28 Feb 2008

Kerviel Case: Where has all the money gone?

In all the excitement about the huge losses made by Soc Gen's Monsieur Kerviel and the bank's management one thing never gets mentioned: someone out there has made a whopping big profit out of all of this. Futures in particular are the ultimate zero sum game and where there is a loss there always is a profit. This is no consolation for Societe Generale and its shareholders who are left holding the proverbial bag but it should calm the nerves of politicians, economists and other commentators. Economically not much has happened except that a substantial sum of money has passed hands. Society as a whole is not poorer as it would be if the same sum of money would have been spent building pyramids - or steel plants that turn out to be surplus to requirement once they are finished.

18 Feb 2008

Northern Rock - two key questions that need to be answered

The first question - and it has hardly been receiving attention in all the discussions of the Northern Rock saga that we are aware of - is the question of how it can be that in a so-called 'democracy' emergency legislation can be passed where the executive and legislative branches of government are in collusion and decide to 'nationalize' private property. The emergency support that the German Government has just decided to give to IKB Deutsche Industriebank in Germany (thanks to an obliging taxpayer that has no say in these arbitrary spending decisions) is just a less blatant form of nationalisation (where private wealth is taken away from its rightful owners and spent by politicians to spend on their favored constituencies).

The second question is again an indictment of Government, more specifically the quasi-governmental agencies that masquerade as 'banks' and are more commonly known as 'Central' Banks. In recent months untold (literally) billions of confetti money have been spent by these curious 'banks' in providing liquidity to the World's Banking system. No one will deny that Northern Rock used the leeway that is given by banking regulations to an extent that could with some justice be described as imprudent. But this is no excuse to provide all other banks with liquidity but let this particular bank hang out to dry. This was the crucial decision (mistake?) taken by the authorities back last summer and that has to be the point of departure when assessing the correct compensation for the Northern Rock shareholders. It simply is not good enough to destroy a business first and then base compensation on the situation that has been created by one's actions.

4 Feb 2008

Non-Dom Taxes - Nail in the Coffin for London's City?

Ill-conceived taxes were instrumental in the development of the Eurocurrency and bond markets during the late 1960s and early 1970s. First the American Government in its wisdom introduced the so-called Interest Equalisation Tax in 1963 in order to make it more expensive for non-US borrowers to access the US capital market. Then the Swiss authorities levied penal tax rates on transactions involving Eurobonds and other securities. As a consequence, most business involving international securities decamped to London during the 1970s. Now Gordon Brown has decided to make his own mark on the history of the Euromarkets by introducing a special levy on foreigners involved in the international capital markets. Not only is the per-capital levy of £30000 per person highly arbitrary and unfair but the detailed regulations introduced are so complicated and wide-ranging as to provide the proverbial straw that breaks the camel's back. The London City should take note that in the intervening years the authorities in Switzerland and the USA have learned a lesson or two and that financial institutions - once gone from the City of London - are unlikely ever to return again.