from The Great Debate UK:
Waiting for the other shoe to drop
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -
The unemployed and the terminal insomniacs who have nothing better to do than read my blogs will know that I have long been gloomy about most of the Western economies. How can you fail to be pessimistic when the world economy is still dominated by the U.S. - a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?
Now house prices are plunging again and, with the dollar still strong, the prospects for an export-led recovery look bleak. In fact, a return to recession is far more likely, and the markets are starting to show signs of that sickening here-we-go-again feeling.
How will it all end?
Anyone who claims to know how this will all play out is on no account to be trusted, but there’s nothing wrong with trying to guess – in fact, that’s exactly what we have to do before we can decide what assets to invest in, or whether to invest at all rather than simply blowing it all on a long bankruptcy binge.
So here goes. I start from the observation that the bond and currency markets, in their infinite lack of wisdom, seem to have divided the whole membership of the United Nations into two classes, high-risk countries and low- (or no-) risk countries.
from The Great Debate UK:
Not much stress, not much test
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-
Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:
“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”
Imagine the effect of this question on the poor guy sitting there eating his meat and two veg. It must often have been enough to make him choke on his roast potato there and then – maybe even die on the spot.
Not being in the business of selling life insurance, the European bank regulators were unwilling to take any chances with the client’s cardio-vascular system, so they have restricted themselves to asking the question:
“What would happen if the client had the flu and needed a couple of weeks off work?”
from The Great Debate UK:
EU stress tests: for banks or governments?
- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-
Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead. Concerns centre on four areas.
First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.
Second, there are worries about the small-to-medium banking sector in Germany, where some of the first signs of the oncoming crisis appeared early in 2007. It is hard to tell how seriously we should treat these concerns, because the Landesbanken are closely linked to their regional (“Land”) governments, so the question is unusually sensitive. Third, there are worries about the European giants, especially the big French and German banks.
Not only is it still unclear (to me, at least) how badly hit they were by Lehman and its aftermath, it is still a matter of conjecture how much sovereign debt they are holding.
Fourth, there is the enigma of Spain, worth a blog on its own. The bald facts about Spain are frightening – 20 percent unemployment (and nearly as much even before the credit crunch), the economy most dependent on construction of any in Europe, a large budget deficit, tourism suffering from the strong Euro.
from The Great Debate UK:
Banks, borrowing, bonds and Britain’s budget
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-
George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.
There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.
First, if anyone thought the electoral cycle was dead, the run-up to the last election should have disabused them.
The old wisdom is still valid: get the pain in early, keep the goodies for later, when the next election is in sight. In the present case, it is reinforced by the more Macchiavellian consideration that the more blood is spilt on Tuesday, the less attractive will be the prospect of an early election and hence the stronger the bonds holding the coalition government together.
The more important reason for cutting the deficit drastically at the outset is the message it sends to the markets that we are not going to exploit our position outside the Eurozone to inflate away the debt.
from The Great Debate UK:
A history lesson for lenders
-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-
Anyone looking for a broader perspective on the events of the last three years could hardly do better than choose for bedtime reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.
It is nothing less than a history of financial crises through the ages, starting in late medieval England and continuing via 15th and 16th century Spain and its New World colonies on to the teething problems of Britain’s banks in the industrial revolution and the upheavals of the 20th century, ending in 2008 with the bankruptcy of Lehman Brothers.
The emphasis throughout is on sovereign default. For many politicians, bankers and economists, it ought to read not just as a lesson, but as a severe rebuke, because its basic message is that there is nothing new under the sun and that financial history reads like a long catalogue of facts we have chosen to forget.
So, as the authors show, no country’s history is free of bank collapses, sovereign defaults and currency debasement in one form or another.
Many countries have been serial defaulters, and – surprise, surprise! – the recidivists include some of today’s shakiest sovereigns, notably Greece (which went bust several times in the first decade or two after it gained its independence in 1821, and has never in its history merited a good credit rating) and Spain, which after many defaults in the pre-industrial era seemed until relatively recently to have reformed.
from The Great Debate UK:
How will the Eurozone crisis end?
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Back in 1997, when I wrote about the prospects for the forthcoming European Monetary Union, I said I expected something like the Greek crisis to end with a wave of bailouts of ClubMed countries, and I followed the situation through to what seemed its logical conclusion.
