An interesting article from Timmy, who makes clearly a point I’ve glimpsed muddily recently. Notice that the point stands, even if you happen to like regulation (I think there is far too much). Permit me to quote (fair use, I’m sure):
Big business positively delights in much regulation… Capitalism… is indeed all about making profit. Get the most out of whatever it is that you’re doing. It’s the market, the competition that it allows, which is what tempers this [] profit gouging. You can’t charge what you like for a pint of beer because there’s another pub around the corner… What regulation does is favour both the incumbents in any activity and also large companies in anything at all. For what worries business is not whether they’re allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.
This affects things like, say, Wonga. If you’re certain that Wonga’s rates are too high, then you think they’re making too much profit. In which case, someone else should want to undercut them. What stops other people? Well, a variety of things, including the need to advertise in order to be known. But also, the vast mountains of regulation you’d need to go through to set up any such operation.
Non-beardy says “I’ve met the head of Wonga and I’ve had a very good conversation and I said to him quite bluntly we’re not in the business of trying to legislate you out of existence, we’re trying to compete you out of existence” (see-also the Gruan). When I first heard this while driving into work I mis-heard it (or slightly more accurately, at that point the news was new, and exactly what he meant by this wasn’t clear): I thought the CofE were intending to actually loan out money, on a commercial-but-nicer basis. Thankfully they aren’t going to do that: it would most certainly have been a total disaster (remember the Church Commissioners financial ineptitude). In principle I applaud his stated intent of out-competing rather than out-legislating them; that would be, in principle, the way to demonstrate that your system is better. But I think that while he might actually do some good, overall he is doomed.
[N.b.: while everyone in the current version of this argument is using Wonga in the generic sense that “Hoover” means vaccuum cleaner, AFAIK they are just one of several such “pay-day lenders”.]
I visited the CofE website to see if they’d laid out their plans carefully there, but they hadn’t. So I decided to use the FT to work out what they are proposing. First of all, there is some rhetoric, or perhaps scene-setting if you’re more generous:
Justin Welby, a former finance executive in the oil industry, has described lenders such as Wonga as “morally wrong” and has compared the industry to Old Testament usurers.
This, too, is a hint to the wise that they’re on the wrong path: traditionally the fight against usury has been a fight against reality. Even now the stricter bits of the Muslim world have absurd bits of financial engineering that dress up interest in order to pretend that it isn’t. But on to the plans:
Dr Welby has… laid out plans to help 500 financial co-operatives, which already provide small loans, to expand their reach by using the Church’s 16,000 premises. He said he was embarking on a “decade-long process” to make credit unions both more engaged in their communities and “much more professional”. He has already launched a new credit union for clergy and church staff at the General Synod in York earlier this month.
This might do some modest good. I have no personal experience of this stuff, but I can easily believe that there are a number of financially-pressed folk who could do with useful advice, and possibly some actual help.
However, I strongly suspect that there is also a block of people who have a reasonable understanding of what is going on, and simply need a loan, and no-one else is going to give it to them, which is why they go to the likes of Wonga. And if you’re making smallish loans to financially pressed people with little or no collateral, then you’re going to have high expenses and you need to make money to cover the inevitable default rate (see-also Timmy). I haven’t checked, but I rather doubt that Wonga is making ginormous profits. If it was, it wouldn’t be for long, as others would pile into the sector and margins would fall. If it isn’t making enormous profits, then its margins aren’t excessive. QED.
But I have to admit, Dr Welby is a model of sanity compared to idiot politicians such as:
Stella Creasy, a Labour MP who has campaigned for a cap on credit costs and a wider crackdown on payday lenders, welcomed Dr Welby’s intervention, but said: “It should not take divine intervention to deal with this problem. It is very easy to fix.”
You have to be a complete moron, or a complete liar, to assert that this problem is “very easy to fix”.
