大象传媒

Here鈥檚 some disappointing news for the Northern Rock, its shareholders, the Treasury and taxpayers.

The Rock and the Treasury had expected there would be fresh bidding interest for the battered bank, sparked by the Treasury鈥檚 promise of financial support to Northern Rock for at least five years.

The Treasury鈥檚 proposal to guarantee up to 拢40bn of new bonds to be issued by the Rock surely transformed any Rock rescue deal from no-hoper to sale of the century.

The world鈥檚 banks and financial institutions were bound to trample each other in the rush to obtain a piece of the action 鈥� because the Rock is probably now the only retail bank in the world which can be completely confident of its funding for years to come.

No such luck.

Not a single new potential rescuer has emerged.

In fact, if anything the outlook is a bit gloomier than it was - because one of the groups still technically in the game, the management of the Rock itself, is struggling to raise the requisite amount of equity.

That leaves just two serious players: and the consortium led by .

And they have just three days left to submit their definitive offers.

But why does the Rock remain so unloved and unwanted, even after the Treasury has stuffed it with readies?

Partly because, as I pointed out in an earlier blog, the Treasury is not being quite as generous as it seems 鈥� in that it鈥檚 understandably demanding that any future losses in the special purpose vehicle issuing the bonds would fall first on the Rock, its rescuer and shareholders before hurting taxpayers.

Also there was not a lot of time available for any potential new bidder to do its homework before the deadline.

However what the emptiness of the auction-hall really tells you is that most of the world鈥檚 financial institutions are very anxious beasts at the moment.

This is not the time to embark on new takeover adventures, they feel, but to conserve capital and batten down the hatches.

Taking over a 拢100bn mortgage bank when the economy is turning down doesn鈥檛 feel quite right to them, however attractive the terms.

It鈥檚 all particularly nerve-wracking for the prime minister, Gordon Brown.

He insisted on the bond-solution as an alternative to nationalisation.

In doing so, he took a big political and financial risk.

So if the Rock were yet to be nationalised 鈥� and that鈥檚 not impossible 鈥� he would have quite a lot of explaining to do.

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• - What's this?

I have discovered more about the extraordinary risks being run by Jerome Kerviel, the rogue trader at whose transactions cost the bank 鈧�4.9bn.

According to official investigators, in the last few weeks his bets on stock markets were so big that every 1 per cent swing in the value of European shares resulted in either a profit or a loss for the bank of 鈧�500m (拢370m) depending on whether the swing was positive or negative.

In other words, his bet was big enough to bankrupt SocGen on the basis of any sustained fall in stock markets.

What鈥檚 more, bankers have confirmed that at the end of last year, Jerome Kerviel had generated a colossal hidden profit for the bank of 鈧�1.4bn.

Among the great mysteries of the Kerviel affair is how the French bank could have failed to notice a profit of that size.

That 鈧�1.4bn profit had become a loss of 鈧�4.9bn by January 23, when M. Kerviel鈥檚 position had been unwound.

Or to put it another way, the deficit on Kerviel鈥檚 bet in the opening weeks of this year was 鈧�6.3bn, or 拢4.6bn.

Bankers have also disclosed that in 2006 Kerviel鈥檚 open positions in stock-market index futures 鈥� largely bets on the direction of the DAX, FTSE and Eurostoxx indexes 鈥� reached a colossal nominal amount of 鈧�30bn.

This was closed out at the end of 2007. But Kerviel then went on a gambling spree and increased his position to a mind-boggling 鈧�50bn earlier in January.

According to a banker close to the investigation, Kerviel鈥檚 first fraudulent positions were taken out in January of last year 鈥� although he apparently took steps to conceal a small loss at the end of 2006.

What is also shocking is that as long ago as March and April of last year, Societe Generale鈥檚 back office, or administrative operation, queried phoney transactions being carried out by Kerviel to disguise his massive stock-market bets.

At the time he was covering up his massive speculative activity by pretending to enter into 鈥減ending鈥� futures transactions, whose economic effect would have been to negate the real trades.

These pending futures deals were identified by SocGen鈥檚 back office 10 months ago, but Kerviel鈥檚 explanations of them were regarded at the time as plausible.

The use of the 鈥減ending鈥� futures transactions was one of five different methods employed by Kerviel to hide the extent of his real trading.

