Sir John Gieveās interview with Robert Peston was very worrying. There should be no instant history from the participants fighting the banking crisis, as the problem is not yet resolved. Anything they say could damage confidence further. They need to give us the figures and make the official statements they need to make, but they should not wander off into risky analysis and self justification. When itās over, when they write their memoirs they can do that.
Sir John wanted to get over the fact that in his view the UK banking crisis in the week before the re-capitalisation was severe. I guess he wanted us to know this, so that no-one would try to argue they had over reacted or made the problems worse. At one point he wisely said he would not mention individual banks, but comment on the system as a whole. He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment. Both these banks are open for business and should expect decorum and support from their Central bank.
So what was the nature of this crisis that the authorities suddenly decided they needed to tackle? There are 4 possibilities.
1. There was a run on the deposits, the disaster which brought Northern Rock down.
There was no visible run, although the authoritiesā leaks were far from helpful in maintaining confidence. It is difficult to believe it was a prospective run on retail deposits that led to the action.
2. The authorities suddenly discovered the loans these banks had made were far worse than they thought, so they became fearful for their solvency without more capital injections.
There is no evidence that the authorities suddenly became more alarmed by the banks assets. Indeed, when I asked in the House if they were carrying out proper due diligence before buying the shares, I was told they were not, implying they were not especially worried by the then value ascribed to the assets they were buying on our behalf. They did not insist on any immediate additional write downs.
3. Certain banks were unable to gain access to money market funds in sufficient quantities which would force them to contract rapidly, too rapidly for comfort.
Sir John implied it was partly this. Why then didnāt the authorities get on with supplying the ample liquidity to money markets they have subsequently supplied through the Bank? That can explain the need to make the loans and guarantees available through the package, but does not explain the need for more capital and the sudden request of the regulator for higher ratios of share capital to loans. That would only have been a sensible thing to do if they were worried about 2 above.
4. The share prices of leading banks were falling.
Yes, that is true. However, a falling share price does not bring a bank down. RBS is just as able to trade with its share price around 45p today, as it was with its share price many times higher before the crunch. A low share price does not stop a bank doing anything, unless it reflects a general loss of confidence by depositors and other providers of cash.
Whatever the rights and wrongs of these four points, two points should be incontrovertible. Firstly, any sensitive discussions between banks, the Bank, the Chancellor and the Regulator should take place in confidence and in private. Bankers do not have to be invited in dramatically over a week-end to the Treasury through the front door. We live in an age of conference calls, emails, webcasts, working in normal working hours, and there are side entrances. There are not many top banks, so each one could have been sorted out individually. It does make it worse for the authorities to show how worried they are in public.
Secondly, any action should be based on revised figures that are as accurate and well based as possible. Confidence building in banks requires the banks and the regulators to put out credible information in a timely way. It is no good denying things have changed from the heady days, nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function. Working through this is about access to cash, and having the right amount of patience to minimise the losses on all the positions the banks have taken.
I do not believe they had just a week-end to save the world or the banks. Their actions increased the pressure to do something, and the leaks made action imperative, but that does not mean it was a good way to handle the situation. Nor do I believe they then in a single flash of the government cheque book solved the problem. The nationalised banks still have a cost level out of line with their earning potential, and probably more to write off. The sooner they recognise that reality and get on and sort it out the better. I see no reason why taxpayers should have to tip more money into these banks, when they are still employing too many people on high salaries and big bonuses, and still have a gap between what they charge and what it costs them.
As for Robert Peston, he was the recipient of information that should not have been released in that way. Some of the things he broke to the BBC audience looked like price sensitive information that should under the rules have been released to the Stock market as a formal announcement in the usual way, to be followed by all news outlets handling it at the same time. Whilst one can admire his journalist skills in getting hold of such a fount of stories, one is left to wonder who leaked the information, and for what possible reason? It is also curious that so far no Minister has made a big issue of the leaks in the way they did over immigration figures.
December 23, 2008
I believe the problem was not a run by small depositors but by the financial institutions and large corporates who pulled out their cash. Some very large companies can have several billion that they pull in one go. As soon as confidence is lost then nobody will trade and the bank is bust even without the Northern Rock queues!
In this case it sounds like Sir John is trying to get some revenge in whist he still can against his detractors in the BoE. Saying “we” didnt know is essentially saying Mervyn King “didnt get it”!
I would imagine most people would agree the bank has been pretty useless as soon as the going has gotten tough especially as anyone with a small understanding of economics could see the credit market was out of control.
December 23, 2008
Yes, the initial whiff of self-justification gave way to a stench. In truth I think it was a combination of panic, ignorance and the chance to partly nationalise the banks, a crypto-aspiration since day 1.
