Goodbye Gordon Gekko

Who could forget the electrifying performance of Michael Douglas in “Wall Street” a film that still smolders in the consciousness as reflecting the canvas that is the financial market.

Though the products have changed the mantra hasn’t: Greed is Good.

Greed as an incentive to productivity? I don’t think so. Look at the innovation coming out of the technology world and compare it with the innovation coming out of the financial world. Technology is founded on the idea of making life easier, efficient and fun. Innovation in finance is a way of slicing and dicing the same piece of paper.

But what’s the paper made of? Not much really as we are finding out.

The investment banks that rolled out of the 80s and dominated the global financial landscape are falling like dominoes. Falling on the back of injudicious management of risk, capital and balance sheets.

But that’s not where the rot really starts. Greed is just another human emotion, another desire. Living in a world with few boundaries it should come as no shock that we have tipped over into the abyss.

The money seems to have been flowing like the pump was turned on full steam, an inexhaustable supply of cash to be invested in anything that moved or, in the case of property, did nothing.

Now the party is well and truly over. After numerous attempts to keep it going by the self proclaimed master, Alan Greenspan, no one can take anymore. Its like turning up to a mad all day party at 4am with another case of wine or keg of beer. It has no value. Everyone is asleep, passed out.

It will take a while to play out. Some more institutions will go under probably in the form of a shotgun merger, a hastily arranged monetary marriage with glum faces standing behind the bride and groom attempting to be happy.

Just last night the FSA in the UK talked about how “well capitalised” HBOS was. At the same time they were forced into a “merger” with Lloyds. Oliver Stone couldn’t make this up if he was on acid.

But looking ahead can we find anything in the rubble to work with? Well maybe.

It’s time for a reform of the banking system, root and branch.

Banks can go back to being deposit takers and loan makers (though I think P2P lending will eventually take this over).

A Parliamentary institution can take over the task of supply money to the economic system via a Universal Basic Income and Direct expenditure. This would be managed with excrutiating process and targets.

Not like our current Central Bankers who have given up on targetting inflation: one because they can’t get it to work and two because they are more worried about the impact on financial markets.

It doesn’t work. The current system promotes inflation, falling real wages and the treatment of money as a financial asset.

So when we see the reaction to Parliamentary control of the money supply we can simply point out the failures of the private system for all to see.

Game over for the Fed

6 months ago I summarised the status of the US banking system finishing with the line “the financial system on the verge of complete collapse”.

I haven’t added much recently because there was no need. It’s like watching a train wreck in slow motion: you stand there with yoru mouth wide open unable to speak as you take in the enormity of the action in front of you.

What’s left to say? The banking system is effectively nationalised but we knew that with Northern Rock. The difference between Lehmans and Bear Stearns was simply timing. BS was first in the queue and so got some help. By the time Lehmans (who I once worked for) came around no one wanted to touch it and given that they didn’t have customer deposits they could be allowed to fail. Mind you I see Barclays already snapping up some units in the US.

Now we have AIG, a private company, but an insurer so therefore a pretty important spoke the the wheel of the economy. $80bln…..the Fed’s printing press must be running to breaking point. Anyone keeping count of all this?

Don’t bother.

The US debt position is in La-La Land.

This move on AIG is dangerous. Not only has the banking system been nationalised but the stock market is being underwritten. Why the S+P isn’t at 1000 is beyond me. This artificial support of the stock market is just as crazy.

The Fed worries about adding “to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”. Well that’s fair enough but that is the reality. The US has overextended itself over the last 8 years with cheap credit and massive leverage through financial intermediaries.

It’s over. The Fed should be over too.

The authorities need to take a cold hard look at the financial system and the disaster it has wreaked.

No clearer evidence of this has been the advancement into positions of political power by ex-investment bankers particularly from Goldmans. The leverage game must surely be over now.

We are watching the end of 20 years of US financial domination through global investment banking. The end of financial assets being marketed as investments and hopefully a complete reorganisation of the banking and financial system onto a sounder and more stable position, once which encourages productive endeavour and not constant speculation.

Who’s running this show? Rise of the Superclass

Elites have always ruled the world even in open democracies. Sure this was expected in dictatorships regardless of political persuasion but in democracies? What happened to “government of the people, by the people, for the people”?

In his new book, “Superclass: The Global Power Elite and the World They are Making“, David Rothkopf explores the globalisation of the new elites, naming some 6000 players who basically run the whole show. From media to banking he lays out how close these people are and how they are shaping and making the world in their own images. The link between politicians and business is crystal clear. In some countries its hard to tell the difference with the US a great example of this.