The other techniques for creating phoney trades included entering transaction dates for deals that fell after the normal settlement cycle, doing forward deals with other parts of SocGen, and creating fictitious issues of warrants.

Bankers say that he must have been frenetically busy covering his tracks by concocting these illusory transactions.

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• - What's this?

There will be a lot of harrumphing in the board rooms of the big banks this morning.

They won鈥檛 like the Treasury鈥檚 nod in favour of pre-funding a new scheme for insuring their retail customers鈥� deposits.

It would mean that the banks would have to transfer billions of pounds into a rainy-day pot.

And the money would simply sit there, unless and until a bank collapsed and depositors had to be recompensed.

The argument for such an arrangement is a good one, which is that in these anxious times it鈥檚 important to have a tangible manifestation that depositors鈥� funds are being protected.

That鈥檚 what the said in a published over the weekend.

But the volatile conditions in financial markets that have created anxiety about the robustness of banks are what make the reform proposal difficult for banks: right now they are chronically strapped for cash.

The big banks fear that if they were to inject hundreds of millions of pounds each into the new insurance fund, they would have less capital available to lend to all of us 鈥� and that would exacerbate an economic slowdown that鈥檚 already underway.

The Treasury is promising to consult on this idea.

Of all its myriad proposals to shore up the financial regulatory system in the wake of the debacle at Northern Rock, this is the one that will precipitate an unseemly fracas.

By contrast, there will probably be a broad welcome for measures to help the mount covert rescue ops for troubled banks.

It wants to legislate to over-ride provisions in law and in stock exchange listing rules that force a troubled bank to make a public statement that it is being propped up by the Bank of England.

The Treasury would also end the requirement for the Bank of England to publish a weekly balance sheet, which is what helps nosey parkers like me identify how much support is being provided to a frail deposit-taker.

And protection would be given to Bank of England directors against the risk of being sued by the shareholders in an enfeebled bank 鈥� who might legitimately feel that if the Bank of England knows their business is in trouble, so should they.

There is only one flaw in the Treasury鈥檚 cunning plan.

What is proposed would not have done much to prevent the panic at the Rock that was caused by the disclosure that it had gone cap in hand to the Bank of England.

The Treasury feels that an emergency loan from the Bank of England should only be kept secret where that loan is temporary and limited in nature.

But the Treasury, the and the Bank of England have concluded that the Rock was suffering from a serious structural flaw in its business model.

And they believe that the Rock would have required so much taxpayer support for so long that it would have been inappropriate, naive and impractical to endeavour to keep it on a life-support machine in a wholly clandestine way.

Whether they are right or not excites great passions. Some Rock shareholders profoundly disagree with them.

There is also the point that I disclosed the news of the Rock having gone to the Bank for a rescue loan some 12 hours before the authorities were planning to make their official announcement.

Or to put it another way, there is no way any new law can prevent journalists or City analysts excavating the truth about evasive action being taken by the Bank of England.

So it鈥檚 the other parts of today鈥檚 reform package which are more relevant to preventing a repetition of a Rock-style disaster.

They include measures to give the authorities more powers to intervene at a bank that鈥檚 being managed in an unduly risky way, and 鈥� as a last resort 鈥� to seize control of that bank and manage it with the twin aims of protecting retail depositors and taxpayers.

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• - What's this?

It鈥檚 always the quiet ones.

, the leading pub chain, has become the first non-financial company in the UK to be seriously crunched by the poor conditions in credit markets.

M&B has suffered a 拢274m loss from closing out a series of financial positions it took on.

These were supposed to be a hedge for a property joint venture that it planned to execute last summer, but which was cancelled when the onset of the credit crunch made it impossible to raise debt for the deal.

Unfortunately for M&B and its shareholders, the hedge was already in place 鈥� but it was an orphan and it was naked, unable to do what it was supposed to do, which was to provide inflation-protection to that elusive property spin-off.

In fact the total loss for M&B is a bit more than 拢274m. There is further 拢22m unrealised loss showing on a bit of the hedge which M&B will retain.

Also, closing out the hedge has pushed up M&B鈥檚 debts, so the business鈥檚 interest-rate bill will rise and reduce post-tax earnings by 拢13m this year.

So the total cost is well over 拢300m.

M&B needs all this like a hole in the head right now.

Trading conditions for pubs, after the smoking ban and at the onset of a consumer slowdown, are as bad as anyone can remember.

