How do BSs raise more capital, pray tell?
February 29, 2008
For starters, the Yanks don’t have the term “negative equity”. I tried to tell them by commenting on this CNN story, but it seems CNN is another site where they get you to write a comment and nothing happens. I won’t bother in future.
But this NYT story is breath-taking. It seems the US is the land of the free, yes sirree, you’re free to walk away from your mortgage if it turns “upside-down”! Unbelievable. I hope they realise that no-one (stupid foreigners) is ever going to lend them (the US) money to buy houses ever again. And they’ll probably be very careful what else they lend it for. Talk about moral hazard, eh, Merv?
There was an excellent Cambridge Energy Forum (CEF) meeting on aviation yesterday. As someone said there, it’s astonishing that flying is now a sin. Is this really justified? Do we all have to stop flying? How can we reduce carbon emissions from flying?
It turns out that some work is already taking place to develop (small) aircraft powered by electricity. This could be scaled up, or a development path via hybrids to minimal reliance on liquid fuels.
I drafted the rest of this post in response to an email before the meeting, but nothing was said there that changes my mind – I’m now just somewhat better informed!
I intend to address the thorny issue of aviation in the book I’m (slowly) writing. I don’t agree exactly that the aviation industry should create technologies such as CCS (companies, in my view, should do what they do best), but it should certainly pay for them.
There is a clear economic problem to be overcome if the goal is to reduce carbon emissions from flying. If you just put a price on carbon, or on fossil fuels for that matter, then you introduce disincentives for different activities disproportionately, because, (among other reasons) fuel costs are a different proportion of the total cost of different products and services.
Consumers would still quite happily fly at a carbon cost of $100s per tonne [as was pointed out at a recent CEF talk, if I recollect correctly], but at such levels people would be switching away rapidly from other uses of carbon fuels, e.g. road transport, power generation. Incentives for suppliers to introduce technological changes depend on (inter alia) (a) competition from substitute products – for long-haul flights this will only become significant at a very high price for carbon (for business travellers, the cost would surely have to be $1000s/tonne) and (b) the availability of alternative technologies and the cost to introduce them. It is politically impossible to go straight to a carbon cost of $100s. Therefore, if we simply put a (gradually increasing) price on carbon, the aviation industry will continue to grow for some decades. George Monbiot reaches a similar conclusion, I believe, just by considering possible alternative technologies (an incomplete argument). If the policy agenda is to simply impose a flat cost on carbon emissions, then, by 2050 (say), the global economy will be hugely dependent on an unsustainable mode of transport, making it difficult to achieve further emission reductions.
So we have two distinct reasons for taxing aviation emissions more than other emissions:
(1) the additional Radiative Forcing of aviation emissions (because they take place at altitude);
(2) the need (because of the urgency of the GW problem) to encourage technological innovation in aviation and the development of substitute products (high speed rail, etc.) in parallel with, rather than after, other technological changes (such as the decarbonisation of power-generation and road/rail transport).
It seems to me that it is therefore a no-brainer to impose additional costs on aviation emissions beyond a carbon cost proportional to emissions. It seems logical to use these to pay for CCS, the idea being that once we reach the point where we can afford zero net anthropogenic GHG emissions, the aviation industry will have to pay to capture a multiple (based on the scientific assesssment of the damage of high-altitude aviation emissions) of its GHG emissions (though such an equation would not be climate neutral). Obviously the carbon sequestered shouldn’t come ultimately come from fossil-fuel burning, that would be double-counting, i.e. aviation has to pay for both extracting carbon (and/or other GHGs) from the atmosphere and sequestering or destroying these GHGs.
