Anatomy Of A Dodgy AAA Rating?

Can't wait for a judgment in Cassa di Risparmio della Repubblica di San Marino SpA v. Barclays Bank Plc (Case No. 08-757, High Court, Queen’s Bench Division).

According to Bloomberg, CRSM claims that "Barclays Plc deliberately designed structured notes that would have a much higher risk of default than their triple-A rating suggested" - i.e. "25% or more" instead of “a fraction of 1 percent.”

With any luck, the case won't settle, and we'll have some more forensic insight into the relationship between investment banks and ratings agencies, as well as due diligence and the ratings methodologies...

Lifting The Lid On The EU's Finances

Congratulations to the Financial Times and the Bureau of Investigative Journalism on their exposé on the gross fraud, waste and ineptitude inherent in the EU's €347 billion 'structural and cohesion' funds.

Even putting fraud and waste aside, it's hard to understand how this approach is sustainable if Greece, Ireland, Portugal and Spain are anything to go by. Public sector largesse eventually seems to generate the need for public bail-outs, especially when local governments borrow to match the free money that's available. No wonder the new UK government has put an end to direct local authority funding through this mechanism.

Certainly all this porkbarrelling has done little for 'cohesion'. A recent poll found that only 42% of Europeans trust the European Union - reflecting a general disenchantment with EU institutions over the past few decades.

The seven year budget cycle and lack of provision for returning unspent funds to donor states also makes the scheme incapable of flexing to meet changing economic circumstances. The fact that a large proportion of this money is lying around simply unclaimed in the current environment is scandalous, and another blow to economic confidence.

It's a travesty that this money was raised in national taxes in the first place, let alone handed over to Brussels on the terms of this scheme.

The EU's budget for this nonsense should be slashed next time around.

Image from Forest's Fine Foods.

Hey Eric: Lend Your Euros Directly To Other People

Like previous financial crises, this one won't end until individual and collective confidence in banks and the financial system is restored. And while it's all very well for the Eurozone's political masters to be demonstrating their 'political will' to hold the Eurozone together at individual taxpayers' expense, their latest attempt at restoring confidence has not exactly impressed Spain's debtors...

But such bail-out headlines merely the typically dominant institutional narrative. The real question is whether the Euro and EU institutions actually have the confidence of EU citizens - especially taxpayers. A recent poll suggests they do not: only 42% of Europeans trust the European Union - reflecting a general disenchantment with EU institutions over the past few decades. Meanwhile, in sharp contrast, bottom-up facilitators that enable citizens to participate in shaping and personalising their own services have done very well.

This is reflected in the behaviour of EU citizens on the economic front. The implications of the one-size-fits-all Eurozone monetary policy seem to be regarded as just as unfair by German taxpayers and the French savers supporting Eric Cantona's suggestion for mass bank-withdrawals on 7 December as by those hitting the streets of Greece and Ireland. The Guardian quotes Valérie Ohannesian, of the French Banking Federation, as saying Cantona's appeal is "stupid in every sense". Yet, crucially, she did not explain why people should feel more confident about leaving their money on deposit, or why it is fair that banks receive taxpayer bail-outs while taxes increase and spending is cut. In the absence of any other narrative, each bail-out undermines our confidence even further, to the point where we hit the streets and seriously consider suggestions like Eric Cantona's.

But it doesn't have to be this way. There is a bottom-up narrative emerging, and our politicians need to focus on it.

Eric Cantona's confident call for mass withdrawals hints at the fact that people are prepared to put their money where their mouth is. But it would be futile for those with surplus cash languishing in low interest savings accounts to withdraw it all and hide it under their beds. Instead, they should join those who already put their money to work helping others, by lending it directly on peer-to-peer lending platforms to creditworthy people and businesses at a decent rate that also represents a decent return.

Swiss Tailwind For Personal & Small Business Social Finance

Banks will find it more costly and less profitable to offer short term unsecured personal and small business finance under Basel III rules, according to a recent McKinsey report.

To comply with the new rules, Banks face a long review of their businesses and products to reduce risk, use capital more efficiently and minimise the need for market funding by the end of 2012.

Which is more great news for participants in the 'capital light' social finance business models, like Zopa and Funding Circle in the UK.

As I mentioned in the context of the proposals to regulate vertical shadow banking functions, people using these 'horizontal intermediaries' benefit from:

1. Loan amounts being split into small one-to-one loans at inception, rather than having to wait for the slicing, re-packaging and grading involved in asset-backed securitisation;
2. A direct, one-to-one legal relationship between borrower and lender for the life of the loan, enabling better control over debt adjustment and collection, where that becomes necesary;
3. Lenders retaining day-to-day control of the management of their money and credit risk, minimising the capital required by the intemediary;
4. The intermediary not needing to slice and re-package debt to alter loan maturities, since lenders can manage this by assigning loans of unwanted duration to other lenders;
5. The intermediary having no balance sheet risk, and therefore no temptation to engage in expensive and complex regulatory, tax or other arbitrage;
6. Transparency in the original underwriting decision and loan performance against grade - making lenders' due diligence easy, and removing the moral hazard of the kind we see in vertical intermediation models, where the endless slicing and re-packaging makes due diligence hard.

For these reasons, one might expect banks to allow their depositors to lend directly to their personal loan and small business customers. But it seems unlikely the banks could feed themselves on the scale of fees their nimble competitors can afford to charge. And they would soon face calls to allow the peer-to-peer approach for mortgages and larger corporate loans - by which time other nimble providers may well beat them to those segments too...

Image from Gogherty.com.

Usual Suspects Bottom Out EU Consumer Scoreboard

You may wonder why a blog focused on how we seize control of our consumer experiences devotes so much space to our frustration in the personal finance space.

Because, as the latest edition of the EC's Consumer Markets Scoreboard confirms, it's our biggest source of angst.

Bank current accounts and credit products, investments, pensions and securities all feature in the bottom 20% of the "Market Performance Indicator", with investments, pensions and securities coming in lucky last.

Real estate services, internet service provision and railways also get a pasting; as well as secondhand cars, clothing and footwear, meat, and house maintenance/ improvement goods.

An incredible 31% of consumers find it fairly easy to compare investments, although only 34% of consumers think they deliver what's promised. A naive 26% of us are as likely to trust investment providers as used car salesmen.

Yet 76% of us don't bother to switch providers...

As a result, until the usual suspects get their act together, we face an endless stream of edicts emanating from the Brussels bureaucrats, adding more and more to the complexity for both providers and consumers alike. A great deal more proactive work in this area by providers may help stem this tide. Switching providers might also help.

In the meantime, internet service providers and the "meat market" can also expect the joy of EC market study questionnaires.