in front of each clay and wattle hut that was home to the average Rwandan family is impeccably manicured and peppered with pretty flowerbeds. This remarkable civic pride is reinforced by innovative social policy that makes it law for every single Rwandan to spend the last Saturday morning of every month, picking up rubbish, cleaning-up public areas, weeding flowerbeds and re-painting walls in public areas. It is only one day a month but, the amazing sense of collective civic pride that it has engendered in a country that only 14 years ago was literally tearing itself apart, is nothing short of awe-inspiring.
I'm not sure if the world is capable of a seismic shift in its value structure that makes us all want to volunteer for the local soup kitchen. Unfortunately, the man in the street will always be predominately motivated by the filthy lucre. If ever we manage to get out of this mess, tax legislation will have to be structured towards financially motivating the 'haves' to give back to the communities that spawned them. Only then are those on the margins of society motivated to participate rather than opt-out and add to the ills of society. That's when an economic boom becomes a fundamental shift in a country's fortunes.
Capitalism does require winners and losers, 'haves' and 'have-nots' but, it is only sustainable if the passage from one end to the other of these polar strata is actually possible by following the rules of the game. If a young person from a working class community doesn't believe that they can rise to the ranks of the affluent upper-classes, no matter how hard they work, then society merely resembles a feudal state rather than a free market economy. Without this basic freedom to even influence one's destiny, bust will always inevitably follow boom.
The Chicago Boys, who masterminded General Pinochet's dismantling of Allende's socialist economy, had many admirers, including Margaret Thatcher who was then inspired to take on Arthur Skargill, and break the unions in the UK. The capitalist free-market ideology that they implanted into 1970's Chilean society was applauded widely in the western world and even resulted in one of the Boys, Robert Coase, winning the Nobel prize for economics. The subsequent discovery of the repressive nature of Pinochet's administration has since led to Coase's admission that the Chilean experiment was a failure. His conclusion was that a free-market economy cannot succeed without the free will of its people.
Socio-economic policy that guarantees status quo for the 'haves' and 'have-nots' can never create a truly free population that fundamentally believes in its individual ability to influence its own destiny. Until every member of society has the true choice to make something of themselves if they are prepared to work hard enough, there will always be an excuse for people to opt out. The downfall of every empire has its origins in the dissatisfaction of the masses with its share of the pie and, the paranoid ringfencing of the pie by the ruling classes. Thing is, if everyone could work their way towards a bigger slice, they would also make the pie bigger.
WNgC
Thursday, 11 December 2008
The Chewbacka Defence
Modern pop culture has brought us everything from flash mob PR stunts, Ali G, and Avid Merrion, to Vicky Pollard and more cowbell. The supposedly niche language and intonation are supposed to confirm your membership of the cool club but, in fact, only serve to confirm your conformity with the prevailing cultural wind. That said, all these people can't be wrong. In an effort to convey a more pressing issue, I'll glean a hidden gem from the video vault... The Chewbacka Defence.
With the cold wind of recession blowing down the high street of UK Inc, there is now an even greater need for the risk taking trailblazers of the entrepreneurial world, to step forward and seize the moment. This is only possible with the backing of the UK banking industry. Even the simple process of buying a house requires a bank to play ball and, provide realistic funding. At the moment, most of the UK banks are passing on the Bank of England base-rate cuts to existing mortgage holders on their standard variable rate. This is a positive step however, it is undermined and slightly negated by their unwillingness to extend new mortgage deals with rates that reflect the aggressive nature of the BOE rate cuts. This unattractive general funding situation that is being sustained by all of the main high street banks, en-bloc, only serves to exacerbate the malaise of the UK housing market.
The general public have copped that something is amiss and that there is something wrong with the banks reluctance to provide mortgages in the same ballpark as the Bank of England base rate. No one, however seems to have figured out why. The banks seem to have an eminently plausible (yet frustrating) excuse. The excuse that the UK banks dish out, ad-nauseum, to the mainstream UK media is that 3mth sterling Libor (the average rate that at which banks will lend sterling to each other over 3 months - London InterBank Offered Rate) continues to lag the collapse in BOE base rates. This is the real level at which they fund themselves in normal market conditions (when the much famed money markets actually work). This rate is published daily by a suitably reputable institution called the British Bankers Association and is accepted as gospel by all as the last word in British finance. No one, however, seems to have asked where this calculation comes from. Now seems a good time to explain the chewbacka defence...
In an episode of the hugely popular animated comedy series, South Park, Chef (Isaac Hayes) is being represented by the famous lawyer Johnnie Cochrane in a legal case against a record company. In order to convince the jury to find in favour of his client, he employs what is famously described, by the commentator of the live coverage of the trial, as the Chewbacka defence. This basically involves Cochrane begging the question of why Chewie would chose to live on Endor....