As it happens, M&B is doing better than its peers and is capturing market share 鈥� but it is struggling to increase sales by more than a fraction.

Understandably, both of M&B's senior directors tendered their resignations.

The board allowed the finance director, , to go. But it decided that the services of the chief executive, , were too valuable 鈥� and, presumably with shareholders鈥� consent, he is staying.

None of the executives will receive a bonus for 2007 鈥� which is perhaps a poke in the eye to all those investment bankers who felt it appropriate to pocket bonuses in spite of the enormous losses their outfits incurred on sub-prime and related rubbish.

Two questions.

What responsibility for this debacle rests with the big banks, Citigroup and Royal Bank of Scotland, which left M&B with its naked hedge when they declined to provide loans for the property deal, having indicated that they would provide the finance?

And what of . M&B鈥檚 partner in the property joint venture that never was? Has he too incurred a big loss on a similar hedge he took out? And how does he feel about the fall in value of his M&B stake?

He runs his business a long way from the stock market, so does not have to share his financial pain with the wider world. But he can鈥檛 be feeling too chipper.

That said, Robbie Tchenguiz certainly has gumption. He's been increasing his holding in M&B, so that it's now 21 per cent.

The stock market believes M&B has hung out the for-sale sign this morning, by making the resonant statement that it is reviewing "strategic options for value creation". Which is why its share price has risen a bit, in spite of the humiliating loss.

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• - What's this?

I鈥檓 not sure whether yesterday鈥檚 鈥渆xplanatory note鈥� by Societe Generale about what it describes as its 鈥渆xceptional fraud鈥� was supposed to be reassuring.

But it didn鈥檛 do the trick with me. It left me feeling more anxious than ever, not only about how SocGen got into its mess but about whether controls are appropriate at other large banks that are stewards of our cash.

Here鈥檚 why.

As I explained last week on 大象传媒 television, Jerome Kerviel鈥檚 alleged method was to take very big bets on the direction of markets, and then only pretend to hedge them by making fictitious bets in the other direction.

This fictitious hedging made it look to his employers, for a year or so, that his net trading position was close to neutral 鈥� or that if that one bet swung massively out of the money, it would be offset by a swing into the money by the matching bet (and vice versa).

Let鈥檚 push to one side, for now, the mystery of his motivation. And that is perhaps the most gripping mystery of all, because even if 鈥� as his lawyers claimed yesterday 鈥� his real trades were in profit to the tune of 鈧�1.5bn (拢1.1bn) at the end of last year, there was no way he would ever have trousered any of this: that gain would have been sitting in his employer鈥檚 account, not his.

Also, let鈥檚 not fixate at this moment on what may enrage SocGen鈥檚 shareholders, which is the bank鈥檚 disclosure that as of mid-day January 18, M. Kerviel鈥檚 position was in balance 鈥� but that the massive loss of 拢3.7bn was only made real by the bank鈥檚 actions of selling M. Kerviel鈥檚 positions into a declining market.

Now I have been told by a banker advising SocGen that the Banque de France, France鈥檚 central bank, instructed SocGen to close out the position as quickly as possible.

But the official explanation from SocGen is that its chairman, Daniel Bouton, opted to sell tout de suite.

If so, SocGen鈥檚 shareholders may well be feeling less than enamoured of M. Bouton.

And, I have to say, if SocGen were a British bank, my instinct is that M. Bouton would already have been ejected from the boardroom.

But all of that, to an extent, is a sideshow.

The only thing that really matters is how M. Kerviel was able to bet his entire bank on the direction of stock markets and whether the flaws in SocGen鈥檚 controls also exist in other big banks.

What doesn鈥檛 provide comfort is that a senior banker with one of the world鈥檚 largest and most respected financial institutions 鈥� who has been drafted in by SocGen to help sort out its mess 鈥� told me he didn鈥檛 think SocGen鈥檚 risk-control techniques were any different or worse from most other banks.

The point is that SocGen鈥檚 method for controlling the risk to the bank from the activities of traders like M. Kerviel relied on controlling their respective net exposures to markets, rather than taking into account their respective gross exposures.

In fact, SocGen鈥檚 latest statement says that M. Kerviel was encouraged to engage in a 鈥渧ery large amount of operations involving very high total nominal amounts鈥�.

