Lloyds-TSB: Failure to heed the warning signs

Management has stubbornly refused to call off the acquisition of HBOS. The warning was on the wall in CAPITAL LETTERS and for all to see. We understand that leading a large organisation is a lonely job but that does not mean that executives have to be pig-headed to the extent that they doom their companies as Fred Goodwin had nearly managed to do. The defacto demise of RBS as a free-standing business should have been warning enough and no one can claim that the extent of the decline in financial markets and the world's economies could not have been foreseen last autumn. For an excellent analysis of this debacle read 'Brown cannot shirk the blame for Lloyds' (The Times, 9 Mar 2008). It is difficult to see how the Chief Executive and Chairman can remain in their posts.

Shall we 'modify' away Wilbur Ross' wealth?

Shall we 'modify' away Wilbur Ross' wealth?
During the past few weeks the chorus of experts in politics, academia and business has become noisier by the day. Everyone tries to peddle his own personal solution to the credit crisis. What is being lost more and more is any sense of personal responsibility and accountability. Each and Everyone seems to be entitled to be bailed out by 'society' or the 'community' (especially the 'international community').
Today the American 'Billionaire' investor Wilbur Ross contributed his 5-cents worth of wisdom on CNBC by suggesting that it should be made possible to 'modify' the terms of all residential mortgages in the USA. Effectively he is suggesting that either the taxpayer or - more likely - the mortgage creditors gift a cheque to the homeowner (more likely only those that the rulers consider worthy of public largesse).
One has to wonder what Mr. Ross would think if the legislators and other experts would hatch the idea that his wealth could be used to compensate the losers in the credit crunch? This idea may sound outlandish at first but there is no material difference to the idea of taking away agreed interest payments from those who lent through mortgages in good faith.

Madoff - could he have done it alone?

What is the similarity between the Fritzl case in Austria and the Madoff scam? In both cases it is extremely unlikely that those close to the perpetrator were ignorant of what was going on around them.

More on Mark-to-Market

See also: Former FDIC Chairman William Isaac on some historical perspective on mark-to-market accounting: Market Value Accounting Crippling Economy (American Spectator, 12 Nov 2008)

Regulators too close to Lobbies

Reading that Jay Levine, the former head of Royal Bank of Scotland's US Capital Markets Business, has made substantial donations to Chris Dodd, the head of the US Senate Banking Committee, makes one wonder who is more at fault. Accepting money from someone who you are supposed to police must be as questionable as channelling money into the coffers of your regulators. (Sunday Times, 8 Feb 2009)

Failure of Accounting Reform

An interesting article supports our view about the problems associated with Mark-to-Market: Jesus Huerta de Soto: Financial Crisis, The Failure of Accounting Reform (Mises Blog)

Death Spiral in the Banking System out of Control?

After having watched the Banking System all our adult life (and some more) we are the first to admit that managements have committed serious errors of judgement. This just reinforces our view that hiring the right people is the most important job for all those working in positions of responsibility in any bank of other financial service business.
But this particular banking crisis is characterised by certain features that have a tendency to push institutions further down the path to ultimate destruction. For instance, hardly anyone seems to focus on what proportion of the loan books are actually delinquent. Instead, there is constant talk of 'toxic assets' most of which turn out to be mortgages that just happen to be under water to different degrees. Nothing new to that. That has happened before and will happen again.
Instead, the markets, commentators and the authorities are completely enthralled by what can only be described as a 'death spiral' of weakening economic data and falling asset prices which drive 'market prices' down. The main culprit is the 'mark-to-market' rule that has been designed to keep accountants, auditors and theoreticians in academia happy. Never mind that these 'prices' are created in thin markets and pushed around by speculation. They are accepted as gospel truth even though it is a well-established fact that all markets overshoot - on the way up and on the way down.
As a result prices for so-called 'toxic' assets are divorced from reality where assets may be somewhat impaired but are still in the major part serviced by debtors. The difference between these two levels of valuation is the difference between a banking system that is in trouble but able to work its way out of a hole and a banking system destined to hit the buffers sooner or later.
In addition, respected analysts such as Meredith Whitney (CNBC, 14 Jan 2009) paint a horror picture where banks are supposed to look at economic data such as employment or home price trends and mark down their books according to some spurious economic forecast. That assumes that economic forecasting is an accurate science - a heroic assumption if there ever was one!
The latest fashion among commentators is the reference to the 'Swedish Model' of bank rescue. As no one seems to realise what is driving the death spiral they jump to the conclusion that all bad assets should be written off against shareholder equity. Given the logic of 'mark-to-market' that would mean that ever-declining 'market prices' would set the benchmark for these write-offs. Naturally, the authorities - who must share a major part of the blame (banking was always heavily regulated and the authorities were if anything supposed to prevent bank runs) have to step in and nationalise the institutions.
Ironically this outcome would not even mean that lending can resume as usual. In our impatient age politicians, the media, academics and the world of business seem to have forgotten that credit cycles are a major - maybe the major - force behind economic cycles. After an extended period of excess credit creation it is inevitable that a period of credit contraction will follow. Banks have to rebuild balance sheets and the same applies to business and consumers.

Incompetent Regulators

'Catastrophic interaction of governmental and managerial incompetence that led to the collapse of Fannie Mae and Lehman Brothers' (Anatole Kaletsky, The Times, 12 Jan 2009)

Spending no solution to debt problem

Jim Rogers - in-depth Bloomberg interview. In case you also wonder if spending more is the right way to reduce the debt mountain.

Alan Greenspan - long on Words, short on Insight

That is what he produced for years, and Media and Investors were hanging on his every uttering. It went so far that the gullible Commentariat even tried to get a glimpse of his suitcase when he walked from the Fed to Congress and tried to devine what the 'Sage' might intend to say based on correlation with previous events.
We are grateful for this gem of a quote we found on the Marketoracle: I think further comment is not required.
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants… With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers… Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending,… fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”-- Alan Greenspan, April 2005