If anyone felt the US financial authorities were in collusion with the banking system look no further. The current US Treasury Secretary, Henry Paulson, is a former Goldman Sachs Chairman and Chief Executive. Rothkopf reveals the shennanigans that took place over the bail out of Bear Stearns. He tells how bank heads met over the weekend to hammer out a deal for Bear Stearns. Clearly the deal had to be done that weekend lest the market really fall apart on the Monday. This type of round table pow wow is becoming more and more common as the fragility of financial markets continues to be revealed.

On one hand this sounds good: we have capable people in government and business to take charge of managing a crisis. They all know each other and have worked with each other. They know the score.

But: are they not the same people who caused and are part of the crisis? Is there any chance we get to hear the truth of the matter? Do ordinary shareholders and citizens matter anymore?

Well there have always been plenty of stories about how the Fed operates and the murky manner in which its was founded.

But one thing is clear from this article and the activities of those in power. They run the show in a “we know best” style. The question all concerned people should have is whether power should be so concentrated and in the hands of so few.

I wonder what Lincoln would have made of it.

Microplace: Securitised Microfinance

Somehow I haven’t heard about Microplace but it’s an exciting addition the the expanding world of P2P lending and microfinance. It is different to Kiva because you invest in a security (like a bond) for a fixed term, usually 2-4 years and you receive a return, although minimal 1.5-3%. As I understand it the big issue is getting registered with the Securities and Exchange Commission. Microplace is backed by eBay which certainly helped whereas Kiva was a start up and was forced into going the non-profit route.

It’s great to have two companies to compare and contrast.

Kiva is more personal. I choose who I want to lend to and can received feedback and updated information on how the borrower is getting on. This is really important as it builds a web of social capital.

With Microplace you are buying a package of loans and so you don’t have that personal contact. Also there is the issue of return. I think it’s good you can get a return on your loan as long as it does not influence the rate being paid by the eventual borrower.

So you could actually lend to the same borrower through either Kiva or Microplace but somehow Microplace can get you a small return on your money. I’ll be digging further to see how they do this.  So far they have been very helpful and open.

In a way the securitisation approach is not much different from mortgage backed securities where people invest in a package of mortgages. Of course we all know what’s happened with those. However i would stress this is completely different in that all the loans are unsecured anyway. It’s also important to note that default rates on microfinance are a mere 1-3%.

When we cut out the banks and go direct we enable relationships of trust to be built. This allows the traditional aspects of social relationships to take place. No one cares if you default to the bank but to default to other people can bring personal shame and other social fallout.

These 2 companies are blazing a trail for the rest of the finance industry. P2P finance could well be the next big thing.

House market in a slump

We’re starting to see real signs of a weakening house market here in New Zealand. Sales for Auckland’s top real estate company are down over 50% and a recent auction saw a 6% clearance rate.

I decided ton investigate this myself in Christchurch and looked at some properties recently. One i saw was a 3 bedroom unit which had been bought for $375,000 a year ago. It could be rented for about $350 a week maybe a bit more if it had some money spent on it. It wasn’t in great condition but looked a reasonable investment property.

It was auctioned yesterday and passed in at $317,500. It still hasn’t sold.

We’re not really seeing this come through into prices yet because we only get the median price which is often misleading. In fact it can go up if a few properties sell in the higher brackets and none in the lower levels.

But it’s clear that prices are falling quite heavily in many areas and there is a buyers strike on at the moment.

Although there is the belief that property prices increase regardless the market is clearly starting to realise that capital gains are not guaranteed and therefore investors are starting to look more closely at the maths.

Mortgage rates are 9.5% for 2 years fixed. Yields are 3-5% and prices are falling. Even with the negative equity tax break that’s a big yield gap to fill. There is also the issue of not being able to borrow 100% of the price anymore.

With many fixed rates rolling over this year to much higher rates, the squeeze is really on. This will really start to impact when banks ask for properties to be revalued and then ask for extra equity.

Property investors, like banks, are facing a major liquidity crisis.  Price falls of 10-20% may not be as outlandish as previously thought.

Banks still raking it in

Yesterday the ANZ reported another huge profit even with very large write downs and provisions for bad debts. A mere $510m for the six months to date is not too shabby though we can expect 2008 to be much harder going as loan demand (and supply) falls and consumers pare back on expenditure. We are already seeing signs of that with credit card spending falling along with credit card balances increasing.

But what really stands out is the $3.2bln the banks made in New Zealand in 2007. That is a lot of dough, the majority of which comes from the ability to create money into existence via interest bearing loans.

In the last 10 years loans have risen from $127bln to $323bln an increase of 154%….in 10 years!!!

In that time house prices (from QV data) have risen 178%.

It’s good to see Kiwibank taking a bigger part of this market because at least the profits stay with the taxpayer. And of course the right to create money is a sovereign one so why not have a “national” bank. That’s something worth thinking about.