Mortgage Reform - one aspect overlooked by George Soros

While I agree with most points that Soros makes today (Wall Street Journal, 10 Oct 2008) I think that he should have focused more on one important aspect: there have to be limits on the amount mortgage providers are allowed to lend against property. In previous times it was just inconceivable that anyone - let alone 24 year olds barely out of school - was able to borrow more than a conservative amount (60-70%) against the value of a property. In addition there were strict limits on the multiple of income and this income was also much more carefully documented. These lending policies would be simple to monitor by senior bank management and regulators alike - no need to rocket scientists or highly paid risk managers! It would also be appropriate if similar regulations would be applied to commercial property lending where (near) 100% mortgages were also available to persuasive property 'tycoons' during the height of the asset bubble.

Short Selling - Argument against

Several Hedge Funds and their industry representative today make thinly-veiled threats that they might consider to move their business away from London if the ban on short-selling the shares of financial service companies is not lifted soon. We had quite a lively reaction from a number of readers and business partners. They argue that this may mean that national regulators would let themselves be pushed into a 'race to the bottom' in terms of regulatory standards. The consequence might then be that international regulations will be introduced to avoid this. In addition, one correspondent pointed out that the argument about the pros and cons of short selling could only be resolved by a detailed forensic analysis of all the transactions involving the shares of banks during the past 14 months. This would have to include equity and credit derivatives and all related off-balance sheet instruments.

Maturity Mismatch - obvious starting point for reform

Regulators are running around like head-less chicken, applying completely arbitrary principles when deciding on an ad-hoc basis what to do in each individual problem case and therefore just fanning the flames of the credit bushfire.
A key feature of the ongoing banking crisis is the fact that institutions that may well have balance sheets that in the long run would turn out to be more than viable are facing the equivalent of a 'run on the bank'. Is Hypo Real Estate, to pick just one example, really ready for the knackers yard or is the fact that it cannot roll over short-term financing nothing but a short-term liquidity problem?
Whichever way this sorry saga ends one simple lesson must be learned: it is just not enough to force banks to finance themselves if possible with more genuine retail deposits but they must be made to finance their assets with liabilities that are matching by maturity. Only small deviations from this principle should be allowed. Monitoring this should be a relatively simple task for regulators and therefore eminently practicable. It just is lunacy to finance long-term mortgage lending with funds raised in the Inter-Bank market on an overnight basis.

Inept Regulators allow bank run

Every Age has his prophet, but 'Houdini' misses the key point: the Credit Crunch is a bush-fire where inept regulators allowed a bank-run to develop.

London and New York after the Credit Crunch

Both Cities may well remain the dominant financial centres after the credit crunch has been consigned to history. The common language will continue to be the language of commerce for decades, the financial, legal and accounting brains will not decamp en masse, but the shine will be less intense than before. Just looking at a financial portal in India - a country that we know very little about - the other day brought home the fact that in that country alone forces are at work that will create a marketplace that will dwarf most other domestic markets in the near future. Who will be a big beneficiary? While London may well be one of them we would also give good chances to Singapore and Dubai as they are much nearer to the action and possess more cultural affinity. In a similar vein China and Russia will develop internal markets that will pull business away from the old centres and in Europe we can envisage a multi-polar network of regional centres that can stand their own against the gravitational pull of London and New York. Property Developers take note: with communication costs at rock bottom you should not bank of continued expansion in these two cities.

Short Selling - Argument in favour

Arturo Bris argues (Wall Street Journal, 29 Sept 2008) that the ban on short sales of financial shares should be lifted. We think that the argument is not convincing. The real question that would have to be asked is: what would have happened to the shares of financial companies if there would have been no short selling? The level of short interest that Bris quotes in the article is truly enormous (19.1 % of outstanding shares in March 2008!). We just cannot accept that this amount of short selling did not have a substantial influence on the level of share prices of banks and investment dealers.
That the market in shares where short selling has been banned after the Lehman collapse is now less liquid should not surprise anyone. It is only to be expected - and maybe desired - that there will be less trading when short sellers are out of the market. They are likely to be the most active market participants - some of them are reputed to have turned over their portfolio up to two times (!!) EVERY DAY.
For an interesting detailed rejoinder to Bris' argument you may wish to read a post on www.deepcapture.com. The blog also exposes the incomprehensible - not to stay stupid - attitude of the SEC with respect to abusive short selling.

Lenders still don't get it

InBev is borrowing $45 billion to finance its $52 billion acquisition of Anheuser-Busch. How can the banks justify this sort of lending given what is happening in the credit markets? One has to wonder on what planet management lives.

Third Runway at Heathrow

Every time I see the expression 'City Grandee' I must cringe as it immediately produces the image of a worthy but not very effective person that may well be past his prime. The recent newspaper ad in favour of another runway at Heathrow Airport that was sponsored by an assortment of businesses created a similar effect. Worthy but way off mark. If the price mechanism rations traffic at Heathrow there should be more than enough capacity to cater for business passengers. In the age of higher fuel costs and limits on pollution there is no need to accommodate cut-price shopping flights to New York.

Credit is always scarce

With respect to the current credit crisis Ann Pettifor claims (Financial Times, 30 Sept 2008) that 'there are no intrinsic reasons for the scarcity of capital'. The quote is taken from Keynes' General Theory. The quote may make sense if read in context but it makes little sense when applied like this to offer a solution to the credit crisis. It just panders to the public's general desire for free - or nearly free - credit when the economic problem is just the opposite: allocation of scarce resources to their best use. Interestingly, when trying to find out more about the author we spotted that in 2006 she wrote a book entitled 'The coming First World Debt Crisis' - now that might be an interesting read!

Rational Lending reappears

Lenders refuse mortgages based on City bonuses. Is sanity finally returning to the property caroussel?