May I also thank you for this outstanding blog in 2008. It was one of the very few places one could come to realise that not everyone in the world was mad. I think your analysis of nearly all the major issues has been more or less spot-on, so thank you very much.
Lets hope Mr Cameron joins Mr Brown as a regular reader!
December 23, 2008
My question of the day is; “Is it time to do away with national central banks and have one world central bank. This being the only bank allowed to print money in any currency.” Discuss.
I have looked at hundreds of charts on the web, searching for where it all began to go wrong. Gordo and Co tell us it started in the USA. But, we know a lot of the exotic toxic financial instruments were designed and implemented in London.
There are more technical indicating instruments out there than would fill the dashboard of several Boeing 747s. Interest rate spreads between treasuries; corporates etc etc and the price of Mars Bars. But, then I found the Maloney Panic Meter which actually summed up all the other charts I have collected.
So where and when did the panic actually start? Would you believe Northern Rock? As far as I can gather, the fact that NR was in the UK; the de-facto centre of the financial universe, was the straw that broke the increasingly wobbly camel’s back.
http://www.financialsense.com/fsu/editorials/2008/1219.html
December 23, 2008
I didn’t see John Gieveās interview, I only read about it in the paper, but to me it seemed welcome. He seems to have accepted that British economic policies created the problems for the British banks. This is highly significant in view of the Labour spin we have been hearing recently. In the Labour version, it’s all the fault of the Americans, or the Gnomes of ZĆ¼rich, or really anyone other than Gordon Brown.
Clearly, if the Bank got it wrong, the government got it wrong. The Bank is the responsibility of government, even if the Treasury chooses to allow it some independence.
We also have to remember that the Bank did very well at hitting its inflation target until comparatively recently. The problem is that this target had become meaningless when Brown decided to exclude housing costs. So Gieve was actually being too modest: the Bank was very good at the meaningless job Brown had given to them.
“He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment.”
I agree perhaps he shouldn’t have mentioned specific cases, but the problems at RBS and HBOS are well known. I own shares in those banks, and Gieve certainly didn’t tell me anything I didn’t already know!
December 23, 2008
I remember thinking about point four a while back, i believe there is some relationship between share price and how the bank operates, but i never found out what is was.
When Northern Rock approached the BofE as lender of last resort, that news being put on the airwaves (Peston) resulted in a run on the bank. Presumably with their highly leveraged position, withdrawal of cash reserves had a very bad effect on them.
December 23, 2008
I can see that Barclays were right to go to the Gulf for recapitalisation rather than our own government. Even though it affronted the feelings of Vonce Cable.
December 23, 2008
JR: “nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function.”
I disagree. It is not correct to say the market is not functioning. It may not be behaving in the manner you would like, but the market is right now busy finding the correct price of everything being offered for sale. It is doing this after a decade during which the authorities around the world deliberately attempted to inflate the value of nearly all assets classes.
Government is to blame for this mess, not ‘the market’ nor Capitalism. By the way, we should have had a recession when the .com bubble burst back at the begining of the decade, if we had taken it then, we probably wouldn’t have had to face it now.
At least not nearly so severe as this will be.
December 23, 2008
APL – could not agree with you more!
December 23, 2008
Robert Peston ‘scoops’ comment from the BBC politics barrel which holds not a scintilla of thought or care that he may be dropping the contents of his scoop on everyone else’s feet as he sits smug like in self satisfaction that he’s given us ‘cutting news’ which he thinks we want to hear and we believe.
Who is really slightly interested in watching Darling and his other lackadaisical minions and fudger’s patting themselves on the back in self admiration whilst caring ought for the repercussions of what they say?
As you say Mr Redwood the time is not now and nor is it welcomed at any other time, to jeopardise the early recovery of RBS and HBOS by making stupid unthinking remarks which they should know better not to make at even the best of times least of all for reason to simply give Robert Peston another so called news story.
We care only of the action now.
There are plenty of thing I’m sure many could have said before now of the actions they seek to glorify, but they haven’t. Why? Because they’re not stupid and know they’ll be dropping stuff on people toes by doing it.
Which leaves only one thought in my mind, which is when will this clown stop making a mess of our economy, and you can fit any name you like into that question.
December 23, 2008
I find this acceptable though :-
An International Monetary Fund (IMF) economist has criticised the UK's 2.5-percentage-point cut in spending taxes.
Olivier Blanchard, the IMF's chief economist, said that the temporary cut in VAT would not significantly influence shoppers' behaviour.
In an interview with French newspaper Le Monde, Mr Blanchard said he did not think the cut was "a good idea".
And this :-
Peter Jay, who was Britain's envoy to Washington between 1977 and 1979, said that the definition – two consecutive quarters of negative growth – had no basis in economic theory and was created by the US Government in 1967 to aid the re-election prospects of President Lyndon Johnson.
