Why Gordon Brown’s Rescue Package Is Not Going To Work
GORDON Brown has got it wrong and the banking system remains inherently f*cked:
Despite all the gushing in the media, the drooling about “saviour” Brown (or not, depending on what you read), this “rescue” package is not going to work. It is addressing the symptoms of the problem, not the disease itself.
What to do?
This is very much like old-fashioned doctoring, before the days of antibiotics, when you tried to cool the fevered patient, in the hope that it would break, and the natural healing process would take over. Sometimes it did work, but most often the patient died.
We’re doomed!
Here, the infective agent is so powerful that hosing down the “patient” with money is only going to buy time – and very little at that.
The signs of impending disaster are there. John M. Berry in Bloomberg tells it as it is.
“The world’s banking system is caught in a vicious trap, with a forced sale of assets at one institution wiping out capital at others holding similar assets,” he writes. “Think of it as extraordinarily high reverse leverage.”
And, after considering the options, he comes down on the side of blaming “mark to market” accounting. It’s way past time to suspend it, he adds, “or somehow to make investors and analysts understand that fire-sale transactions aren’t supposed to be having such broad implications.”
Mark to market - sell it for what you can get. And if can get sod all because the market is shafted, then you must still try to sell it to pay off your debts…
Posted: 14th, October 2008 | In: Gordon Brown, Money, Twitterings Comments (11) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink
Comments
October 14th, 2008 at 10:38 pm
Well, certainly in the US there are no longer any investment banks, so that bit doesn’t surprise me, but it would be a big deal if GE went.
I’m told they build excellent train engines, so the hope is that their banking arm doesn’t take them all down…
October 14th, 2008 at 10:34 pm
It is said that Investment Banks will not be part of the new system, and I suspect
Warren”s motives are not patriotic, but General Electric should be helped.
October 14th, 2008 at 10:10 pm
sam
a can can is unlikely to provide much in the way of finance, unless it’s for the lady doing the can can…
val
Warren Buffet has bought a chunk of Goldman Sachs, and a chunk of General Electric, though neither of them are small businesses. Of course, without his investment they might have ended up as small businesses…
October 14th, 2008 at 9:52 pm
chenier
I wonder if Warren Buffet or Bill Gates have offered to lend any of THEIR money
to small businesses…. wouldn”t be a bad idea would it . General Motors are closing
down a plant, and many smaller Companies who supply to them have been forced
to do the same. Where”s the American Patriotism now, there must be many Billionaires in the U.S.A. .
October 14th, 2008 at 9:51 pm
we do a can can ?
October 14th, 2008 at 9:43 pm
I haven’t a clue, Val; economic theory seems to bear so little resemblance to reality that I gave up bothering with it.
The equities markets aren’t what matters; what matters is getting money flowing again, which is the point of the exercise. No business can survive without credit, but credit has ground to a juddering halt.
However, LIBOR has fallen for two days, and if it keeps falling it means that the situation is easing. Gordon has forced the banks we’ve bought to make worst case assumptions, so that we can be sure that they do have enough capital. Paulson is doing something similar in the US.
That is the only way we can hope to get investors willing to lend to us the sort of vast sums we need…
October 14th, 2008 at 9:27 pm
chenier
Agreed, judging by the comments today from various “experts”. there is no way
to escape the Recession and at this very moment the Dow is down 67 points……
the euphoria didn”t last long did it!!!!
By the way, what”s the name for the second part of the Trade Cycle:-
1. Boom
2 ?
3 Recession
4 Depression
5 Slump
October 14th, 2008 at 9:12 pm
No, Val; Berry is an idiot. He thinks if they just pretend that the garbage is actually worth a lot more than it is, investors will line up to give the US lots of money.
The chances of that are non-existent, but some people have difficulty in grasping reality.
And yes, I’m sure traders will want to go and work elsewhere, but for the next several years there will be no chance to make that sort of money. The markets are comprehensively screwed, and even if the Brown plan works there is still going to be a nasty recession ahead of us…
October 14th, 2008 at 9:01 pm
chenier
I watched Bloomberg this afternoon , is Berry the one who predicted this some time
ago.
