HBOS Complaints: A Nice Little Earner

There's a loooong way to go, but it's nice to see the FSA chipping away at all the 'revenue' banks have made through various nefarious means. The latest in the saga is HBOS's trick of wrongly rejecting half the complaints it received over investment products.

Their spokesman is quoted as saying:

"We recognise we have fallen short of the high standards of service our customers should be able to expect of us and we apologise to them for this."

Yeah, yeah. Just show us the money. We want our £17m in taxes back where they belong.

Do The Media Matter?

"Well, old man, I will tell you news of your son:

give me your blessing: truth will come to light;

murder cannot be hid long; a man's son may,

but at the length truth will out."

The Merchant of Venice, Act II, Scene ii

Whether you love or hate Articles 8 and 10 of the European Convention on Human Rights (or the UK media's own Editors' Code of Practice), its perfectly understandable that a judge doesn't consider it in the public interest for the media to publish the 'news' that a man and woman have bonked each other, or that a court has made a decision to that effect.

At first I found it strange that John Hemming MP would choose this particular location on which to build his redoubt in defence of freedom of expression. But then I read his Wikipedia entry.

The Trafigura saga is perhaps a far better example of something on the margins. However, it also shows that an issue may grow to be considered in the public interest in due course, despite early attempts to keep it under wraps. And that the 'traditional media' have little to do with that process, although a mention in Private Eye might be required to get the ball rolling. By contrast, it seems the recent Twitter coverage of bonking injunctions was driven more by media folk and an opportunistic MP than the genuine ferocity behind the social media attention given to Trafigura.

In other words, the truth about matters of real public interest will out. Maybe not in a way that allows the tabloids a 'scoop' and a fast buck. But it will out.

So perhaps the biggest irony in all this is the enormous quantity of free advertising the traditional media have lavished on Twitter. For the sake of argument, they point to Twitter as a rival media property. If Twitter can publish, they complain, why can't the media?

Let's put aside the reality that Twitter does not have anything like the marketing spend, reach or 'authority' behind it as the UK press. The fact is that Twitter is an unedited dynamic, the product of its individual participants' own publishing decisions. For the media to complain about Twitter is simply to admit that the truth will out in spite of them.

Image from Mogulite.

Why The GIB Should Be P2P

In this month's Financial World, Michael Mainelli helpfully explains why the Green Investment Bank "supporters get a hard ride from City anlaysts." The problem, he says, is lack of independence from the government, especially since government policy on alternative energy is "capricious".

I like the "slightly subversive" suggestion for an index-linked carbon bond with the coupon set to the government's performance against its green energy targets. Although if the City won't gamble on government policy, we probably shouldn't let the government bet taxpayer money on its own performance either.

However, there is a way to encourage both broad-based retail investment and widespread household commitment to alternative energy without direct government support. Allow individuals to directly finance each other's alternative energy projects via a dedicated channel on any peer-to-peer finance platform - or, indeed, on dedicated peer-to-peer platforms. Credit risk would sit with individual lenders who are able to diversify across many projects and limit the amount allocated to each one, while earning a better return on their surplus cash than bank savings rates. The initial and ongoing capital requirements for each platform operator would be nominal, compared to the £3bn currently being contemplated for the GIB. And the transparency of online P2P platforms would enable easy measurement of the capital dedicated to alternative energy. In effect, the government would be leveraging its subsidies towards feed-in tariffs etc., not by borrowing on its own account through the bond markets, but by attracting surplus personal savings that currently lack a decent return.

As I've previously explained, this would also avoid the primary risks associated with the vertical credit model of existing bond structures, namely:

1. The separation of lender and borrower, and fragmentation of the original loan note makes it harder to adjust loans when borrowers get into trouble (as highlighted by the 'fraudclosure' and 'forced repurchase' problems in the US also explained in Confessions of a Subprime Lender).
2. The process of transforming 'maturity' (changing the date when loans or debt instruments are due to expire) creates balance sheet risk for the intermediary.
3. It is unclear whether ratings, accounting and audit functions really do remove information asymmetry between borrowers and lenders. Do we have "credible" ratings agencies, when only three dominate the market and they are paid by the issuers of the securities they grade? Similar problems exist in the accounting and audit markets - hence the calls for reforms in these areas.
4. There are huge challenges for subsequent bondholders to undertake adequate due diligence on large volumes of original loans long since disconnected from the bonds and often not even under the bond issuer's control.
5. Pressure to reduce the amount of capital required by each operator in the vertical chain of intermediaries results in a game of regulatory, tax, capital and ratings arbitrage that spans the globe and creates endlessly complex corporate structures.
6. Various factors lead to underestimation of the capital required for the private and implicit public sector guarantees required to support it. This is further complicated by the fact that "...the performance of highly-rated structured securities... in a major liquidity crisis... become highly correlated as all investors and funded institutions are forced to sell high quality assets in order to generate liquidity."
7. The knowledge that the market can ultimately 'put' problem securities on the taxpayer (whether this is explicit, implicit, direct or indirect) creates a moral hazard that seems to increase in line with the demand for the securities until the system irretrievably melts down.