I wouldn’t completely write off the possibility of decarbonising aviation, though. There are certainly a lot of efficiency savings that could be made (I guess we’ll hear about some of these later today), but, apparently, experimental entirely solar-powered aircraft have been built. My idea (OK, just a thought-experiment to support my argument for the possibility of zero carbon aviation) is to increase the energy available to aircraft by putting up a few (thousand) satellites with computer-controlled solar reflector arrays (any old orbit will do, computers will be able to deal with the problem). Solar-powered aircraft would book slots for satellites to focus light on them (note the word “focus” – nothing below or above the aircraft need get fried). Just an idea, but maybe it could reduce emissions at altitude, which is where you want to get rid of them. (There is also a multiplier effect to be exploited, since, with an external energy source, an aircraft could fly higher for a given onboard fuel to payload weight ratio, reducing air resistance. Also, we should be able to focus a lot of light on solar panels on top of an aircraft, since the surface would be air-cooled). At the airport, an alternative way of using external power would be to accelerate aircraft using electricity (why stop at towing them to a stationary stop at the start of the runway?), e.g. maglev ought to be able to get you to take-off speed. Obtaining power this way during landing could be tricky, though, but maybe after the recent incident at Heathrow, it might be a good idea to develop non-powered landing techniques purely involving drag and braking, anyway! I’m a bit surprised, really, that carbon-fuel free flying isn’t one of the 14 great engineering challenges: http://www.networkworld.com/community/node/25219
Campaigning to prevent runway development is not the way forward, IMHO, since:
(1) It’ll simply displace economic activity that causes flying, i.e by the Displacement Fallacy, the available fuel will simply be used in China, India, Africa… rather than UK.
(2) It may have unintended consequences and reduce opportunities for efficiency savings.
(3) It second-guesses where technological breakthroughs will occur – i.e. what if we manage to decarbonise flying before, say, shipping, and are left without enough airport capacity?
(4) It pisses people off, motivating political opposition (and I’m sure there will always be people who want to do less about GW than others).
My alternative proposal would be to turn airports into more general transport interchanges, adding high-speed rail connections to take advantage of the existing local transport infrastructure that currently only supports air-travellers. This would encourage people to switch transport modes, perhaps initially for part or one leg of a journey. Btw I worked out recently that you could save around 10%, on average, of total journey carbon emissions if you simply got people to take the train rather than drive to Stansted. But I bet you FoE et al would object that improving rail services from, for example, Cambridge to Stansted would “encourage people to fly”. But I’m starting to digress…
It seems to me that a practical first-step would be for (say) the EU and US to get airlines to fund CCS trials, either via a levy/tax or through a voluntary agreement with the industry. We need to know a lot more about the viability and likely costs of CCS, ASAP. There are huge policy implications if the potential of CCS has been overblown (or understated, but that’s never happened before in the whole of human history for a technology at this stage in its development!).
February 27, 2008
This is positively my last post on Northern Rock.
I’ve recently taken to listening to Radio 4 in the mornings. As a communication medium TV has much greater bandwidth than radio (visual awa aural), so why do they fill it with garbage?
Anyway, yesterday we had the former Treasurer of the Rock, who noted passim that “a £5bn problem” was turned into a £25bn one by the bungling authorities. Would have been nice if he’d broken cover before nationalisation. Still, it’s more than his successor has done – he’s quietly left the bank. Not surprisingly, since basically liquidity is a Treasury issue and I presume it’s the Treasurer’s job to stand up to a Chief Exec who gets carried away.
Today we had Hector Sants of the FSA, who explained how it would all not have happened had they paid a little more attention to NR. What self-serving twaddle! Any system that relies on a single group of experts (a) seeing something that’s going on that no-one else (auditors, the markets) can, and (b) being able to quietly solve the problem behind closed doors, will always fail. No, the Tripartite Authorities need to concentrate on setting objective liquidity (and other) measures for the banks, that can be policed not just be the FSA, but by the market and the banks’ own internal and external auditors. Because liquidity is a collective property, the behaviour of the BoE also needs to be predictable – i.e. to inject liquidity into the markets if particular thresholds are crossed. The 19th century approach Sants and King would like (I wonder why) is no longer appropriate. We need “water” – transparent liquidity – management. Planet Hector must resemble Mars.
After the Guardian rejected my exceedingly witty letter, I thought of writing a piece for their “Reply” column. Trouble is, the issue will now have to be resolved in court, so bashing my head against a Rock trying to change a few minds can no longer have any real world effect, so I left it unfinished. Here’s my draft, anyway:
“Public support for the nationalisation of Northern Rock is based on a misunderstanding. The false impression has been given that nationalisation is the least risky option for the taxpayer. In fact, two private sector proposals were rejected last weekend because the Government judged the potential to be too low for profit to accrue to the public purse.
The shareholders’ preferred option was that of the in‑house management team, led by Paul Thompson. This proposal included a rights issue of £700m. The shareholders would have invested another £700m in the bank. This will not now happen. By nationalising the bank, the taxpayer is therefore taking more risk than necessary. As a Northern Rock shareholder, I am baffled that the Government has spurned my offer to take on this risk, and distressed to be vilified in the Guardian and other media.
