OneGuyFromBarlick

Dis anyone watch the Money Programme on BBC2 last night? First of three programmes about the bankers. Lots of smug well dressed people telling us how surprised they were to learn about the extraordinary LIBOR scandal. I can remember being ridiculed on the site when I suggested this might be quite a serious matter.....

The Co-op bank could be about to go bust. Ostensibly because of their amalgamation with Britannia. Credit down graded, chief exec gone with immediate effect.

How many casino bankers under that roof?

Will the EU impose Cyprus type conditions?

Bump

Post lost about the CEO of the Co-op bank departing the scene rapidly...... The bank says that being downgraded by the rating agencies is not a matter of concern....

hmm, my post about the depth of the problem at the co-op appears to be lost

Suffice to say that there are currently not enough assets to sell off from the co-op group to match the losses, so the bank may have to be sold off.

Some commentators pointing at the fact that the losses at Britannia were there way back in 2008, maybe the co-op thought that they could trade their way out

One of the big problems that is surfacing, and the current Co-op problem has focussed attention on it, is the failure of the first line of defence, the auditors, to blow the whistle when they look at the accounts. Questions are being asked as to why this happens. Not really a big mystery, the auditors are loathe to bite the hand that feeds them. It was suggested a few weeks ago that there should be a short time limit on how long an auditor could retain the contract. It's thought that if fresh blood was brought in at a reasonable interval they would be more likely to give an adverse report which is evidently what is needed in many cases.

Same problem with the ratings agencies, like Moody's, Standard & Poor etc - they get their money from the very companies they are supposed to judge and rate objectively. Which is why they didn't fly the warning flag about the Icelandic banks even though our newspapers were telling us to get out of them. And why UK councils and charities got their fingers burnt, leaving their money in those banks "because the ratings agencies said it was safe" when they would have been better simply to `read the papers' like the rest of us did.

Add to the incest list the close relationships between the members of remuneration committees with the boards of their respective institutions and one wonders how much 'policy' is quietly decided in cosy conversations in clubs and restaurants. Than there are the special advisers....

The auditors may be culpable but they are guided by international standards.

The reason that the co-op is now in so much trouble is that the regulations have changed and they have been forced to write down more of their toxic assets. They have lost huge amounts of money on mortgages

Complex situation I'll grant, but the more that appears, the more it looks like the co-op had no idea about banking

Good programme on BBC2 last night on bankers, the second in the series. Examined the fall of MF Global and JPMorgan's London 'Whale Trade' (LINK) Fascinating account of greed and the misuse of risk based trading to increase profits. Well worth watching. It revealed that the London based trades (The Whale Trades) involved £157 million of funds and had been sanctioned by the HQ in NY. So much for the 'Rogue Trader', the bosses allowed him to triple the size of the gamble in order to find a way out.
News from the US that the Acting Commissioner of the IRS has been sacked for targeting conservative political parties. See this LINK for more.

I shall catch that programme the i-Player.

I've mentioned before the risk modelling of the products was odd (to be charitable). Appeared the chances of an adverse event was calculated at 12-sigma. Forget the 'long word'. What it means is that the chances of it all going pear-shaped was put at 1 in a time period several orders of magnitude greater than the life of the universe. Or, by analogy, it was like those of us in double-physics all those years back, weighing something on our digital scale and reporting it as 22.345687298736g. The teacher would tell us we're an idiot and move on.

For some reason, no one told the 'brightest and best' they were idiots. But then they shouldn't have needed to. There have been crashes and crises with depressing regularity over the past few centuries - and several in just the last 80 years. But still it was assumed to quote one financier prior to event that 'we have eliminated risk'. Quite.

This is not to wholly apportion blame here. Certainly regulatory bodies, Governments and consumers played a part. It's just no one seems to want to tackle what was essentially a system failure (again, as I've mentioned before and so am a little boring now).