I guessed that Germany and the other surplus countries would realise they were caught in a can’t-beat-‘em-may-as-well-join-‘em trap. On balance, I think I stand by that forecast today.
The problem is of course that monetary union without fiscal union requires a willingness to leave member countries to stew in their own juice when they become insolvent.
In the current situation, this not an option because right from the start of EMU, Brussels used both direct and indirect methods to ensure that no invidious distinctions were made between the debt issued by member country governments.
So, in a regime that treated the bonds of all Eurozone countries as acceptable reserve assets, banks all over Europe (even in Britain) duly bought up sovereign debt with little regard for the creditworthiness of the issuer.
Many of the proposed exit strategies being discussed in the media are irrelevant because they miss the point altogether. The central structural problem in EMU is not that it has no stabilisation fund or any other mechanism for routinely channelling funds from surplus to deficit countries – in fact, the problem is not funding at all, it is enforcement.
I mix with many German people here in Portugal and a few weeks ago they believed that saving the € was the best course of action for political and monetary stability. How quickly views change since various EU member states have revealed their deficits with more losses looming. Personally I think Germany will return to the DM as the German people are more than a little annoyed at the deceit of some of their neighbours, unless countries such as Greece and maybe one or two others are forced out of the €.
The American economy is supporting such massive debt it is difficult to see how the $ can continue to maintain it’s current level. While China continues to grow as the manufacturing powerhouse of the Western World, most Western currencies will continue to decline, except Germany because they understand what makes a stable economy.
from The Great Debate UK:
Punishing investment bankers: the nanny-state goes global
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
In a previous blog, I expressed the fear that in the aftermath of the financial crisis we were going to see either the innocent punished or guilty men convicted of the wrong crimes, or maybe both.
A topical case is Goldman Sachs, an investment bank which weathered the crisis better than most, only taking Fed money when all the other dominos had already fallen, repaying it extremely quickly, and facing accusations ever since of having been too clever for its own good.
The latest charge is that they foisted a type of complex securities known as Collateralised Debt Obligations – essentially, securitised mortgage packages - on their unwitting clients, in spite of the fact that the underlying assets were of extremely poor quality, as Goldman were allegedly fully aware.
If Goldman is guilty of outright deception, it should face the appropriate penalty. But here, as in many other cases we read of, the charge amounts to one of simply catering to the greed of corporate clients who ought to have known better.
As Gillian Tett says in today’s FT:
“It has long been an open secret that the [CDO] sector was so murky that it was easy for banks and hedge funds to engage in shady practices that enabled them to make a fast buck.”
Lots said about “good” and “Bad” bankers, “nanny state” etc.. It seems to me that the bankers, all of them, were very happy when “nanny” states intervened to save their bacon. It should be remembered that democratic government was originally set up to control the rich and powerful
from The Great Debate UK:
Greenspan and the curse of counterfactual
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?
It is of course impossible to know. Perhaps something along the lines: “the British prime minister’s stubborn refusal to compromise resulted in a war which dragged on for 6 months at a cost of over 300,000 lives.....” Make up your own scenario.
We can never know. But we can be 100 percent certain the history books would NOT now say anything like: “by refusing to appease the dictators, Neville Chamberlain saved more than 30 million lives, prevented the division of Europe and saved the world from 40 years of Cold War”.
In the same way, we can be absolutely sure that, if former Federal Reserve Chairman Alan Greenspan had raised interest rates and tightened credit in 2005 or 2006, putting a stop to the lending boom before it could become a risk to the banking system as a whole, he would not today be feted as the man who saved the world from the worst financial crisis in 60 years.
More likely, opinion would be divided over whether the ensuing recession, with the loss of maybe 1 percent of GDP and 100,000 jobs, was at all necessary.
Critics would have called for Greenspan’s head and possibly even for the Fed to lose its independence, while the defence would have been left lamely quoting the famous dictum of a previous chairman that it is the job of the Fed to take away the punchbowl just as the party gets going.
All we need is Banker’s salary/bonus should be consistent to other sectors. Huge bonus makes them greedy and force them doing creative accounting to boost bonus. We need to stop all bonuses, if they want to go away, they are most welcome. There will be no shortages of bankers in this job market.
