Monday, 17 January 2011

The Great Confidence Trick

When Bobby "Dazzler" Diamond said the time for bankers' remorse is over, I thought for a moment he was suggesting something more profound.

But of course he was merely attempting to inspire enough confidence to justify a quick bonus before reality bites harder.

A recent tour of the contrarian financial blogs did not make for pleasant reading.

US bank "earnings — like those from 2009 — will be skewed by falling loan loss provisions set aside to cover bad debt." Meanwhile, toxic assets remain on public books as delinquencies soar and the rules are bent to allow the banks to magically produce profits. Which may explain why at least one of the ratings agencies may finally be taking steps to curb the ratings of investment banks.

Even the US Commerce Department seems to be engaging in jiggery-pokery to avoid a 'double-dip'.

And while FT Alphaville speculated that the impact of the decline in the pace of US mortgage foreclosures might be good for the economy because:
- Fewer houses come to market, thereby propping up prices (or slowing their decline)
- Therefore fewer people go underwater on their mortgages
- Foreclosures have a devastating impact on the prices in the surrounding neighborhood
- Households preserve more wealth and are therefore more likely to spend rather than save
- Consumer confidence in housing increases
- More loan modifications (though how many successful ones is unclear)
- Time is bought for the rest of the economy to recover

On the other hand, [they said] this might not be good for the economy because:

- The problems in the housing market have simply been put on hold, not solved
- The excess inventory in the market won’t clear unless prices fall to a more natural level, and the sooner the inventory is cleared, the sooner the housing sector recovers and builders can get started again
- It’s unlikely that loan modifications will ever work on a large enough scale to make a difference
- Foreclosure delays are a distorting incentive on mortgage borrowers, who will be more likely to strategically default

[But] we have a nagging feeling that there are unintended consequences (or even straightforward expected consequences) that we simply haven’t thought of..."

Which encourages the aforesaid aggressive provisioning and selling practices:
"In its offer for the $1.5bn stock sale of privately held social-networking company Facebook, Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to “significant restrictions” limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning."
Amazingly, today Goldmans pulled the offering, but only in the US. We gullible foreigners can always be relied upon...

As can pension funds, life insurers and other asset managers. So don't expect to retire.

Now, Bob. About that bonus...

Image from Sulekha.


Unknown said...

All we have to do is look at what the NAO had to say about the state of UK banks:

Basically, they are now costing UK taxpayers half a trillion GBP a year to maintain, down from just under a trillon/annum to stop them from going bankrupt. And this will go on for years to come apparently!

The banks got to this point through their own greed and stupidity, and had it not been for the UK taxpayer bailouts, they would no longer be!

They are basically taking their "bonuses" from UK taxpayer's pockets (ie thieving) - not through any profits they themselves have earned. Banks and their CEOs are utterly revolting sociopathic scum.

I just wonder how much less "austerity" half a trillion GBP would buy for the general populace in the UK.

Pragmatist said...

Hi Candice, many thanks for the link to the NAO report. Further evidence that the crisis is far from over, and bonuses should be a long way off.

I'm also watching the Commission on Banking with great interest, but little optimism:

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