Shuffling The Deckchairs On HMS Status Quo

I've kept a beady eye on the 'progress' of the Commission on Banking, while holding out little hope that it will result in more than a shuffle of the proverbial deckchairs, rather than any wider solution to our general funding woes.

UK banking, as we know it, would be finished without ongoing taxpayer support of at least £512bn, according to the latest National Audit Office report. And that's assuming the economic headwind doesn't get any stronger.

But this figure doesn't include the subsidy banks get to help gather deposits cheaply, especially in the form of the Individual Savings Account tax-free savings programme. Banks are accused of abusing this privilege by offering a mere 0.41% average interest rate on the £158bn they attract with higher teaser rates. Of course, you can add to that practice the many £millions in fines incurred to date for such things as mishandling customer complaints, reporting failures, lapses in anti-money laundering controls and poor investment advice (keep up with the latest fines here).

So, if it weren't for the uncertainty about the extent to which the government will continue to bend the theory of evolution in their favour, the only way for us to really make money out of UK banks would be to bet against them.

Instead, the taxpayer safety net allows the Commission the luxury of merely wondering whether good old British banking might be delivered more safely (if still more expensively) via independently funded, ring-fenced subsidiaries.

What difference could this possibly make?

Testament to this bizarre preoccupation with maintaining status quo is the government's determination to ignore alternative models. For instance, the government has just meekly referred to Zopa, the UK's own world-first in person-to-person finance, as a form of "giving" (see page 15). That's weird, because with absolutely no government assistance Zopa has so far enabled over £100 million in person-to-person loans, representing 1% of the UK personal loans market. Lenders are seeing annual returns of 7.9% and a default rate of under 1%, while delivering market leading rates for creditworthy borrowers. Banks aren't offering anything like this service, even with the added government subsidy of tax-free ISA status. Imagine how much of the personal loan market would shift to the Zopa platform if people's lending returns were also tax-free? FundingCircle has already launched a similar model for small business funding. Could the greater liquidity enable mortgage funding in the same way? Such horizontal funding processes also offer a more transparent, low cost and efficient solution than the vertical intermediation model that operates in the 'shadow banking system'.

It's one thing to avert overnight systemic failure, but quite another to prop up exploitative, inefficient business models over the longer term in preference to more efficient alternatives. We should expect a more holistic approach to the UK's financing woes than the Commission on Banking is attempting to provide.

Today's Post Taken Aurally

The law's very own Black Swan, 1928

Rather than communing with my laptop, tonight I had the pleasure of discussing the challenges of emerging technology with the inaugural meeting of the SCL Junior Lawyers Group.

What differentiates this group is the desire to focus on the context for IT law and lawyers, rather than merely the law itself. As a result, the discussion that continued over drinks ranged from New Journalism, to the difference between facilitators and institutions, to the Cheetah Generation and Steampunk mobile, rather than merely the legal challenges posed by WikiLeaks.

The overriding questions seem to be: where will the key trends take the law and lawyers over the next 100 or 10,000 years? And how do we minimise our exposure to the downside - and maximise our exposure to the upside - of the next Black Swan?

Tweet your top tips using #legaltrends.

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..."

Of course, the authorities remain timid in their approach to corporate and securities fraud, perpetuating collusion in the mortgage markets and prolonging the economic crisis.

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.

Alternative Power For Geeks

It's fascinating how much data is publicly available. Here, for instance, is a summary of key data that describe the UK electricity market, including demand and generation by fuel type.

So what?

Well, apart from putting various fuel types into perspective, and maybe settling a few arguments, it's worth reflecting that the Hawthorne Effect was named after the electricity plant in which it was first documented. Henry Landsberger found that workers' productivity improved when he measured it to study the impact of light levels on their work, but declined again when his experiments ended. That suggests that when people know you're measuring their activity, it improves.

Alternative energy-generation measurement widget, anyone?

Water Quality/Filter Filter?

A tale of two teas

I confess to having taken drinking water pretty much for granted, until my brother-in-law joined a leading water softener and filter supplier. Now I'm a little obsessed.

Amazingly, UK water companies actually produce a report that shows the water quality in your area. Just plug in your post code and tick the content you want to see. This is designed to tell you what 'contaminants' the water companies have been able to filter out, and allow you to decide what you might need or want to filter out yourself for whatever reason.

Unfortunately, there seems to be no mash-up that enables you to directly compare the remaining contaminants in your area with the capabilities of all the available water filters on the market - a "water quality/filter filter".

Something for the Open Data community, using API's and data from the various utilities and filter providers?