PFI Bailout: One Last Gulp Of The Kool Aid

To be fair, I did warn Ministers when Gordon drained the Cabinet tea urn and filled it with his own lethal Kool Aid cocktail. Don't drink it, I said. Do something useful. Take one of the nation's never-been-used military helicopters and fly out to meet the Taliban.

But oh, no. They just sipped away. Nonchalantly playing with the country's finances until, when they lifted the Union Jack piggy bank to their ears and shook it... nothing.

Well, hell. When you're mainlining on fearless ineptitude, that won't stop you. You just get taxpayers to stand in long lines outside banks with IV tubes running straight from their wallets into the vaults.

And as economy grinds into reverse, we have their last, best, brightest idea. The last big gulp from the Kool Aid: bridging loans for stalled PFI projects.

Boy, has that one knocked over the cappuccinos at the Taxpayer's Alliance!

Bridging loans? A bridge to where and when? "Until the economic climate changes, at which point the loans would be renegotiated." That's not a bridging loan. That's the financial equivalent of lighting an oil well and running away. How are we going to fund these things for an indeterminate period? How will they be repaid when the economic climate doesn't "change" in the way that is mysteriously expected?

Who knows? They certainly don't care. It's over for them.

The Leadership Crisis Is Ours To Resolve

Paul Moore's recent evidence to the Treasury Select Committee reveals the kind of top-down culture in the UK financial system that explains not only rampant over-expansion and the financial chicanery that went with it, but also arrogant, self-interested foot-dragging over such things as slow payments, mis-selling of PPI, acceptance of falsely self-declared income on mortgage applications and allegedly excessive bank charges. Intensive regulatory activity, checks and balances aimed at preserving the banks has not been enough to save them. For this, the very taxpayers who are poorly served as consumers must now pay.

After a string of CEO departures, the resignation of Sir James Crosby from his post as Deputy Chairman of the FSA, and with the "blame" now lying at the door of the man who was Chancellor through it all, there is no doubt we are in the midst of a leadership crisis.

But what lies in store for us once the "old guard" has gone? Who are the new leaders? Will their leadership improve?

Leadership is a rather nebulous concept. Over centuries, people have literally died trying to define it by reference to specific character traits, sundry personal qualities, types of behaviour, situational responses, functional responsibilities and so on. But regardless of whether or not leadership features all or some of these characteristics, it is ultimately a very complex, contextual, dynamic, inter-personal relationship between the purported leader and those he/she is trying to lead.

In other words, leadership is what the participants in the relationship make it, and we get the leaders we deserve.

But we know this, and we're acting on it. Our decline in faith in our institutions over the past 30 years, and the corresponding surge in political awareness, participation in informal politics, and personalisation of previously mass consumer experiences all reflect our growing individual pragmatism and our confidence in acting on it from the bottom-up. We have learned that great leadership is within our control because we are a fundamental part of that relationship. In essence, we are the leaders.

That is why, when Chris Skinner issued an apology to 98% of bankers for his rather apt criticism of banks, I suggested that in fact they should take his remarks personally. Because we know that as people they are not powerless. We know that great leadership will emerge when the 98% respond to the criticism, bottom-up, by forging a decent relationship with their customers, putting those customers first, ahead of their managers, executives, board directors or shareholders. Only then will we see decent, sustainable profits from the finance services industry.

BarCampBank Valentine's Day

Forsake your loved ones! Your country needs you at BarCampBank in London on Valentine's Day.

Given that a BarCamp is about as grass-roots as you can get without actually going out into your snow-filled garden and digging, it's a great opportunity to question everything from the bottom up - to really turn the world on its head.

While, unfortunately, I have other commitments on Valentine's Day, I'm fascinated by what the attendees will come up with in terms of "new business models in the world of banking and finance", and possibly democratising the financial markets.

In an attempt to help, I plan to jot down on this post various issues and observations that occur to me this week.

Closest to my Zopa heart are person-to-person mortgages and person-to-person invoice discounting for SME's. But I'm aware that those two suggestions assume an awful lot. The real starting point should be what financial problems do people face today, how big are those problems and what array of solutions might solve them? Ideally, this inquiry should not be driven by, or viewed through the lenses of products in the market today. But it would also be interesting to question today's retail products. Do we need credit cards, for example? If so, why? And why/for whom do the financial markets exist. And so on.

Indeed, what would happen if I went AWOL for about 10 hours on Saturday ;-)

Here are my builds:

1. I reckon there are 8 characteristics that any new retail financial service will need to acquire critical mass.

2. Banks can be the back-office of financial services 2.0 - after all, the money that's not currently lent out at Zopa sits in a segregated account at RBS.

3. See Dave Birch's post on payments without banks. My 10 cents worth on alternative currencies:

• A facilitator would need to gather enough reasonably reliable data on each "currency" for users (or the facilitator itself) to estimate the exchange value.
• People could list "currencies" they have a surplus/deficit of and the facilitator could show matches, with or without estimates of exchange value.

What functions currently reserved for "authorised" financial institutions could be opened up for more lightly regulated players (following the trend set by e-money and now payment services for example).

4. Chris Skinner has listed various "next generation" financial services firms due to present at Finovate in April.

5. Note that "payment service providers" will be able to passport their services throughout the EU from 1 November 2009 - the UK regs went before Parliament yesterday. Similarly, the E-money Directive is also to be overhauled, largely to reduce the capital burden on e-money businesses, and to ease the restriction on conducting other business.

