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