[Update: I’m pleased to say that the Tories, fed up with falling behind in the talking-utter-drivel stakes, have made a late – and, it looks to me, winning – entry in the “Oh good grief I really can’t believe that even a politician would be dumb enough to say that” competition:
I’m sure my headline is over-optimistic. But its certainly looking good, compared to the doom-laden view mid week. And (insofar as I can tell, not having any specialised insight) the correct solution has been found – so much so, that you might wonder why it wasn’t found immeadiately. And that solution, in brief, is to honour the guarantees for deposits of less than 100k euro, close the most broken bank, and impose losses on those with more than 100k euro.
The bit I find interesting is the Russian perspective. The original bad deal – losses on accounts above 100k limited to 10% – was clearly a result of “pressure” from Russia, though in what form its hard to say: it could have been anything from direct corruption of pols, to as little as those same pols not wanting to piss off the Russians to avoid losing future business. Was the pressure coming from teh Russian gummint, or from the dodgy folk who had parked their tax-avoiding money in a quiet offshore corner? And mid-week, when their finance minister was off in Russia trying to do some murky deal, it all looked very dodgy: Russia poised to snaffle up Cyprus because the EU were too skinflint to help it. But then: all that fell apart. The Russians weren’t interested. From which I draw the conclusion that they have no spare cash to push their imperial ambitions.
There’s a fun quote from some lawyer: “Since last Saturday, we are just answering calls from angry clients,” said the lawyer, whose firm has helped Russians and Ukrainians setup 6,000 companies in Cyprus so that they can avoid taxes, benefit from a sound legal system and, they hoped, keep their money safe. Cyprus still offers those draws, he insisted, but his clients “thought we had betrayed them.” Notice the bizarre juxtaposition of “avoid taxes” and “sound legal system” but in the end, they did indeed get a sound legal system, and are wishing they hadn’t.
[Update: as some of my commenters have pointed out, the “haircuts” imposed on the depositors seems rather high. Timmy has what looks like a plausible explanation for this – that only two banks are now affected. It has some interesting consequences.]
Refs
* Timmy, as usual, is on hand to point out economic illiteracy in the meeja.
* Economist: interview with Athanasios Orphanides has harsh words for the former prez, and for the Krauts
What could possibly be a more coherent, convincing and above all evidence-based argument than this?
SIR – You were wrong to attack the financial-transactions tax (FTT) that is being implemented by 11 European Union states (“Bin it”, February 23rd). You dragged up the bad experience of Sweden, which ditched its own FTT in 1991. But even the IMF has accepted that the Swedes had simply failed to design their tax well enough. As Algirdas Semeta, the EU commissioner on tax, recently said, Sweden invented a bicycle with square wheels.
We are campaigning to get the financial industry to pay for some of the damage it has caused. There are sensible arguments to have over the impact of an FTT on volatility, liquidity and the cost of capital. But the real issues at the heart of the matter are whether democracies control the capital markets or not, and whether finance serves the real economy or vice versa. The people are on our side. There comes a time when even The Economist should stop defending the indefensible.
Basically it amounts to “shut up, witches, or we burn you”.
Mind you, that’s not as Orwellian as “Exorbitance cannot be allowed in a free and socially minded society…” (my bold). Guess who.
I’m referring to the fools trying to p*ss around with how banks pay their staff. It am all over de noos, and to spare the blushes of some of my more delicate readers I won’t refer you to Timmy, you can have the Graun instead: Don’t cap bank bonuses, scrap them. The EU’s plan to cap bonuses sounds like good news – but it may simply lead to banks jacking up salaries. Yes, you idiot, that’s exactly what will happen. And notice the follow-on idiocy: capping bonuses leads to increases in basic pay, so lets cut bonuses entirely! That will surely lead to… yes, that’s right, yet more increases in basic pay.
The basic problem here is there is a fair segment of the population / chatterati that are really really jealous of people being paid more than them for what they think of as little work. In fact they are completely wrong: its a lot of work (at least the only guy I know in banking regularly leaves the house before his kids get up and gets back after they are in bed). So they want bankers to be paid less. But being utterly ignorant of basic economics, they don’t seem to realise that the bankers are not being paid because the banks like throwing money away; they’re being paid because the banks think they need to (banking isn’t easy, its fiercely competitive, you do it wrong with not-quite-top-grade people and you get stuffed). So if you restrict bonuses, then basic salaries go up (aside: if you’re an I-hate-bankers type person this has one good consequence: in bad times, staff have to be fired, because their basic salaries are high. When they had low-basic and most of they renumeration via bonus, they could be kept on with just basic in bad times).