SocGen probably thinks it is just stating the bloomin鈥� obvious, given that M. Kerviel鈥檚 official job was in equity-markets arbitrage.

And the various traders who read this column will probably accuse me of being needlessly alarmist.

They will point out that M. Kerviel was supposed to generate profits for the bank by exploiting minute differences in the buying and selling prices of almost-identical financial instruments, in his case European stock index futures or instruments with near-identical characteristics to those futures.

And in order to do that, he needed to trade on an enormous scale.

If done properly, they鈥檒l say, the risks are minimal.

Perhaps it鈥檚 understandable that SocGen hadn鈥檛 properly allowed for the mad-genius risk, that a trader should have the desire and ability to gull the bank for no apparent personal gain.

But my fear is that SocGen, and possibly other banks, may be unduly optimistic about their ability to hedge a large position so that it becomes, in net terms, a small position.

Here we have to get into the detail of what M. Kerviel did.

According to SocGen, his fictitious hedging portfolio consisted of 鈥渧ery specific operations with no cash movements or margin call and which did not require immediate confirmation鈥�.

The relevance of this is that it shows how M. Kerviel sustained his alleged game for so long.

If M Kerviel had hedged his bets in a normal way, there would have been margin calls 鈥� or demands for cash from those he was dealing with, known as counterparties 鈥� when those hedging bets moved against him.

So alarm bells should have rung at SocGen when there were no margin calls.

However, M Kerviel silenced the alarm bells by putting in place special hedges which involved no margin calls.

Now, his ability to do this is troubling enough.

But I find it difficult to believe that even if those hedges had been real, as opposed to figments constructed in SocGen鈥檚 computers, they would have been safe.

A hedge requiring 鈥渘o cash movements, or margin call鈥� doesn鈥檛 sound like a very liquid hedge, or one that could have been traded out when needed.

Forgive me for this long pre-amble, but we are now at the nub of what worries me 鈥� that SocGen was allowing its traders far too much exposure to liquidity risk.

Let鈥檚 just say that everything M. Kerviel had done had been real, can we really be confident that his portfolio would have withstood a drying-up of liquidity of the sort we have experienced in the credit markets since last August?

Was there a degree of naivet茅 built into SocGen鈥檚 assessment of the risks being run by all its traders?

We need to know a great deal more about the hedges it permits in its arbitrage department.

In particular, we need to know that when a trader legitimately makes a 鈧�50bn bet, his or her hedge really will behave in the way that it says on the label 鈥� because if it turns out to be an illiquid hedge, it might well be no hedge at all.

These may sound like technical issues. But they matter to all of us, because they directly concern the robustness of the controls imposed by all the banks on which we rely.

PS. M. Kerviel鈥檚 day job in equity index arbitrage sounds complicated, but it鈥檚 not really.

Think of it as buying a load of apples at 50p a pound from market-trader Fred on one side of the street, and then selling them to trader Boris on the other side of the street for 50陆 p per pound.

If you sell enough apples to Boris before he reduces his price to 50p, you will have pocketed a few pennies.

In fact, what M. Kerviel did was a little bit more complicated than that. He was dealing in futures.

In effect, he made a deal with Fred that he would buy a load of Granny Smiths from him at 50p in the pound in two weeks time, and he simultaneously agreed to sell Boris an equivalent amount of Grannies at 50 陆 p, also for future delivery.

Now you can鈥檛 get rich by selling ten apples at a 陆 pence profit.

But if a bank buys and sells 50 billion apples, that鈥檚 a lot of 陆 pences.

Which is why M. Kerviel had a licence to take enormous 鈥渘ominal鈥� positions.

M. Kerviel was allowed to buy 50 billion apples from one group of traders, so long as he simultaneously sold 50 billion apples 鈥� or some similar fruit, exhibiting similar price behaviour to apples 鈥� to another set of traders.

Unfortunately what M. Kerviel actually did was buy all those apples, while only pretending that he matched all those purchases with sales.

And that鈥檚 how he upset the apple cart.

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• - What's this?

France has one, Switzerland too. The UK has a big'un, Germany numbers two or maybe more, and the US has a veritable epidemic of them.

As if you didn't know, I am talking about banks that have become chronically sick since last summer.

It's why the prevailing mood in Davos is anxiety - or at least among the business leaders and politicians from the wealthy, old economies of Europe and North America.

Among the roll-call of western banking shame, our own Northern Rock humiliation is special.