Richard Broughton

Interesting change of tack by Bob Peston in his poor reporting:

America wrote off debts whilst Europe and the UK protected all those people who have over borrowed

As a result, American does not have the cash flow issues that the EU and the UK are suffering

A very hard lesson to learn, but capitalism is brutal and our leaders must protect us with workable regulation. Banks must be allowed to fail

Richard, you're no more boring than I am! (Not sure how good a recommendation that is....) From what my daughter has told me about her time in Risk Management the biggest problem was that the managers didn't understand the algorithms and reduced every report by the risk assessors to "Will it make money?". The programme on banking concentrated on this aspect, how the pursuit of profit blinded the managers to the dangers. At the root it's open warfare and survival of the winners. Problem is that for the winners to make money the losers had to lose it. It's why 'boring old fashioned banks' are the most stable. Look at how successful the old model of the building societies was and how they got into trouble when they were allowed to become banks. 'The Halifax' for instance was a byword for boring stability. That all changed when the Lords of the Universe came in and 'improved' their performance.
My mind works in a peculiar way and I have an example of the same syndrome from my experience with dairy farming. Old fashioned dairy farms which used the old model of milking cows and maintaining fertility by spreading the cow muck back on the meadows and pastures, reseeding fields when necessary, had a stable system. The introduction of the 'Blue Bag' in the 60s and 70s where very high nitrogen fertilizers were spread on the grass to boost growth gave wonderful lush crops and enabled more cows to be milked. Unfortunately what wasn't appreciated was the fact that the Blue Bag was a pump that extracted fertility from the land that had been built up over centuries of conservative field management, putting as much nutrients back in as was taken out. (Many farms had clauses in the tenancy agreements that prohibited the sale of hay off the farm for this reason, conversely, the best farmers imported hay and straw to build up fertility) The consequence was that after an initial flood of grass the farmers found they needed more and more blue bag to get the grass, raising costs. At the same time as natural fertility dropped, so did the quality and quantity of the grass. What they had been doing was pumping out the legacy of fertility built up over the years by the conservative system and once it was gone they were left with depleted fertility levels that no amount of chemicals could cure. I see a parallel with the case of say the Halifax becoming a bank. They used the capital and reputation of the institution as the foundation for their new methods and in the end found they had spent the legacy. The algorithms were their version of the farmer's blue bag.
(You can see the effects of Wycliff Sunday School can't you, they taught us by parable, an earthly story with a heavenly meaning.....)

I caught an ad on ITV last night for a loan company advertising cosy, friendly, "old fashioned" loans. I checked this morning and the interest rate is 49.9%! I also see that another similar loan company is sponsoring programmes on ITV. It's all becoming a bit mainstream isn't it.

The building society was the bank of the people, how quickly did they sell their birthright for a mess of potage. Yes Stanley Sunday School sticks. Excellent piece on farming.

Two figures caught my attention this morning. The Pound is down to $1.51 and up to €1.17. I remember when I first had to convert Pounds to Euros for grant applications in the late 1980s the Euro was €0.87 and the Dollar $1.65. At the same time the UK Stock Market is expected to pass its all time high in the next couple of days. Don't ask me what it means, all I know is that it worries me!

Third programme on the Bankers on BBC2 last night. Fair, well balanced and overall totally damning of the freedom given to the banks and what they did with it. In all the interviews with talking heads I hardly heard any mention of the concept of service to customers and no heartfelt agreement that the Lords of the Universe had cocked up big time. The best quote was left till the end of the programme, it was from the man who ran the enquiry into banks. He said that the thing that bothered him most was the absence of Orange Jump Suits (Sanctions against perpetrators) He said that there needed to be categories of criminal offences that could be used against people who in normal life would be seen to be fraudsters and thieves.

" in the late 1980s the Euro was €0.87"
Are you sure? The Euro didn't start until Jan 1st 1999, and from memory was at about 1.50 'ish to the pound, making the cost of a euro about 66p

Interesting FT reporting

Some of the regulation on ordinary banking is actually diverting funds into other sectors of lending which are less regulated because they don't require deposits, like Pay Day lending

Then the BBC carrying reporting that the pay day lenders are not rigourous enough to prevent massive online fraud.