Mr Jay, who said he was "in the room" when the definition was established, said that Art Okun, the chairman of Johnson's economic council, acted upon "indications that there might be a recession that year", which he feared would dent the President's popularity.
He said: "Art had the neat idea that if we had a definition of recession which meant that people could say we are not actually in a recession, not technically, that would get the president out of a difficulty.
"So on the back of an envelope he invented the idea that in order to call it a recession you had to have had two consecutive quarters of negative growth."
December 23, 2008
I have just read Robert P’s book on the “mess we are in and who’s to blame” and I must say I thought it was on the whole a very good read.
If you can ignore the “I’m not going to be drawn politically but really I’m obviously a raving Socialist” theme that runs throughout, it gives some very good insights.
Private Equity, Hedge Funds, Royal Mail, Government Pensions Fiasco and Philip G’s attempt at the takeover of M&S.
Disappointingly, I thought the Panorama interview and report was not a patch on Robert P’s book.
PS. If you read the book, ignore Chapter 1 as it will put you to sleep. Go straight to Chapter 2.
December 23, 2008
I am afraid that Sir John Gieve also mentioned Barclays in his list of likely defaulters. This, as you say, is not right.
The cause of our depression, surely is this:
“The sucking sound of capital being pulled out of Europe and into East Asia is almost deafening. Slowly but surely, economic and demographic pressures, combined with a decline in scientific and educational achievements, will condemn Europe to becoming first a military, then an economic, then as educational backwater, and finally even a cultural backwater.”
China produces 3 million graduates a year, 250,000 in engineering. In Britain we can’t even find enough people to teach physics in our schools.
Andrew Neilwrote that in the Spectator well before the credit crunch happened.
I reckon what he says goes for America too. The crash is just the massive resettlement as the world economy readjusts to reality.
December 23, 2008
what journalistic skills? he is gordon’s deniable poodle.
December 24, 2008
What private investor is going to buy Bank shares when the Government and the Governor of the Bank of England says they may still nationalise them if they do not do as they are told. Its a possible investment and money down the drain as the shares are taken for nothing.
Bradford and Bingley assets (deposits) sold off, shareholders get nothing. The debts now held by Government/Taxpayer and shareholders thus pay again.
Its a brave person that will invest in banks under these circumstances.
December 24, 2008
Would that be Robert Peston, son of a Labour Lord?
December 24, 2008
The whole programme was a set up by the BBC to give the BoE and Darling an opportunity to blame everyone but themselves, with Peston giggling along at Darlings prompting.
The pompous and over rated Cable (one of the BBC’s ‘one of us”) also got an easy peasy look in.
As I understand it Darling is getting another softball interview with lab pour luvvie Peston. I think its pretty clear where all Peston’s leaks came from.
January 2, 2009
This is the nearest thread I could find relevant to the BBC Mr Redwood.
How about the truth coming from the BBC for once instead of its flaming constant attempts to stoke up panic and promote propaganda !
http://news.bbc.co.uk/1/hi/business/7807632.stm
Yes, it's useless to ask I guess.
So the BBC reports that a "dispute between Russia and Ukraine over gas supplies has raised fears that UK energy suppliers could delay long-awaited price cuts".
It continues to say "Russia's move to halt supplies to its neighbour has made wholesale market prices volatile", and quotes some guy who happens to have set himself up as a price comparison site to sell energy connections, as "an expert" in these matters. I mean, this guy, ( Joe Malinowski, from TheEnergyShop.com ), would be a mind reader would he, and be able to tell the world what price it will be paying for Russian gas which is under Russian control and not affected by the fact Russia has not stopped or cut supply of gas to anyone other than Ukraine!
There's no mention anywhere incidentally that Russia hasn't been paid any more than usual for its gas, or for the fact that Europe sells it to us for TWICE what it pays and then adds another lump for VAT when it gets here. Nope, none of that is relevant apparently, just the 'news' what the BBC want you to hear is relevant.
I wonder when the BBC would like the world to declare war on Russia, seize the Ukrainian pipeline, give it plenty of pictures and 5 star hotels for the 400 reporters it would no doubt send there to prey on the then "nasty west", or the then "even nastier Russians", or would it sooner not cover the truth for once and tell the world that Ukraine hasn't paid its gas bill, doesn't want to pay its gas bill, hasn't the money to pay its gas bill, and wants to buy gas at half the price it costs Russia to get it out of the ground and ship it along its pipelines to Europe and the Balkans?
Maybe it could 'advise us' of the fact we only buy 20% of our gas from Russia, that the amount it sends us hasn't been tampered with by anyone other than Ukraine, and that we shouldn't worry too much because the North Sea is full of it, and the bloke they have as an "expert" is the bloke in charge of a comparison SALES site ?
But I guess that would be too easy.