"Why would a Wookiee, an eight-foot tall Wookiee, want to live on Endor, with a bunch of two-foot tall Ewoks? That does not make sense! But more important, you have to ask yourself: What does this have to do with this case? Nothing. Ladies and gentlemen, it has nothing to do with this case! It does not make sense! Look at me. I'm a lawyer defending a musician against a big major record company, and I'm talkin' about Chewbacca! Does that make sense? Ladies and gentlemen, I am not making any sense! None of this makes sense! And so you have to remember, when you're in that jury room deliberatin' and conjugatin' the Emancipation Proclamation, [approaches and softens] does it make sense? No! Ladies and gentlemen of this supposed jury, it does not make sense! If Chewbacca lives on Endor, you must acquit! The defense rests."
As amusing as this is, it parodies the ridiculous distractions that popular culture will fall for so that the wool can be pulled over their eyes. OJ Simpson was guilty as sin and is only now being brought to justice. The jury in his original trial fell for a smoke and mirrors distraction by a well-polished shyster and, acquitted the movie star. Now the UK public and parliament are falling for a similar trick.
The British Bankers Association calculate daily Libor rates by computing an average of the rates quoted by the main UK banks at which they would lend to each other. So, the excuse they are using as the reason they can't provide realistic new lending rates to home buyers and small businesses is controlled by themselves. Meanwhile they can raise as much cash as they like through bond issues guaranteed by the UK treasury. Therefore, they can afford to leave this rate, at which they lend cash to each other, well above the BOE base rate. This is basically a cartel of banks setting 3 month Libor at a sufficiently high rate to discourage any new lending and cream off extra margin from anyone prepared to pay the extortionate rate. So far, no one has called their bluff.
UK banks have taken substantial UK taxpayer money in order to survive and now, they are feeding us the chewbacka defence in order to fob us off. I think its about time Alistair Darling read up on the fundamentals of Libor and made a call to the heads of UK banking Inc. The game is up - turn the tap back on..!
WNcG
With the cold wind of recession blowing down the high street of UK Inc, there is now an even greater need for the risk taking trailblazers of the entrepreneurial world, to step forward and seize the moment. This is only possible with the backing of the UK banking industry. Even the simple process of buying a house requires a bank to play ball and, provide realistic funding. At the moment, most of the UK banks are passing on the Bank of England base-rate cuts to existing mortgage holders on their standard variable rate. This is a positive step however, it is undermined and slightly negated by their unwillingness to extend new mortgage deals with rates that reflect the aggressive nature of the BOE rate cuts. This unattractive general funding situation that is being sustained by all of the main high street banks, en-bloc, only serves to exacerbate the malaise of the UK housing market.
The general public have copped that something is amiss and that there is something wrong with the banks reluctance to provide mortgages in the same ballpark as the Bank of England base rate. No one, however seems to have figured out why. The banks seem to have an eminently plausible (yet frustrating) excuse. The excuse that the UK banks dish out, ad-nauseum, to the mainstream UK media is that 3mth sterling Libor (the average rate that at which banks will lend sterling to each other over 3 months - London InterBank Offered Rate) continues to lag the collapse in BOE base rates. This is the real level at which they fund themselves in normal market conditions (when the much famed money markets actually work). This rate is published daily by a suitably reputable institution called the British Bankers Association and is accepted as gospel by all as the last word in British finance. No one, however, seems to have asked where this calculation comes from. Now seems a good time to explain the chewbacka defence...
In an episode of the hugely popular animated comedy series, South Park, Chef (Isaac Hayes) is being represented by the famous lawyer Johnnie Cochrane in a legal case against a record company. In order to convince the jury to find in favour of his client, he employs what is famously described, by the commentator of the live coverage of the trial, as the Chewbacka defence. This basically involves Cochrane begging the question of why Chewie would chose to live on Endor....
"Why would a Wookiee, an eight-foot tall Wookiee, want to live on Endor, with a bunch of two-foot tall Ewoks? That does not make sense! But more important, you have to ask yourself: What does this have to do with this case? Nothing. Ladies and gentlemen, it has nothing to do with this case! It does not make sense! Look at me. I'm a lawyer defending a musician against a big major record company, and I'm talkin' about Chewbacca! Does that make sense? Ladies and gentlemen, I am not making any sense! None of this makes sense! And so you have to remember, when you're in that jury room deliberatin' and conjugatin' the Emancipation Proclamation, [approaches and softens] does it make sense? No! Ladies and gentlemen of this supposed jury, it does not make sense! If Chewbacca lives on Endor, you must acquit! The defense rests."
As amusing as this is, it parodies the ridiculous distractions that popular culture will fall for so that the wool can be pulled over their eyes. OJ Simpson was guilty as sin and is only now being brought to justice. The jury in his original trial fell for a smoke and mirrors distraction by a well-polished shyster and, acquitted the movie star. Now the UK public and parliament are falling for a similar trick.