David, it was a grant application I made in about 1990 and I had to give the amounts in Euros. I went to Barclays in Ilkley to get the rate. I may have confused you, one Euro was worth 87p.
Shares in Portuguese Bankia are under investigation. Two and a half times the total number were traded yesterday. Regardless of whether there is fraud or not, the activity suggests that profit is being made even though the bank is fatally flawed. Every cloud has a silver lining for someone. Hence the rise and rise of the FT Index. Did you see the huge fluctuations in the Japanese market? Biggest QE exercise ver is evidently very fragile. 7% fall almost certainly caused by profit-taking, another Silver Lining?

Stanley wrote:David, it was a grant application I made in about 1990 and I had to give the amounts in Euros. I went to Barclays in Ilkley to get the rate. I may have confused you, one Euro was worth 87p.
Shares in Portuguese Bankia are under investigation. Two and a half times the total number were traded yesterday. Regardless of whether there is fraud or not, the activity suggests that profit is being made even though the bank is fatally flawed. Every cloud has a silver lining for someone. Hence the rise and rise of the FT Index. Did you see the huge fluctuations in the Japanese market? Biggest QE exercise ver is evidently very fragile. 7% fall almost certainly caused by profit-taking, another Silver Lining?

Stanley there may still be some confusion, at the time of your grant application, there was an international unit called the ECU. This unit made an appearence in 1979 and was widely used till the Euro appeared in 1999. My coin collection holds a 1992 example, but no others, hope this helps.

Hearing that after a review of policy and the exit of the boss, the co-op bank is freezing loans. Not entirely sure if that means they are withdrawing from the market or just not accepting new applications.

Hartley, you may be right, it was a long time ago. I can remember the rate clearly though. ECU does ring a faint bell....
Good discussion on Today between two economists which got rather heated. One being extremely radical and the other (the lady) being more level-headed. It was triggered by the general unwillingness of the3 banks to lend, particularly the Co-op. The reason they both agreed on was that all the banks are holding high levels of debt attributable to what are described as 'zombie companies', More accurately these are 'zombie debts', debts which have no prospect of ever being repaid because the companies are moribund and not trading.
A little story for you, when I was engineer at Bancroft I noticed that in the warehouse we had a lot of empty weft boxes and skeps with the names of long defunct mills on them. I asked Sidney Nutter one day if I could clear them out and he told me that on no account must they be touched, even though, in effect, they were rubbish. He explained that the reason for this was that in the annual accounts these empty boxes were accounted as an asset because a deposit was still outstanding on them which had been paid by Nutters and never recovered.
This is an exact analogy to the 'zombie debts'. If they were written off they would have a serious effect on the annual accounts because under the rules of accounting they are an asset even though they are actually worthless. It may well be that the action of the Co-op bank may be followed by other banks, cut back on current landing, weed out the zombie loans and write them off at a rate sustainable inside the operating profits of the bank so as to preserve the minimum level of assets required by current banking regulations. At the moment, these worthless assets are counted as part of the capital buffer the banks are forced to hold against future trouble. As no bank will come clean about the exact amount of these debts the government at the moment is having to guess about how much reserve capital is needed. One would think that the Treasury and the regulators will have allowed for this zombie money but in truth it can only be an educated guess. Just one more example of the way the Lords of the Universe have manipulated the system to show the maximum amount of book profit and therefore the maximum bonuses. In any other walk of life this would be called fraud. It makes honest pe4ople lo0ok like fools and slows down lending to responsible firms which would help get the economy moving again.

It came as a surprise to me to discover that on a bank's balance sheet, cash held is a "liability" whereas debt is an "asset". This is totally the opposite to my personal accounts. Presumably the thinking is that cash can be withdrawn at any time whilst debt will one day be recovered. As you describe, much of this debt "asset" is worthless, and will never be seen again.
So when your Building Society boasts in its annual report, about the increase in its assets over the past year - don't cheer too loudly.

I'd be a lot happier if they wrote off dodgy debt and were allowed to treat it as a tax free windfall if it was recovered. Better for the bankers and the country and could be a good incentive for clearing the books out. One wonders why something that is so obviously common sense and prudent banking is not implemented immediately!