Horizontal credit intermediation, is a feature of peer-to-peer finance platforms - like Zopa, Ratesetter and Funding Circle - where each borrower's loan amount is provided via many tiny one-to-one loans from many different lenders at inception.

The one-to-one legal relationship between borrower and lender/loan owner is maintained for the life of the loan via the same loan origination and servicing platform (with a back-up available), allowing for ready enforcement. The intermediary has no balance sheet risk, and therefore no temptation to engage in regulatory, tax or other arbitrage. Loan maturities do not need to be altered to achieve diversification across different loans, loan terms and borrowers. The basis of the original underwriting decision remains transparent and available as the basis for assessing the performance of the loan against its grade, as well as for pricing the loan on any resale or refinance, making due diligence by subsequent owners easy. To the extent that credit risk were to concentrate on certain borrowers or types of borrowers, those risks would remain visible throughout the life of the loan, rather than rendered opaque through fragmentation, re-packaging and re-grading. Similarly, the transparency of the initial underwriting and subsequent loan performance removes the scope for moral hazard.

Image from Carnation Canada.

Consumers Form Mutual As Protection Against Banks

UK consumers announced today that they have formed a giant mutual finance and insurance fund to avoid ever having to rely on British banks again.

"For the same reason a bank wants to sell you something, you shouldn't buy it," warned about 30 million people.

A chap from the Midlands said, "We've had an overdraft, PPI, ID theft insurance, office computer finance, a mortgage and an investment product - "

"We've had enough!" about 17,000 people from Leeds interrupted.

The British Bankers Association said in a statement:

"In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal."

The Return Of Manual "Banking"?

There is no such consumer activity as "banking". Fiddling around with bank accounts is just something we do in the course of paying a bill, making a purchase, reimbursing a friend, investing etc. - an interim step in a much longer process. "Banking" is what retail banks think we're doing, because they only view the world, and how to make money, through the lens of their own products. Which are designed to make money for the bank, not to benefit the customer, as recent coverage of the PPI mis-selling scandal has highlighted.

Here's a little story.

In 2005 I opened a savings account that had recently been launched by the ill-fated Halifax plc. The only way they allowed you to access the funds was using a passbook, even though the Internet had been fully operational for a decade. So it was pretty clear they wanted me to shove my money in and forget about it.

The last time I'd had a passbook was in Australia in the '70s, so I was a bit nonplussed to be given one in 2005. But at least the Halifax IT system enabled the teller to complete all the little bits of paper they seemed to need each time you wanted to move money. You'd say what you wanted to happen, the teller would feed bits of paper into a printer, tap some keys, hand you the paper to sign, tap some more keys, and you could get the hell out of there. In my case, with a banker's draft - a cheque, for Christ's sake - that I had to then mail to a discount stockbroker before finally investing the funds. It was a miserable pilgrimage. And, sure enough, it declined in frequency from quarterly to annual. The bank did in fact get to hold onto my money for longer.

Cut to 2009, when Gordon Brown and I think one, maybe two other people thought it wise for the ill-fated Lloyds Banking Group to buy the ill-fated HBOS plc, the owner of Halifax. Then cut to this morning, when a Halifax teller patiently explained to me that, as a result of the recent transfer of my Halifax savings accounts onto the Lloyds Bank IT system, I must now complete all the bank's requsite bits of paper myself, by hand.

In other words, not content with the destruction of two financial conglomerates, mis-selling billions worth of products and becoming a drag on the country's finances, these people have spent the last 6 years removing any vestige of consumer-friendly automation from the process of accessing my money.

In fairness, the teller did explain that I can now sign-up for [trumpets] internet banking, to access these accounts. But I'm not convinced that would be a satisfying experience. I'd probably be expected to bring my laptop into the branch just to log-in.

Bad Data In...

The IMF seems to be having a bad year. First it was accused of 'groupthink'. Then it was rumoured (again) to be considering Gordon Brown as its leader.

Now it's The Economist's turn to sink the slipper. It points out that the IMF's forecast of China's current-account surplus assumes a steadily depreciating yuan, and a widening surplus. That provides ammunition for protectionists to impose tariffs on Chinese goods. Yet China's current-account surplus has actually declined since 2006.

But let's not just pick on the IMF. In "Botox and Beancounting", The Economist also points out the cosmetic effect of US official measures of government debt, productivity and economic growth compared to European measures. "The snag comes if investors fail to grasp that official national figures can show the American economy in an overly flattering light."

Of course, none of these is an isolated incident. There are also fundamental problems in comparing corporate financial data, for instance, given differing accounting standards.

And we live in a world where auditors are still trying to figure out what "scepticism" means...

But we don't have a problem detecting bad data. Plenty of people warned others about what Madoff's fraud, for example, and investment analysts routinely uncover issues such as The Economist has reported. Short-sellers make this their business. No, as David Einhorn elucidated in "Fooling Some of the People All of the Time", the problem is how to give the same weight of publicity to the prudent interpretation of the data as is given to the release of the data itself.

The media and social media clearly play a significant role. But even if we create an Office of the Devil's Advocate, ultimately each of us must accept responsibility for thinking critically about the data we're given if we're to avoid making some big mistakes.

Image from TraceyNolte.