The damaged banks from the other countries were all terrible lenders, or foolish in the way they invested their capital. That includes Societe Generale, even if it was the victim of deception.

Northern Rock was a disastrously bad borrower, far too dependent on wholesale money markets for the finance needed to provide mortgages.

It was starved of vital sustenance last summer when those wholesale markets closed: its undoing was the crisis of confidence in the financial community precipitated by the disclosure of just how idiotic its international rivals had been as lenders.

Which is why the Rock had to demand succour from the Bank of England - and why it's now on a 拢60bn lifeline provided by the Treasury.

But, make no mistake, for a bank it's as much a sin to take excessive risks as a borrower as it is to do so as a lender. A drying up of access to funding or liquidity will kill a bank just as surely as lending to those who can't repay.

So who's to blame for the Rock debacle? Well, we now have the first official evaluation, in the form of a report by MPs on the cross-party Treasury select committee.

Most at fault, say the MPs, were the Rock's directors for constructing a flawed business model; then the City watchdog, the Financial Services Authority, for failing to spot the flaw in the business model till it was too late; then the Bank of England, for being unimaginative and inflexible in the way it provided funds to the banking market after it seized up.

Few will quibble with that verdict. And it's certainly fashionable to give the FSA a good kicking. That said, it is worth noting that no British bank has been exposed as a lethally poor lender - for which, perhaps, the FSA deserves modest credit.

However it's the select committee's prescriptions for reform that will prove more controversial.

It seeks to address the widely acknowledged holes in the powers of the authorities to cope with a bank that runs into difficulties.

What seems to be required is:

a) the ability by the authorities to obtain more information at an earlier stage from any bank facing trouble;

b) greater powers to direct the offending bank to mend its ways;

c) a system for formally taking control of a bank on the brink of crisis, to quarantine the depositors and take them to safe harbour, while reconstructing or deconstructing the rotten part of the organisation;

d) deposit-protection arrangements that provide comfort to depositors that they can't lose money or access to their money.

The logical place for most of these new functions to go would be the Financial Services Authority - or at least that's what the chancellor thinks, and he'll flesh out his reform proposals in the coming week.

By contrast, the Select Committee is proposing the creation of a new semi-independent financial-stability body that would sit within the Bank of England. It would be run by a re-invented deputy governor of the Bank of England, who would have no direct reporting line to the governor on banking remedial work.

The committee has put the chancellor in a tricky position. He can't really ignore the verdict of a Labour-controlled committee. But presumably he can't simply abandon most of his own ideas.

The big issues here are whether the creation of this new bit of the Bank of England would lead to excessive duplication of costs and functions with the FSA - and whether it will enhance or undermine effective decision-making.

One committee recommendation would, I think, be impossible for the chancellor to adopt. That would be for the banks to "pre-fund" a new deposit-protection scheme or make substantial cash injections into it.

Although it is vital that we all have total confidence in the robustness of such a scheme, right now none of our banks have a surplus of spare cash.

It may be better to take an IOU from the banks than to drain them of liquidity at a moment when they're feeling the pinch - and the economy is paying a price in the form of reduced availability of credit.

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• - What's this?

This is a transcript of a piece I did for the 6pm News on Radio 4 on Thursday.

At the world economic forum, the mob of bankers are agog at the Societe Generale debacle.

They simply don't understand how a trader earning around 拢70,000 a year was able to evade SocGen's risk controls - and bet the entire bank that stock markets in Europe would rise this year.

His ability to vaporise the bank's capital represents a massive dereliction of SocGen's responsibility to look after the savings of its millions of customers.

Regulators around the world will be seeking reassurance that the same flaw does not exist in their banks.

What also intrigues the Davos crowd is the extent to which SocGen's actions in reversing its rogue traders' bets on Monday and Tuesday were responsible for the sharp drop in European stock markets.

This matters - because that fall in share prices in part spurred the US Federal Reserve to announce its emergency cut in interest rates on Tuesday.

Sir Howard Davies, the director of the London School of Economics and a former central banker, explains.

Davies told me: "Did the Fed know this was going to happen? If it didn't know it was going to happen, then why on earth wasn't it told? And if it did know it was going to happen could it not then see that it was likely to have an unusual effect on the market - and then was it reacting to a false market in a sense because SocGen was dumping a lot of shares on to the market?"