Northern Rock would have been managed similarly whether nationalised or not. Bryan Sanderson has said that he will operate “at arm’s length” from the Treasury. Even if it had not nationalised the bank, the Government could have imposed constraints on the payment of dividends and the extent to which Northern Rock could take on new business.
It’s perhaps worth remembering that among the people who will suffer most as a result of this fiasco are financially stretched Northern Rock mortgage-holders. The essence of the situation is that Northern Rock is simply an institution established to intermediate between those prepared to lend money and those who wish to borrow it. Following the run on the bank, Northern Rock now has a lot less money to lend. Something has to give. It seems that the nationalised bank intends to try to drive mortgage business away at the end of existing fixed-rate periods. But some mortgage-holders will be unable to find another lender, because every bank has reduced the maximum loan-to-value ratio it is prepared to offer, and, in any case, house prices are starting to fall. The most vulnerable homeowners will be forced to remain on expensive variable rate mortgages with Northern Rock. As a shareholder right up until nationalisation, it’s difficult to reconcile the moral opprobrium heaped on myself with the fact of the matter that borrowers were let down by depositors. Hadn’t they seen “It’s a Wonderful Life?”.
Under the Thompson proposal shareholders would have put another £700m in Northern Rock. It is completely untrue that the taxpayer would have been “retaining all the risks”, as claimed by, among others, Vince Cable, on this week’s BBC Question Time. Let’s imagine that there is indeed a serious house-price crash in the UK, and, in a couple of years it becomes clear that Northern Rock is insolvent. If the bank had remained private, the shareholders would have lost everything, including the £700m of fresh capital. In the same scenario under nationalisation, the taxpayer will have to cover all the costs. The taxpayer will be at least £700m worse off under nationalisation than with the private sector solution. It’s a shame that so much energy has gone into pouring vitriol onto shareholders, and so little time spent understanding their role. I’m no happier with the state of Northern Rock than any other taxpayer, but, unlike most, I would have been prepared to invest more money in the bank with the risk of losing it all. Now, every taxpayer is having to take on that risk.
Two typical comments have caught my eye this week. Will Hutton referred (in a Comment piece in the FT) to the “Northern Rock shareholders’ extraordinary sense of entitlement”. And someone left a message instead of their name on a petition on the Downing Street website: “ffs shareholders should know the risks – u deserve nothing”. But during the run on the bank, the government guarantee to depositors was dramatically improved, at great risk to the taxpayer. No‑one said: “ffs depositors should know the risks”. Perhaps that’s why shareholders expect to be treated a little more fairly than they have been.
The nationalisation route has been taken for purely political reasons, and is certainly not the least risky option for the taxpayer. From a shareholder point of view it is laughable for the Government to tell shareholders such as myself that we’ll be treated as if the bank is being wound up, when in fact it is being run as a going concern. Naturally, if the Government does find an “independent” arbiter willing to accept the terms of reference it is proposing, I’ll join with other Northern Rock shareholders in taking legal action, as long as I consider it likely that a judge will see the situation my way. Otherwise, I’ll have to shrug and walk away. The Northern Rock shareholder could have had such a beautiful relationship with the taxpayer. Now I guess we both feel as if we’ve just been screwed.”
That’s it, there are other fish to fry. See you in court, Darling.
February 25, 2008
I’m using BS to stand for Building Society, and b.s. for a more vernacular phrase!
One amusing cameo during the Northern Rock debacle was by the ONS, which ruled that the Bank of England loan and guarantees to the Rock should be counted as part of the national debt. Yet the national debt does not include the guarantee on all bank and BS deposits (up to £35K). This comes to much more, several hundred billion is my guesstimate. Is the taxpayer safe?
A few days ago, I received an annual statement from what I shall term, to protect the innocent, Piggy BS. As far as I know, Piggy is a typical BS. What with all this Northern Rock business, though, I thought I’d have a quick look, rather than filing the leaflet in the wpb immediately. And it makes surprisingly interesting reading.
Piggy helpfully provided some ratios:
- the liquid assets ratio is a whopping 25%, that is, it could meet investor withdrawals of a third of the size of the mortgage book! Impressive.
- its gross capital ratio is 6.2%. That is, shareholders capital is 6.2% of shares (i.e. account balances) and borrowings, and obviously about 8% of mortgages (since the liquid assets ratio is 25%).