The correct solution to all this is for the State not to be intervening in private enterprise if it doesn’t need to. This is almost entirely lead by jealousy and stupid pols trying to make a name.
[Late addendum 2013/03/09, added for my own benefit after reading the Economist, but it just highlights something I thought already: the reason that all this I-hate-bankers is being spread by the pols is because, well, its great to have scapegoats. So no-one, or at least certainly no pol, is willing to stand up and defend them. For which, ter be ‘onest, they’ve really only got themselves to blame – they’ve been content to rake in the money, and feel non-accountable and hidden -W]
The question, which is the better man, is determinable only in the estate of government and policy, though it be mistaken for a question of nature, not only by ignorant men, that think one man’s blood better than another’s by nature; but also by him, whose opinions are at this day, and in these parts of greater authority than any other human writings (Aristotle). For he putteth so much difference between the powers of men by nature, that he doubteth not to set down, as the ground of all his politics, that some men are by nature worthy to govern, and others by nature ought to serve. Which foundation hath not only weakened the whole frame of his politics, but hath also given men colour and pretences, whereby to disturb and hinder the peace of one another. For though there were such a difference of nature, that master and servant were not by consent of men, but by inherent virtue; yet who hath that eminency of virtue, above others, and who is so stupid as not to govern himself, shall never be agreed upon amongst men; who do every one naturally think himself as able, at the least, to govern another, as another to govern him. And when there was any contention between the finer and the coarser wits, (as there hath been often in times of sedition and civil war) for the most part these latter carried away the victory and as long as men arrogate to themselves more honour than they give to others, it cannot be imagined how they can possibly live in peace: and consequently we are to suppose, that for peace sake, nature hath ordained this law, That every man acknowledge other for his equal. And the breach of this law, is that we call PRIDE.
[Update: in the comments, there are complaints about Hobbes’s use of “man” to encompass both genders. My answer is that Hobbes merely used the commonplace words of his time as did (for example) the US Declaration of Independence. But elsewhere he does treat explicitly of the equality of the sexes, for example in Elements, Chapter XXIII “And therefore the man, to whom for the most part the woman yieldeth the government, hath for the most part also the sole right and dominion over the children. And the man is called the HUSBAND, and the woman the WIFE; but because sometimes the government may belong to the wife only, sometimes also the dominion over the children shall be in her only; as in the case of a sovereign queen, there is no reason that her marriage should take from her the dominion over her children”. So it is clear: in his theory, the genders are equal; but he does note how things work in the societies he has observed.]
There has been an awful lot of fluff written about the LIBOR fixing stuff in the past week or so. Which is why I looked forward to my friday afternoon at home reading the Economist – in a brief patch of sunshine even – and getting a more considered opinion, and perhaps even some facts. They seem to take it all very seriously, whereas it seems to me there is an element of moral panic in the air (hey, you’re here because you want my opinions – if you want informed opinion, go read an economist).
First, a throwaway thought: Barclays is suffering from having “come out” of the closet first. This looks to me like a bad miscalculation on their part: they thought they would get credit for cooperating and coming clean. Instead, they are taking all the flak. Others, I’m sure, will learn the lesson from this and start dragging their feet: who would want to be number 2? Far safer to be number 10.
..two types of bad behaviour. The first was designed to manipulate LIBOR to bolster traders’ profits. Barclays traders pushed their own money-market desks to doctor submissions for LIBOR (and for EURIBOR, a euro-based interest rate put together in Brussels). They were also colluding with counterparts at other banks, making and receiving requests to pass on to their respective submitters… This bit of the LIBOR scandal looks less like rogue trading, more like a cartel… The second type of LIBOR-rigging, which started in 2007 with the onset of the credit crunch, could also lead to litigation, but is ethically more complicated, because there was a “public good” of sorts involved. During the crisis, a high LIBOR submission was widely seen as a sign of financial weakness. Barclays lowered its submissions so that it could drop back into the pack of panel banks; it has released evidence that can be interpreted as an implicit nod from the Bank of England (and Whitehall mandarins) to do so. The central bank denies this, but at the time governments were rightly desperate to bolster confidence in banks and keep credit flowing. The suspicion is that at least some banks were submitting low LIBOR estimates with tacit permission from their regulators.