The notion that this rogue trader could have bounced the most powerful central bank in the world into a savage interest rate cut is alarming, to put it mildly.

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• - What's this?

I can't escape Northern Rock even in Davos. What I've discovered is that the term sheet for the massive bond issue has now been discussed with potential issuers.

Much is still up for negotiation. But as of this moment the Treasury is insisting that it will have a claim on the assets of a rescued Northern Rock, were the new special purpose vehicle that would hold billions of the Rock's assets and would issue the Government-backed bonds to suffer a calamitous fall in the value of its assets and be unable to pay bondholders their due.

Or to put it in more technical terms, the term sheet provides that the Treasury would have full secured recourse against all other assets of the Rock in the event that the Treasury guarantee is called.

What does that mean?

Well it provides extra comfort to the taxpayer. In the event that the value of assets in the special purpose vehicle - dubbed 'crapco' by one of the putative rescuers - were not sufficient to repay bondholders, the taxpayer guarantee would only kick in after the reconstructed and rescued Northern Rock distributed all its capital to said bondholders.

I'd better translate further. It means that if crapco suffered a capital shortfall, it could wipe out the new equity to be provided by any successful rescuer of the Rock, such as Virgin, Olivant and/or the existing shareholders, inter alia.

So the Bond issue - which could be as big as 拢35bn or 拢40bn - isn't quite the gift that the supposed rescuers may have believed.

Also rules provide that holders of more than 15% of the shares of a bank must normally provide a comfort letter backing the bank 鈥� for the full amount of its liabilities.

So presumably the would-be Rock rescuers will take great pains to construct their participation in the Rock to ensure that only their Rock capital could be called were crapco's assets to be vaporised. Sir Richard Branson won't want to hand over a few jumbo jets to bondholders, in the event of a crash in the housing market.

It all rather suggests to me that the partial nationalisation of the Rock favoured by Gordon Brown may yet stumble and fall - so it's not quite 100% certain that nationalisation will be avoided.

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• - What's this?

Only one thing will be discussed here in Davos today: the alleged fraud by a trader at which has cost the French bank 鈧�4.9bn, or 拢3.7bn.

I feel slightly sick thinking about it, as I sit surrounded by snow-capped peaks. The sheer scale of the loss is overpowering.

It takes the crisis in the global banking markets into a whole new area.

So here are the questions:

1) Did it take place in London, where SocGen has a big presence?

2) Is the loss related to mis-valuation of structured finance products, abuse of what is known as the "mark-to-model" approach to assessing the value of stuff like collateralised debt obligations?

Funnily enough, there were strong rumours at a big bank's party last night that there was a nasty lurking in the French banking system.

I wonder whether this debacle will add to or lessen the unusually strong mood of anti-Americanism here, which is particularly conspicuous among continental bankers and politicians.

Many of their banks are reeling from losses on investments linked to sub-prime - and they blame Wall Street for manufacturing and selling this poison.

I have to say that there is a plausible counter-argument, which is that at least some of the fault lies with the foolish German and French bankers who bought the toxic stuff.

Rather than simply whinge about the excesses of Anglo-American financial capitalism, the Franco-German contingent might ask why their own banks were so easily seduced into buying securities whose intrinsic risks they plainly did not comprehend.

UPDATE 09:05
Well London and Wall Street may well be able to breathe a sigh of relief, in that it looks as though the great financial centres are not implicated at all in the SocGen scandale.

The alleged fraud took place in Paris, and - in SocGen's words - was carried out in "plain vanilla futures hedging on European equity market indices". So there was no connection to CDOs or structured finance.

SocGen says that a single trader - who had "in-depth" knowledge of the group's control procedures having previously been employed in an administrative role - concealed massive trading positions built up over 2007 and 2008 through "a scheme of elaborate fictitious transactions".

In other words, its significance is in showing the vulnerability of a mighty bank to the mischief-making of a single rogue trader. It鈥檚 eerily reminiscent of the Barings disaster of the early 1990s - which was supposed to have prompted all banks to put in place better checks and controls on the activities of their trading desks.

UPDATE 12:11
Bankers in Davos are saying three things about the fleecing of Soc Gen:

1) They don't understand it. For a trader in "plain vanilla" index futures to exceed his limits to that extent should be impossible, given the controls that exist in most banks.

2) The Americans, Germans and Brits, all of whom have seen crises at their local banks, are unattractively relieved that the French have joined the international roll call of shame.