The British Bankers Association calculate daily Libor rates by computing an average of the rates quoted by the main UK banks at which they would lend to each other. So, the excuse they are using as the reason they can't provide realistic new lending rates to home buyers and small businesses is controlled by themselves. Meanwhile they can raise as much cash as they like through bond issues guaranteed by the UK treasury. Therefore, they can afford to leave this rate, at which they lend cash to each other, well above the BOE base rate. This is basically a cartel of banks setting 3 month Libor at a sufficiently high rate to discourage any new lending and cream off extra margin from anyone prepared to pay the extortionate rate. So far, no one has called their bluff.
UK banks have taken substantial UK taxpayer money in order to survive and now, they are feeding us the chewbacka defence in order to fob us off. I think its about time Alistair Darling read up on the fundamentals of Libor and made a call to the heads of UK banking Inc. The game is up - turn the tap back on..!
WNcG
Wednesday, 10 December 2008
The Cost of Misguided Conscience
For the past couple of months, the saga of the Detroit auto industry soap opera has been played out on the steps and in the hallowed halls of Capitol Hill. Last week, the CEO's of the big three arrived in Washington in the most frugal offering their ailing production lines could muster, in a vain attempt to create an air of modesty to their gas-guzzling product line and so suggest worthiness for their brazen bailout begging. Their desperate tugging of administrative heart-strings has veered from jingoistic promotion of national pride in the US auto industry to ransom demands, in the shape of apocalyptic predictions for the fate of Detroit society. Whatever cards they've played, a certain degree of success has been achieved in the shape of a proposed $18bn grant from funds set aside for the promotion of green industry. Some may find this a fantastic display of the US administration's well-hidden, killer sense of humour but, the truth is possibly a lot sadder than that.
For decades, Capitol Hill has pandered to the demands of both the ludicrously powerful Union of Auto Workers (UAW) and the resultant demands for protectionist government policy from the big three auto companies as they struggled to meet the exorbitant demands of the UAW. Each quarter given to both parties in Detroit has ironically added up to digging a massive hole for them to jump right into. The support for the demands of the UAW and the protectionist policy for the companies themselves has made the indigenous US auto industry completely non-viable as a going concern. They don't make money and haven't done so for a long time. Meanwhile, the Asian auto manufacturers are able to manufacture, distribute, and sell cars in the US and, make a profit. The main reason for this is that their operations are non-unionised. This latest shot in the arm for the US car manufacturers is well below the $25-50bn they say they need to 'restructure' their operations and so, will probably only serve to help them limp on for another 3-6 months before they come back asking for more. It is no more than a 'pity-hit' before the US auto junkies finally expire. It seems the collective conscience of the suits on Capitol Hill finally came to bear in their decision making and so, their guilt in allowing this mess to develop may lead them to give into the demanding 'crack-baby' of American industry one last time.
There has been much call for the Auto manufacturers to be given some of Hank Paulson's TARP funds however, in order for them to qualify, they would need to be a bank - not a car manufacturer. This is not as ridiculous a plan as it may seem. GM has a rather large subsidiary, called GMAC, which acts as a finance company for its dealerships. Those buying a new GM car can get immediate financing for their new Hummer in the car showroom and drive out of the car lot minutes later. Given the unprofitable nature of their manufacturing operations, GM chose to use the cheap leverage available through the last economic boom cycle (sound familiar?) to take a leaf out of Tesco's business model and pile these financing deals high so that they could reap the minuscule margins on each sale. And so, as the days of cheap cash came to an end, so did their business model.
The latest twist in the Mid-Westenders saga came to a head today. Because GMAC is a finance company, it aint far away from being a bank. In order to qualify as a bank, they would have to meet minimum regulatory ratios for the leverage on their balance sheet. They needed to tender for a range of bond issues (debt) and offer to buy them back from the investors. The latest results from the tender process came back today and were light-years away from reaching a high enough acceptance of the tender from the bond holders (only 22%). As GM have admitted they have no room for manoeuvre with regards to the price they are willing to pay for the debt, it is unlikely they will be able to increase that tender acceptance rate. That means, they have little chance of meeting the minimum requirements for being a bank and so, little hope of qualifying for TARP funding from Hank Paulson. Put plainly.... No Bank, No TARP. They are doomed to chapter 11 and bankruptcy.
So, it would seem, this $18bn 'green industry' grant, if passed, will lead to nothing more than where they would have been if they didn't get it in the first place - bankruptcy court. The people of Detroit would have been better served if this money was kept back to deal with the fall out from the inevitable redundancies that will follow once real restructuring is done in the attempt to salvage something of the remnants of the US auto industry. Instead, if it is passed, the $18bn will only end up adding a few cents (if its not all spent) onto the recovery value of each bond/loan owned by the various hedge funds and distressed bond funds (vulture investors) that have flocked to the feeding frenzy that has kicked off around the still-breathing carcass of Michigan's first city.