That isn’t a new distinction, of course, just what is obvious to anyone who has thought about it.
Start at the end
Lets look at the second bit first. Here is a nice graph I ripped off from them:
Now you need to know another Killer Fact: LIBOR is a trimmed average: they take quotes, throw away the top and bottom quartile, and average the remainder. Which means: if you’re the top quote, and you reduce your quote down to being just above the 4th-top, then… nothing changes. And it looks to me like that holds true for Barclays up till, say, early December 2008. After that its hard to say: you’d need to do a more careful analysis to see (but the Economist says In its settlement with regulators, Barclays owned up to massaging down its own LIBOR submissions so that they were more or less in line with those of their rivals. It instructed its money-markets team to submit numbers that were high enough to be in the top four, and thus discarded from the calculation, but not so high as to draw attention to the bank (see chart 1). “I would sort of express us maybe as not clean, but clean in principle,” one Barclays manager apparently said in a call to the FSA at the time.). And as the Economist points out, there were several other banks during that period producing far far dodgier submissions.
The other factoid about those times, of course, is that it was during the Great Panic, and no-one wanted banks to collapse if it could possibly be avoided. Having to pay a high interest rate was a bad sign, which is where the contacts with the BoE come into play:
Mr Tucker stated the level of the calls he was receiving from Whitehall were “senior” and that while he was certain that we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.
Apparently Tucker (deputy BoE chair) insists that he wasn’t asking Barclays to massage its quotes down, oh no indeed not at all who could possibly think such a thing, and the Economist gamely tries to believe him, but… no. At such a time, that’s a bit of a heavy hint, isn’t it? I think its clear how you’d interpret it. So the regulators were complicit, and indeed this was “ethically more complicated” because it may actually have been good, not bad. We all tell little white lies on occasion.
LIBOR fixing of the first kind
Which brings us back to the bit I ducked, the first round of LIBOR fixing, where the traders and the quote-givers were collaborating. No-one has a good word to say for this, and even Diamond says this was “reprehensible”.
Who ya gonna sue?
The worst aspect of this is probably the vast quantities of pork that will be thrown at corporate lawyers and a variety of injured, possibly injured, and not-at-all-injured-but-doing-their-best-to-throw-a-foul folk line up to see what they can get (bloody Radio 4 wasn’t immune to this, the fools). Almost inevitably some people will have lost and some gained; those who’ve lost will want recompense but those who’ve gained won’t want to hand anything back. Perhaps happily, it will be in many cases quite unclear who has been affected.
Fixing it
There is a whole load of pap about reestablishing trust, which I’m not sure I believe (its just like making laws or sausages). For LIBOR, the obvious fix is to move to actual rates used rather than guesses, since those are verifiable and much harder to game (yes there is a problem with various currencies and maturities, but with actual rates to pin the structure the guesses for the holes matter much less).
But there is one ray of hope: apparently its a political fight to the death so there may be a few fewer pols around.
[Update: oh yes, I forget the disclosure: I own shares in Barclays]
Update: Tucker: “I’m clueless”
As expected, Tucker appeared before MPs and said he was clueless about the manipulation, and oh no indeed not at all did he ever suggest or even imply that any manipulation would be a good idea, good gracious how could you possibly suggest such a thing?