3). There is a widespread fear that other horrors are lurking in Europe's banking system - and a wish that the Europeans follow the example of the Americans by 鈥榝essing up to their mistakes as soon as possible.

As Mervyn King, the Bank of England Governor, said earlier this week, the financial system can't be healed till the severity of its illness is fully disclosed.

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• - What's this?

A contained a stark analysis of what may lie ahead for banks.

Mervyn King said that central banks could not fix the fundamental problems in money markets, which underlies commercial banks reduced appetite for lending to all of us.

"The solution to the underlying problem does not rest with them [central banks] but with the banks and financial markets" he said. "Banks must reveal losses promptly, and, most importantly, raise new capital where necessary".
When I was a boy, if the Governor of the Bank of England had made such a statement there would have been a minor earthquake in the City.

It would have been taken for granted that he knew that the balance sheets of one or more of our big banks were shot to pieces. And that massive rights issues of new shares, to raise capital, were undoubtedly on the way.

That was then, when the had direct responsibility for supervising the health of banks and the elevation of the Governor's eyebrow could change climatic conditions.

Since Gordon Brown's regulatory reforms of 1997, the Bank has a more indirect relationship with banks: it is responsible for the stability of the financial system rather than the health of individual institutions.

But that doesn't mean his words can be dismissed as just another view, albeit rather more intellecutally robust than most analysts'. If the Governor really has no special knowledge of conditions in the City, then we're probably in serious trouble.

And Mr King doesn't think the problems at the banks are just that they have failed yet to make a clean breast of their losses on their foolish investments in securities linked to sub-prime lending - though we can expect more losses out of that mess of their own making.

King opined that "there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions".

He implied that the recent sharp falls in the share prices of banks weren鈥檛 wholly irrational.

After the tumbles in their share prices, the historic dividend yields for some of our biggest banks rose to astonishingly high levels, between 8 and 11 per cent - which suggests that investors fear that their dividends will be reduced.

If King is right, and some banks need new capital, cutting their dividends would be one way of achieving that. At a time of such economic uncertainty, cutting the dividend might be smarter than issuing shares.

To be clear, there is no suggestion that any of our banks are in serious difficulties. But the bad-news season for them may not be over.

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There were rumours sweeping the markets all morning of a looming interest rate cut from the US.

And the is intrinsically disturbing: some investors will have made a killing (though they would have had to move fast if they were trading shares, since the FTSE100 has fallen again, having briefly rallied).

To state the bloomin鈥� obvious, central banks are not supposed to leak.

Here are other reasons to be worried, in spite of the Bernanke bounce in stock markets.

What the Fed has done looks like panic.

It hasn鈥檛 cut rates as much as three quarters of a percentage point for as long as I can remember.

And it made the decision to slash a week before its scheduled meeting.

If it looks like panic at , smells like panic at the Fed, and quacks like panic at the Fed, well many will say it is panic at the Fed.

And what if the evasive action doesn鈥檛 work?

What if, after the Bernanke bounce, stock markets continue to fall, financial markets remain relatively illiquid, banks remain reluctant to lend and the US economy continues careering towards recession?

Then the players in the global financial souk will begin to fear that the US authorities 鈥渉av鈥檔ae got the power鈥�, to quote Scotty.

Which, in the battle between the doom-mongers and the optimists over prospects for the global economy, would represent a disturbing victory for the forces of darkness.

UPDATE 15:19 Oh dear, the Bernanke bounce was short-lived in Europe and non-existent on Wall Street.

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The technical definition of a bear market is a drop in a leading market index of 20 per cent from its high.

On that measure, and after the falls of the past couple of days, there are already bear markets in France, Mexico and Italy.

After the first impact of the crisis in money markets in the autumn, Japan and China entered a bear market phase last November.

In fact, according to research by Bloomberg, some 43 stock markets have slipped from bull to bear.

And as for developed markets as a whole, as measured by the MSCI World Index, they are down 17 per cent on average from their 31 October high.

So I think we can safely say that the stomping, snorting optimistic beast of a market is fleeing the field, to be replaced by something scary and grizzly.

In the UK, at one point this morning shares were showing a fall of a fifth in their value on average since just the start of this year.

But volatility is the order of the day. In London there has been a stunning bounce, which could yet turn out to be ephemeral.