Actually government and we the general public are responsible for their activities. We made them too greedy. In developing countries bankers doesn’t have those benefits,yet doing their job.
So I’m agree with Laurence and want lower payments for bankers. If they need more money, they are most welcome to leave job and do their own business. Only then they will realize life is not a bed of roses.
from The Great Debate UK:
Bankers’ bonuses: the fish stinks from the head
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
The awful thing about lynch mobs is they so often hang an innocent man, leaving the guilty totally untouched. In the case of the banks, the danger is acute. As I have already argued, hedge funds and private equity are being unfairly targeted, especially in Europe. But there is another, even less popular class which is likely to end up in the firing line, for no good reason and with consequences which could be damaging for all of us.
Broadly speaking, the banks pay 6- and 7-figure bonuses to two quite different sorts of people. First, there is a layer of what we might call technocrats: the striped-shirted traders of legend, with their loud voices and even louder dress codes, along with the managers who try to control them, the quants who invent complex trading strategies and price exotic new instruments, and a variety of others with specialised skills. Since they are rewarded in proportion to the profit they generate for their employer, which can usually be measured with considerable accuracy, their bonuses are often very large indeed. The question is: should we treat these professionals who trade on their expertise and who heavily outnumber senior management in the same way as their bosses? Not as far as I can see.
However unpopular these market professionals might be, I can see no reason whatever for intervening to limit the rewards their expertise earns for them. Arguments about “justice”, “fairness” and “ethics” are irrelevant, especially when they rely on judgements about lifestyles.
Fairness is no criterion for determining pay scales, unless we are also willing to limit the earnings of rock stars, footballers, best-selling novelists.....that is the way to the madhouse (and the collective farm). The market sets a high price on rare skills, and in a competitive world, any attempt by a single country to restrict that price will result in it losing those skills and the business that goes with them.
No, anger about bank pay levels ought to be directed exclusively at senior management, where the key decisions which brought down the banking system were taken. Merging high street banks with investment banks, securitising mortgages so as to expand balance sheets by borrowing in wholesale markets instead of relying on deposits for funding, leveraging up to and a long way beyond the prudential limit, relentless empire-building that turned Citibank, RBS, HBOS into monsters with balance sheets on the scale of middle-ranking UN member countries – all these catastrophic decisions emanated from the boardroom, not the trading floor. The guilty men were handsomely rewarded for running their banks on to the rocks and, just to add insult to injury, are in most cases now extracting large rewards for salvaging the wreckage! This is the problem, and in my view the only problem, with bank bonuses.
Even before the crisis, it was hard to justify the rewards they earned. Their marketable skills are not always apparent, since they are not always professional bankers themselves –some have spent most of their careers in other industries. It is extremely difficult to measure their contribution to profit, which is precisely why their remuneration packages often involved options with payoff patterns based on highly controversial computations of how well the bank’s shares perform. If their remuneration packages looked over-generous before the crisis, they must be totally indefensible now "après le deluge". Can anybody seriously believe that paying more modest salaries would have resulted in even worse mismanagement?
I agree with most of this, but where is the punishment (apart from potentially being fired) when a trader legitimately loses vast sums of money. Are previous bonues clawed back, do they end up owing the bank money? No. The model still encourages huge risk taking without the potential to lose anything other than their job.
from The Great Debate UK:
Glass-Steagall Lite, brewed by Volcker, served by Obama
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Let me say at the outset that I am far from enthusiastic about either of President Barack Obama’s major policy initiatives: healthcare reform and the banking reform plan announced on Thursday.
But both cases are truly momentous, because both are tests of whether America is an imperfect democracy (like all the others) where government by the people eventually works, more or less, or a totally dysfunctional oligarchy.
Each initiative involves a confrontation with powerful vested economic interests whose lobbyists will no doubt fight long and hard in public and even longer and harder behind closed doors to block the changes.
The only difference between the two cases is that, while there may always have been significant popular opposition to the healthcare reforms, the need to “do something” about Wall Street is almost universally accepted on Main Street.
So if Congress blocks bank reform, it will represent a signal triumph of the lobbyists over the popular will.