6. Here's an interesting piece of context. In December 2007, Royal Bank of Scotland paid $100bn for ABN Amro. A year later, the same money would have bought:

• Citibank $22.5bn
• Morgan Stanley $10.5bn
• Goldman Sachs $21bn
• Merrill Lynch $12.3bn
• Deutsche Bank $13bn
• Barclays $12.7bn
• And with the change $8bn .....they would be able to pick up GM, Ford, Chrysler and the Honda F1 Team.

Back to Basics - Financial Capability Starts Here

While I have a basic competence in Mathematics, passed statistics and even got my Six Sigma 'greenbelt', I've never quite had a 'feel' for it, like some people I know.

In fact, Maths was the one subject at school that annoyed and disappointed me in equal measure (sorry, double that for Physics), as did most of the people who purported to teach it to me. They did little but drone on about their subject, instead of... well, I just never knew how they could've made it interesting. And, like most lawyers I know, I've often flippantly boasted of having 'no head for figures at all' - probably because it sets us apart from accountants... ;-)

However, increasingly aware that this 'phobia' is rather silly, I recently Googled something like "explain mathematics to me now!" and ended up buying a copy of Mathematics Explained for Primary Teachers by Derek Haylock.

Fantastic!

Derek patiently explains Maths from the beginning - in words - missing no step in the logic. So one is never left with that "Huh? You lost me" plunge into the chasm of uncertainty so common in Maths classes. While he's very clear on the formal steps required to solve each mathematical riddle, critically for the under-confident, Derek also carefully explains - and firmly validates - all the informal routines that one might go through in an attempt to grapple with a problem. There may be one right answer, but I was stunned to learn there's no "right approach". And what seems an "easy" way for one person is quite likely to look a bit screwy or "wrong" to another who's never had things properly explained. The point is neither deserves a clip over the ear and five minutes facing into a corner of the classroom.

As someone who has taken many apparent slices into the rough before joining the rest of the class on the mathematical green, this was a joy to discover. A great fog of cringing uncertainty is lifting. In fact, reading this book for the first hour did more for me than the 3 hours a week I spent observing dull, well-intentioned people scratching around on blackboards for 12 years.

Of course, the Derek wrote the book because many teachers and potential teachers of Maths suffered the same experience in their Maths classes at school. As a result they won't teach it, or won't teach it very well for lack of confidence in how to explain it to kids who demand greater understanding of the subject. So, increasing their confidence is key to persuading them to educate our kids in a far more effective way. Derek deserves a medal.

While finance is but one application for Maths, one can't help thinking that we would all be much more financially capable if more teachers - and perhaps parents - read Mathematics Explained for Primary Teachers. Did you know, for example, that subtraction is now taught differently, and that parents and grandparents are often, tragically, an unwitting source of confusion as a result?

This is the role of the Personal Finance Education Group, which has been doing great work in this area - arming teachers with the self-confidence to teach Maths in a financial context. Let's hope this also has a broader impact.

Democratising The Financial Markets

One of President Obama's first acts has been to berate Wall Street executives for taking the sixth largest round of bonuses in history at the taxpayers' expense.

That the US President is suddenly under public pressure to do this demonstrates not only the depth of public anger but also the gulf in public knowledge about how the financial markets work. My own perception is that intensive regulation - ironically designed to protect the financial system and the general public from the kind of risks now occurring - has funneled the world's investment funds and opportunities into a cloistered environment in which only a privileged few are trusted to connect them. Enormous rewards for those few are simply a bi-product of that regulatory outcome. And it's unsurprising that those rewards should remain high as the flow of investment capital runs dry in the face of intensifying demand from cash-strapped banks and corporations.

But all the participants in the financial system must now recognise there's a new seat at the table. While governments and central banks have always been big players in the financial markets, their new role as sole marketmaker has pulled up a chair for the taxpayer. This new player demands to know how "my money" is being used, and has the benefit of increasing media attention focused on finding that out. This in turn casts each government leader in a role similar to that of an investment banking chief executive at a perpetual AGM. Voting may be over for the US President, but now the lobbying for a multitude of special resolutions begins. For Gordon Brown, more torture awaits on both fronts.

So how can governments and their leaders escape this predicament? How can they hand off their role as marketmakers, and let the taxpayer get back to running the store?

Certainly one lever they can pull, amplified recently by Niall Ferguson, is to "de-leverage" the entire system by funding yet further bank write-offs and re-writing consumer mortgages at more affordable rates (which has happened many times in the UK sub-prime mortgage sector).

But this seems to assume the financial system will remain more or less the same. And I don't believe it will. I certainly don't believe that taxpayers will ever completely turn their backs on finance again. Indeed, as emerged at WeBank, it seems we are moved to generate a new system with a new set of rules.

The attack on 'excessive' bonuses challenges the notion that matching investment capital and investment opportunities should be a rarefied activity reserved for the anointed few. Carry that challenge through and you have a set of simplified, transparent marketplaces that are substantially open to all, in a direct sense, albeit still facilitated by a skilled few in an open and transparent way. There is already a trend in this direction with individuals spread-betting and investing in contracts for differences on various plaforms. But that's still way too sophisticated to be deemed reasonably accessible to all. A process of further simplification, with increased openness and transparency, would be entirely consistent with the development of directly accessible consumer marketplaces around facilitators in travel, auctions, retail, betting, entertainment, personal finance and trade finance markets during the past decade. In those marketplaces, the role of the facilitator has been to enable consumers to seize control of their own experience and keep much more of the value that was previously retained by suppliers.

In this sense, the "democratisation" of the financial markets may be seen as very much a logical step, rather than anything terribly radical. It will be important to get the rules right - just as that has been critical to the success of many other consumer platforms already out there. But openness, fairness, transparency, and both governments' and taxpayers' determination to get out of this mess, ought to be reliable guides.