8% doesn’t seem a lot to me (though I’m not claiming great expertise, merely trying to make some simple points), since this sort of capital ratio is considered appropriate for diversified banks. And Piggy only invests in one thing. “Huff, puff”, says the big bad wolf!
Anyway, if 16% (by value) of Piggy’s mortgagees hand in the keys, and it can recover only 50% of its loan on each property, it would be pork pie time.
Looking a little closer, it gets a little worse than this, since some of Piggy’s capital (OK, only about about 5%) is a “revaluation reserve” on – yes , you’ve guessed it – property, i.e. its own offices. Since it’s a reasonable guess that the market value of this property will be correlated with the property Piggy has kindly mortgaged, this reserve might go negative (from +5% to -5%) over the same period as its mortgage book deteriorates. So let’s say we only need 14% of our customers to default.
Still, not a very likely scenario even though Piggy has increased its mortgage book over the last year by about £1.5bn – three times reserves and more than twice total shareholders’ capital – implying that a lot of the mortgage book – maybe a third of the £10bn total – is recent lending and therefore vulnerable to a house price crash. But more than 1% defaults in a year would be extreme – in fact, catastrophic, since “impairment losses” are currently running at less than 0.02% of the mortgage book – so even a decade long housing bear market should be sustainable.*
Bricks not straw so far.
But Piggy also provides a couple of other ratios:
- annual profit is 0.37% of total assets (i.e. of about £10bn mortgages + £3bn liquid assets);
- management expenses are 0.56% of total assets. Seems a lot. If mortgages average £100K, management of each costs about £700/year!
Looking at it this way, it’s not quite so rosy. Defaults of 1% (by value) or more of the mortgage book would wipe out profits for a given year. A few years of this, and we would start to lose shareholder value.
It’s worse than this, though, since the fees on modern mortgages are front-loaded, i.e. they’re arrangement fees and so forth. So, profits will deteriorate even if there’s a downturn in activity.
And we’d all start to worry long before Piggy goes bust. I suspect Piggy would have to find a Miss Piggy to merge with if, over a period of time, its reserves halved (say) from current levels. If there is a housing market crash expect some action in a few years time.
It’s not Piggy we should really be worried about, though. No, Darling’s generosity on our behalf suggests it’s systemic problems we should be worried about. I’ve already mentioned how BS balance sheets could deteriorate if 25 year mortgages become faddish (remember endowment mortgages) and interest rates rise significantly. Of course, if all this is accompanied by a recession, falling house-prices and increasing delinquency rates (though long-term mortgages do militate against this, somewhat) the BSs would face a double whammy.
But what really gets me is that the BSs have no apparent means of rebuilding their balance sheets. They can’t ask their shareholders for more money, like the banks can. The Government would ultimately have to pick up the enormous tab. We only need the mother of all housing crashes once and the BSs are all toast, (or bacon). I just don’t see how they could sustain losses year after year indefinitely. And some markets do drop 70% or more. There’s absolutely no reason why this can’t happen to the housing market in the UK. And, as I said before, it has happened in the US.
As I say, though, I’m not claiming to be an expert. This could all be b.s. You decide. Me, I’ll look at Piggy’s next annual statement even more carefully.
* Postscript (1): Maybe a long bear market would not be quite so survivable after all. I now read in the FT that “1.1 per cent of mortgage borrowers were in arrears at the end of 2007”. Crikey! This can’t be right, can it?
Postscript (2): And the default rates in some parts of the US are quite hair-raising (AP via Yahoo):
“During the past year, 30 states saw an increase in the number of homes that had received at least one filing. Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said. That translates to a rate of about one foreclosure for every 167 households.” [My emphasis.]
…for micro-generation of solar power, geddit? Here comes the sun… oh, forget it!
Is the Guardian trying to piss me off deliberately? Not content with trying to convince me that it makes good sense for the taxpayer to pay a premium rate to savers, they’ve started a dawn chorus (which occurs as we start to be warmed by solar power every morning – oh, never mind!) in praise of feed-in tariffs.
I remember that for reasons I can’t quite recollect I became much vexed about this a little while ago. Searching my hard drive, I find I actually went so far as to write to a letter to the Guardian editor on the matter. They didn’t publish it, so I will:
“Your Leader “Windy words” (December 11) supports David Cameron’s suggestion that using “feed-in tariffs” to encourage micro-generation of electricity would be the best way for the UK to boost its production of renewable energy (Tories see 1m households selling electricity back to the suppliers, December 6). In fact, feed-in tariffs for micro-generators would be an extremely expensive way to increase renewable energy production.