According to his memo, Mr Diamond explained to Mr Tucker that “not all banks were providing [LIBOR] quotes at the level that represented real transactions.” Mr Tucker told the committee that he took this to mean that other banks, which had submitted LIBOR quotes, but did not need to raise cash, had under-estimated their likely borrowing costs. He did not interpret Mr Diamond’s remarks as blowing the whistle on the misreporting of LIBOR, Mr Tucker said—and that he wasn’t aware of any allegations that banks were deliberately “low-balling” LIBOR rates until very recently.
which is incoherent. Barclays told him that people were lowballing estimates, Tucker understood that people were lowballing quotes, but he wasn’t aware of any allegations that people were lowballing quotes. Tucker had a hard line to try to hold: he was innocent, obviously, and hadn’t a clue that Bad Things were going on (obviously, or he’d have done something about it, obviously). But there is no way to reconcile that with actually having a clue and being competent, and it doesn’t seem that he tried to do that last bit. The Economist are still being very easy on Tucker; I can’t see that being from shiny motives.
Refs
* There are some interesting graphs but (IMHO) some dodgy conclusions at The Aleph Blog. This one makes more sense, though.
* Plumbum.
* Timmy reports the Torygraph.
* Balls is a vampire, says Osborne
There are any number of things wrong with that piece, but the headline “How £50m in UN food aid for starving went to buy wheat from Glencore” pretty well sums it up. Its a lie, of course: what actually happened was that the UN spent £50m buying grain; only a small fraction of that is profit. And why did the UN gratuitously spend this money? Because they were the cheapest supplier, of course.
But the whole tone of the piece is drivel. Take Glencore International, which buys up supplies from farmers and sells them on at a profit. What is this supposed to mean? Are we to take it that buying and selling grain is evil; Is it surprising? The statement is just a matter of the bleedin’ obvious, but is presented as yet another item in the charge sheet against Glencore.
The UN seem to have somewhat left themselves open to this Guardianista nonsense, by having said “Our new motto is to help people feed themselves,” Josette Sheeran, the executive director of the WFP, told China’s state news agency. “When we can, we purchase our food from the very poor farmers who suffer because they are not connected to local markets.” But you can see the problem, of course. Setting up an organisation capable of finding farmers so poor they don’t even have access to local markets, and redistributing that grain, would be a huge task. And one that I’d rather entrust to someone like Glencore than the UN, ter be ‘onest wiv yer guv.
There is a fascinating article from Bronte Captial about the Euro Fix.
The story so far, if you’ve forgotten: the ECB can’t be a lender-of-last-resort to governments, because it isn’t allowed to (from memory, the Krauts say No). But in a transparent fix, it is allowed to lend to banks, if those banks put up suitable collateral. And it has said, lo, government debt, that is good collateral. And so 500 bn has been loaned.
Why, as a bank, would you want to buy shonky govt debt? Because dodgy Italian debt yields 6% or so at the moment, and lord knows what the Greek stuff provides. But the ECB loans are at 1%. With the difference yielding 5% pure profit risk-free (ahem), hooray. The downside, of course, is the long-term capital risk.
The Bronte article is speculating on the likely conflicts between the banks’ traders – who can presumably see the short-time huge bonuses coming out of the short-term profits, all sanctioned by the Euro-governments desperation to get the banks to buy the debt – against the Risk Dept., who probably don’t want to touch it with a bargepole.
When the referendum was announced a few days ago, some thought he had played a blindingly good political hand. Which just goes to show that economists aren’t so great at politics and the cobbler should stick to his last. Which is why I’m commenting, obviously. But the argument – that he had magically got out of a difficult position (the Greek public didn’t like the deal that was struck, this was he evaded responsibility, and maybe the need to buy off the public might result in a better deal) sounded quite plausible to me. The downsides were that the rest of Europe wasn’t going to like it, and also that while it might have been good politics it wasn’t clearly good economics.
And that seems to be what the Greek political class has decided:
George Papandreou opened emergency talks with his opponents, who performed a U-turn and agreed to broad austerity measures in exchange for a European bailout.
Faced with the deal falling apart the opposition seem to have been forced to abandon their opposition and agree that yes, they really think the deal is the best solution after all. Which at this point looks good: politicians forced to abandon posturing and consider the good of their country for fear of what their ignorant public might decide if left to themselves.
wmconnolley: scienceblogs.com/stoat archive 