The US administration have put a price of $18bn on their guilty conscience for the part they played in getting Detroit to this point. They would prefer to burn billions of dollars of US taxpayers money in an attempt to distract voters into thinking they did all they could for Detroit, rather than admit their part in leading it to its own self-destruction. Despite the depressing conclusion that looms on the horizon, this is a hoop that America has to jump through. A difficult and cathartic growing pain that will help the American dream evolve into its next manifestation. The sacrificial nature of its impending demise may ultimately ensure the next developmental stage in capitalism however, the difference between Coventry in 1940 and Detroit in 2008 would seem to be the small matter of $18bn of public money. I only hope its legacy is even half as significant....
"Don't do it Guv'nor!"
WNcG
For decades, Capitol Hill has pandered to the demands of both the ludicrously powerful Union of Auto Workers (UAW) and the resultant demands for protectionist government policy from the big three auto companies as they struggled to meet the exorbitant demands of the UAW. Each quarter given to both parties in Detroit has ironically added up to digging a massive hole for them to jump right into. The support for the demands of the UAW and the protectionist policy for the companies themselves has made the indigenous US auto industry completely non-viable as a going concern. They don't make money and haven't done so for a long time. Meanwhile, the Asian auto manufacturers are able to manufacture, distribute, and sell cars in the US and, make a profit. The main reason for this is that their operations are non-unionised. This latest shot in the arm for the US car manufacturers is well below the $25-50bn they say they need to 'restructure' their operations and so, will probably only serve to help them limp on for another 3-6 months before they come back asking for more. It is no more than a 'pity-hit' before the US auto junkies finally expire. It seems the collective conscience of the suits on Capitol Hill finally came to bear in their decision making and so, their guilt in allowing this mess to develop may lead them to give into the demanding 'crack-baby' of American industry one last time.
There has been much call for the Auto manufacturers to be given some of Hank Paulson's TARP funds however, in order for them to qualify, they would need to be a bank - not a car manufacturer. This is not as ridiculous a plan as it may seem. GM has a rather large subsidiary, called GMAC, which acts as a finance company for its dealerships. Those buying a new GM car can get immediate financing for their new Hummer in the car showroom and drive out of the car lot minutes later. Given the unprofitable nature of their manufacturing operations, GM chose to use the cheap leverage available through the last economic boom cycle (sound familiar?) to take a leaf out of Tesco's business model and pile these financing deals high so that they could reap the minuscule margins on each sale. And so, as the days of cheap cash came to an end, so did their business model.
The latest twist in the Mid-Westenders saga came to a head today. Because GMAC is a finance company, it aint far away from being a bank. In order to qualify as a bank, they would have to meet minimum regulatory ratios for the leverage on their balance sheet. They needed to tender for a range of bond issues (debt) and offer to buy them back from the investors. The latest results from the tender process came back today and were light-years away from reaching a high enough acceptance of the tender from the bond holders (only 22%). As GM have admitted they have no room for manoeuvre with regards to the price they are willing to pay for the debt, it is unlikely they will be able to increase that tender acceptance rate. That means, they have little chance of meeting the minimum requirements for being a bank and so, little hope of qualifying for TARP funding from Hank Paulson. Put plainly.... No Bank, No TARP. They are doomed to chapter 11 and bankruptcy.
So, it would seem, this $18bn 'green industry' grant, if passed, will lead to nothing more than where they would have been if they didn't get it in the first place - bankruptcy court. The people of Detroit would have been better served if this money was kept back to deal with the fall out from the inevitable redundancies that will follow once real restructuring is done in the attempt to salvage something of the remnants of the US auto industry. Instead, if it is passed, the $18bn will only end up adding a few cents (if its not all spent) onto the recovery value of each bond/loan owned by the various hedge funds and distressed bond funds (vulture investors) that have flocked to the feeding frenzy that has kicked off around the still-breathing carcass of Michigan's first city.
The US administration have put a price of $18bn on their guilty conscience for the part they played in getting Detroit to this point. They would prefer to burn billions of dollars of US taxpayers money in an attempt to distract voters into thinking they did all they could for Detroit, rather than admit their part in leading it to its own self-destruction. Despite the depressing conclusion that looms on the horizon, this is a hoop that America has to jump through. A difficult and cathartic growing pain that will help the American dream evolve into its next manifestation. The sacrificial nature of its impending demise may ultimately ensure the next developmental stage in capitalism however, the difference between Coventry in 1940 and Detroit in 2008 would seem to be the small matter of $18bn of public money. I only hope its legacy is even half as significant....
"Don't do it Guv'nor!"
WNcG
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