The most popular micro-generation technology would probably be roof‑top photovoltaic solar panels, since it now seems that domestic wind-turbines have the slight drawback of generating only miniscule amounts of electricity.
But feed-in tariffs for solar panels would be an inequitable subsidy, since, if they are to succeed in stimulating investment, the rate paid to micro-generators per unit of electricity would have to be several times the retail electricity price, as it is in Germany. The result would be to increase everyone’s electricity bill in order to provide a guaranteed income to those with large roofs and the financial resources to invest in solar panels, a demographic one might term “the Camerons”.
There is certainly a case for obliging suppliers to buy micro-generated electricity at or just below the retail price, as this would force them to overcome the barriers of organisational cultures and legacy infrastructure geared to purchasing from a small number of large-scale power generators. But forcing them to pay far more for micro-generated electricity than they can sell it for, for many years, through guaranteed feed-in tariffs, in order to make expensive micro-generation technologies financially viable for wealthy home-owners, would not only distort the market but also lock us all into paying a higher price than necessary for all our electricity, including that from other renewable sources. Since electricity carries no information about its source, there would also be considerable scope for fraud, especially if electricity prices fall in the future.
Yvette Cooper outlined (Letters, December 7) how the Government intends to use the planning process, rather than feed-in tariffs, to encourage micro-generation of electricity. This has the advantage of merely raising housing costs for everyone, rather than forcing the poor to subsidise the rich. But if the “zero-carbon” homes to be built from 2016 do still require electricity, albeit less than existing houses, why pay more to generate it locally just for the sake of it? Given the huge costs involved, we will ultimately be compelled to generate renewable energy in the most efficient way possible. This is much more likely to be by building offshore wind turbines than by paying David Cameron to put solar panels on his roof. Pretending otherwise makes it even more difficult to reduce our carbon emissions.
In contrast with David Cameron’s and Yvette Cooper’s expensive initiatives to encourage local power generation, the existing Renewables Obligation provides an effective incentive for electricity suppliers to provide us with an increasing proportion of renewable energy in the most cost-effective way.”
Let the poor subsidise the rich!
I should note that ideally the Renewables Obligation (RO) would be technologically blind, so that old ladies trying to stave off hypothermia invest their pennies in the most cost-effective renewable energy at any given point in time. In fact, though, some technologies are more equal than others under the RO.
Pleased to find it’s not just me – once again another Tim agrees.
There are voices of sanity out there. Tim Congdon has written several sensible pieces on the Rock affair in the FT. He points out in the latest that the ECB has bailed out the Spanish banks in a way the BoE refused to do for NR. I’m a little surprised, though, that he doesn’t mention that at least one Spanish bank – Santander, which owns Abbey – directly competes in the mortgage market with UK banks. They – and all other European and US banks who might want to operate in the UK retail market, perhaps by snapping up A&L, B&B or even NR itself – have now been put at a significant competitive advantage. Knowing how the ECB will behave in a liquidity crisis, they now know they need to maintain less liquidity than their UK peers and can therefore use their capital more efficiently.
But, from a BoE view, of course, the NR cock-up has been self-defeating. No major bank operating in the UK market will ever allow itself to be totally reliant on the BoE again. They’ll make sure they can also draw on funds from the ECB, the Fed and/or other central banks. Presumably they need to retain a relationship with the BoE if they want to offer banking services in the UK, but they will rely on this as little as possible. The BoE will become marginalised. Hmm, maybe I’ll see the day when I buy my UK daily paper with euros.
Unless, of course, the BoE lets everyone know that it has learnt lessons from the liquidity crisis, and will take specific actions – working in concert with other central banks as central banks should, or they’re not really central, are they? . Scapegoating Northern Rock makes it more, not less difficult to calmly identify what mistakes were made by who, and what policy adjustments should be made by whom. And, of course, so does reappointing Mervyn King. Perhaps we should start calling the BoE the UK’s peripheral bank.
Postscript (1) : An article in the Telegraph this morning shows exactly how small UK banks (and building societies) are being penalised by having to use a back-door (larger UK banks with a direct relationship with the ECB) to access liquidity in the euro which is unavailable in sterling. Of course, the British consumer will ultimately pay for this. The Telegraph reports that: “Bankers said the fact that UK lenders were having to access the ECB through the back door exposed failures at the Bank of England.” Quite.