On the News to-night, the Olympic Village is having a “Drawdown” according to Tessa
Jowell of £95,000,000….do we really need to host the Olympics at a time like this.
Whatever the so called experts think……if they were that bloody clever why were”nt they working in the Treasury? I think Mr. McCawber got it right:-
Wages £1 Expenditure 19.6d = Happiness
” ” £1.06d = Misery
Let”s hope some hard lessons are learned from this and never again will the Banks
be allowed to jeopardise the economy the way they have. The galling thing is the
guy yesterday outside a Bank being interviewed. He was obviously a Trader and when asked about the bonuses predicted it would only be a couple of years before they had them back. One threatened to go work in Dubai or Saudi if he didn”t get his bonus.
October 14th, 2008 at 6:24 pm
It’s crap.
Sorry, not you FSBFP, the stuff about the accountancy rules.
They already changed them, and I wrote a piece about it at the time; it did f*ck all to improve matters.
John M Berry is being somewhat disingenuous in not mentioning in his article that the SEC had already issued a statement allowing people to take a much more cheery view of their Troubled Assets, but perhaps he just overlooked it in all the excitement.
Equally, John M Berry pointedly ignores a little local difficulty called Enron, which I suppose is unsurprising given that the fraud there involved taking a view of their Troubled Assets so cheery that people ended up doing jail time.
Ironically, he even cites the Sovereign Debt fiasco of the early 80’s, which I have written about, as an excellent example of what a good idea it is to pretend that banks are not insolvent when they are insolvent. I have written about it as an excellent example of how stupid the bankers were in the first place to lend vast sums of money to countries which did not have a hope in hell of servicing the debt, much less repaying the principal.
Voodoo accounting is almost as attractive as voodoo tax breaks to people who want to believe that there really isn’t anything wrong with laisser faire financial markets as exemplified over the last quarter of a century, and that everything would come magically right if they just implemented whatever bee they have in their bonnets.
If you want to look at what people without bees in their bonnets, but with heavy duty financial expertise, think about the debacle then take a look at the article in Forbes entitled:
Dimon, Munger, Rohatyn: No More Vegas
http://www.forbes.com/2008/10/13/rohatyn-munger-dimon-pf-ii-in_rl_1013croesus_inl.html?dbk
‘Wall Street giants Jamie Dimon, CEO of JP Morgan Chase; Felix Rohatyn, recently senior adviser to Lehman Brothers; and Charles Munger, Warren Buffett’s curmudgeonly sidekick, predict the end of huge leverage and the return of Wall Street to an earlier era when investment firms were mainly “advising corporations and individuals globally and making solid profits overall,” says Dimon…’
Munger wants to outlaw all derivatives, which makes him even more draconian than I am.
The bottom line, which John M Berry and Richard are averting their eyes from in the hope that those nasty numbers will just go away, is that the UK, the US and a hefty chunk of other countries need to borrow vast sums of money to pay for the losses generated by the laisser faire financial markets. The subprime lendings are just the tip of the iceberg; there are all those lovely credit default swaps out there, and Dog knows what else.
The only people who have the money are the Sovereign Funds, and places like China.
If you want to persuade someone to lend you money, you need them to trust you; an iron law of the markets which permits no exceptions. They have been burned before; it is delusional to believe that taking a cheerier view of your Troubled Assets will do anything other than than make them run, not walk, from the building.
I don’t know whether Brown’s plan will work, though the fact that he is following Warren Buffet’s example is cheering; I do know that Warren Buffet, and his curmudgeonly sidekick, thinks that the mark-to-market rules have nothing to do with this disaster.
In fact, Munger is furious with the accountants, not because they were too harsh, but because they were too lenient; in particular for letting Wachovia report actual profits on accrued interest from risky mortgages when, in fact, the interest wasn’t paid but added to the principal amount due on the mortgages….
October 14th, 2008 at 5:28 pm
mwah haa haa haaa haaaaaaaaaa