Postscript (2): And the Guardian notes that “… mortgage experts are trying to predict the winners from the credit crunch and concluding that Abbey could come out on top because of the funding available to its Spanish parent, Santander, through the European Central Bank.” Surprise, surprise.
February 23, 2008
Wunch, n.: a population suddenly expert in a highly technical domain in which the vast majority have no qualifications whatsoever.
It’s amazing how the media – if not the British people in general – have suddenly become expert on retail banking.
They’ve decided, for example, that bank charges for overdrafts must be much reduced. Maybe they’re right: maybe these charges are excessive. But they’re certainly a deterrent. I can’t remember anyone pointing out that it might not necessarily be a good idea to let people take on unlimited overdrafts until they go bankrupt (or their bank does). The alternative, of course, is to stop the account. This is what happened to me when I ran out of money as an undergraduate back in the Jurassic. My cashpoint card was swallowed and the machine ordered me to go into the branch (sadly long since amalgamated with a larger one – they kept the postal address for about a decade, for old times’ sake). I had to submit to a telling off from the bank manager. My personal finances were nationalised, my debt restructured and I was eventually allowed to return to the private sector. I’ve never exceeded my overdraft limit since, not just because I’m afraid of another “little chat”, but mainly because I’ve heard about the really very nasty charges I might incur if I did borrow money again without asking. Today, of course, with so much of our personal banking now totally automated, stopping an account would cost someone going overdrawn for a short period far more in failed Direct Debits and so on, than they would incur in bank charges. It’s all about striking the right balance. Maybe we should leave it to the professionals.
I really must stop reading the newspapers about the Northern Rock affair. Today there’s another nonsensical piece in the Guardian (Money section). To be fair, the columnist, Patrick Collinson, does make some original points and has provoked me to think a little more deeply about how the bank will be run after nationalisation. In a previous post, I suggested that “NR would be run in a similar way whether it was nationalised or not”. Patrick has clearly thought a little more about what this means. But he reaches a strange conclusion.
As Collinson points out, NR is currently offering rather generous rates to savers. But he seems to see these as a way of competing with the private sector, rather than a desperate attempt to rebuild NR’s balance sheet. Let me explain, Patrick. The idea is that banks and building societies charge an interest rate to depositors that is (say) 1% less than they can lend the money out for – to mortgagees, for example. That 1% pays for all the buildings, staff, bad debts and so on. Hopefully there’s a little bit of profit when all these things are paid for. If NR offers mortgage rates similar to those of the other banks and building societies, but continues to pay out 6.49% in interest rates (as also advertised in today’s Guardian), that would constitute what’s termed in the trade “pissing money away”. In this case, the taxpayer’s money.
In fact, strictly speaking, if NR really has a “100% government guarantee” and other banks don’t, it should be able to attract funds with a lower interest rate. Of course, the world now knows that their money would be safe – in terms of “liquidity risk” – in any UK bank of NR’s size or larger, because the BoE will not let such an institution fail unless it proves to be insolvent. The competition issues arise because the nationalisation solution implies the taxpayer is now taking on NR’s credit risk as well as the “liquidity risk”, a distinction the Times (writing about Japan) and the FT (Scandinavia) don’t seem to be too bothered with.
This is why the Government has been dishonest. The shareholders were quite happy taking on additional credit risk (via a rights issue), and a private sector solution would have left open the possibility of winding the bank up should it actually prove insolvent at some point in the future (in this event, as I’ve already pointed out, the taxpayer would be at least £700m better off than they are now). But I put “liquidity risk” in quotes because I think it (or at least the threat of bank runs) should be designed out of the system. It already is, to some extent, for high value interbank payments. UK banks, for example, can’t pay out more sterling through CHAPS than they have on deposit at the BoE. Next time the casualty might not just be too big to fail, like NR, but also too big to bail. Perhaps the BoE and other authorities (since many banks are now international) need to do some work on procedures for preventing or rationing retail withdrawals in the event of the next run on a bank, instead of treating depositors as a privileged class of people and rewarding them (bit of a “moral hazard” here, now). After all, if we’re talking about mortgages, the money is tied up in property. If commercial property funds in the UK are allowed to close to withdrawals for months (as they have), surely the same logic should apply to building societies?
One way NR could try to avoid “pissing money away” as it tries to rebuild its balance sheet, is to charge more for mortgages (to those coming off an agreed fixed rate). That is, it could raise its standard variable rate (SVR). But this really screws those unable to find a mortgage elsewhere, which will be a lot of people, as there’s a double whammy: banks are reducing their maximum loan to value ratios, and house prices are starting to fall. Of course, there’s a limit to how much NR could put up its SVR, as it makes no sense for any bank to push too many of its customers into default. But for a private sector organisation to hammer its most vulnerable customers in this way would be bad enough. If a nationalised NR does it, though, how is this going to go down with the public?
They’re so well-meaning, our Government, but clearly arrogant and stupid. They seem to think they have come up with a fair housing policy, but, in fact, as pointed out in the Times, it is deliberately deceptive (“affordable” housing), prejudiced and counter-productive.
Here’s the contribution I attempted to make to the debate:
“Outrageous. The term ‘key worker’ is like something out of ‘1984’. Do we really want the sort of society where some individuals receive huge windfalls through arbitrary decisions by faceless, corruptible bureaucrats based on subjective rules drawn up by those in power?
Every property subsidised by the taxpayer and by stealth taxes on developers is a property that is not available to be purchased by someone who may be even more deserving. Prices rise for everyone because these properties are not put on the open market. And this policy reduces overall housing supply, by introducing disincentives to house-builders. Prices for everyone rise even further. And look where that’s got us.
Excuse me, I think I’m about to throw up…”
Trouble is, the Times is one of those organisations, like the BBC, which thinks it’s more important to vet comments than to (like the Guardian) allow debate to actually take place. You write something and it doesn’t appear for hours (if at all).
February 22, 2008
Here are two letters to the Guardian editor. What’s the difference, do you suppose?
(1) “I agree with Nils Pratley (Rock fudge is the most palatable confection, February 19). Northern Rock shareholders should be given the same level of compensation I received when I compulsorily lost my share of British Telecom, British Gas, British Coal, British Steel, British Rail and all the other corporations that used to be run in the public interest.”
(2) “As a shareholder in UK plc, I am somewhat alarmed to hear that we are going into the mortgage business just as the smart money is getting out. I’m particularly concerned to read that members of our Board, perhaps including the Finance Director, Mr Darling, apparently do not clearly understand the asset base, nor the modus operandi of the company we have acquired (Northern Rock nationalisation in turmoil over offshore trust, February 21), and that we are entirely reliant on external consultants. Furthermore, I understand we are being threatened with legal action by some very angry fellows who are expert in business matters and may have a strong case against us. I gather that an alternative to acquiring Northern Rock outright would have been to have agreed to a proposed solution to inject a minimum of £700m of private sector capital into the bank. Wouldn’t the alternative strategy have not only avoided the risk of damaging litigation, but also left UK plc at least £700m better off, in the event that the assets and liabilities we now own prove to have a large negative net value?”
Yes, the first one is trite and unoriginal and was published today. The second one was (even if I say so myself) original and not (yet) published. Maybe you’re allowed to agree with Nils Pratley, but not disagree with him. And I even gave them the possible title “Don’t worry, it’s Granite, innit”, but they went for “Rock’s Granite edifice under siege”. Boooring!
I can only imagine that the Guardian considers the point I am making to be nonsense. This is how the public is kept in a state of ignorance. Groups of people – as philosophers of science understand very well – give up “cherished ideas” only with the greatest reluctance. And in this case, the cherished idea is that shareholders belong to some genus of blood-sucking parasites. Unless the shareholders are their mates of course. On last night’s BBC Question Time the union leader Derek Simpson mentioned the idea that just employee shareholders ought to be compensated. Pure prejudice. Note the similarity with racism. The idea of the left, one might suppose, is to create a better, fairer world, with less inequality – this is what draws people to left-wing politics – but in reality the Left is a viper’s nest, crawling with those in power or who wish to be in power so that they can decide who’s deserving and who isn’t.
In fact, “the shareholder” is willing to take on the very risks that are making “the taxpayer” so indignant.
On Question Time last night even Vince Cable said that alternatives to nationalisation would have meant the “taxpayer retaining all the risks”. Wrong! If we didn’t want the taxpayer to retain all the risks, we could have allowed private investors to put in more risk capital, as pointed out in my exceptionally witty letter to the Guardian editor. Does Vince Cable not understand this? Or are he, Brown, Darling et al happy to continue to mislead the public?