Having worked at assorted times on trading floors, I can smell the adrenalin, testosterone and fear that is creating this mayhem.

There are of course fundamental reasons to be worried.

I have written and broadcast extensively about the painful transition we are living through from liquidity crisis to solvency crisis, from credit crunch to asset deflation, from money market malfunction to global economic slowdown.

It started last summer as a crisis of confidence among banks and financial institutions, which led them to rein back the credit the provided to each other and then to all of us.

But what has been profoundly shocking is how the effect of that credit squeeze has been amplified by a self-reinforcing feedback mechanism which has seen the recession in the US housing market pulverise first the value of the alchemical securities manufactured out of sub-prime and then the balance sheets of banks and insurers.

And in the vicious cycle of decline, the flaws in the financial system ignored during the bull-market euphoria are now being exposed. As you know, I have been particularly worried for some time about the fragility of the so-called monoline insurers - and the threat that their woes will lead to massive losses for investors in the bonds they insure.

My fears became very personal yesterday when the disarray at , a leading monoline, led to falls in the price of bonds of my beloved Arsenal.

Few of us are immune from what's going on. Whether you are saving for a pension, a direct investor in shares and bonds, or a Chancellor of the Exchequer dependent on tax revenues generated by the City, you would be right to feel a bit poorer this morning.

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• - What's this?

The scale of the the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent.

The Treasury has said that it will guarantee bonds to be issued by Northern Rock both to repay 拢25bn of loans it has received from the Bank of England and to provide it with sufficient additional funds to run itself as a going concern.

So the taxpayer would support this bank to the tune of well over 拢25bn 鈥� and could still be providing at least some of this financial support five years from now.

No British Government has ever provided financial help on that scale to a business.

The Treasury would be guaranteeing the principal and the interest on bonds or 鈥渘otes鈥� to be issued by the Rock.

That effectively turns those notes into Government bonds, gilt-edged stock.

It means that Rock will be able to raise a colossal sum and at a relatively low rate of interest rate.

What would that be worth to the Rock?

Well it鈥檚 difficult to be precise, because it depends on what happens to money markets over the coming weeks, months and years.

But the value of the guarantee to the Rock would be more than 拢1bn, according to my calculations 鈥� based on the price at which Northern Rock鈥檚 existing mortgage-backed bonds were trading in the market on Friday morning.

Or to put it another way, the guarantee would be the equivalent of a one-off injection into the Rock of more than 拢1bn, a subsidy of that amount.

That said, the Treasury says that the Rock would pay a fee for this succour 鈥� though it doesn鈥檛 specify how much the fee would be.

Right now, the bank could not afford to pay anything like 拢1bn in cash as a one-off.

And if it paid that amount in equity to the Treasury, the bank would end up majority-owned by the public sector, it would be the equivalent of almost total nationalisation.

In return for propping up the business, the Treasury is taking control of what happens to the troubled bank, turning its shareholders and board into bit-part players.

The Treasury will determine which of the groups promising to rescue the Rock offers the best business plan.

At the moment there are three front-runners: Olivant, the consortium led by Virgin, and a standalone plan being developed by the Rock鈥檚 current board.

However the Government hopes that when other financial groups see how generous the Treasury is prepared to be, they might be tempted to come back with new offers 鈥� though they would have to move very fast to meet a tight timetable.

Detailed proposals from the rescuers are to be submitted by February 4 at the latest 鈥� so that a decision can be taken a couple of weeks before March 17, which is the expiry date of the European Commission鈥檚 approval for the current state-aid package being provided to the Rock.

I am told that its primary consideration in choosing the winner of a contest to control the Rock will be the speed at which taxpayer support can be withdrawn.

Which implies that if one of the contestants were to offer less to shareholders while pledging to do without the public-sector crutch quicker than any of its rivals, it could be the victor.

And for those who fear that the Treasury will be providing cheap money to a Richard Branson or some other entrepreneur to enable them to make a quick and easy fortune out of the Rock, the Treasury has said there will be restrictions on dividend payments and on selling the business, until we as taxpayers have got our money back.

What鈥檚 more, the Treasury has lost its fear of owning some of this business.

It says it will take a stake in the bank by being given warrants.

That would provide taxpayers with some of the upside, if the value of the bank were to bounce back at some point.

So to call what鈥檚 on the table a private-sector rescue is a misnomer.

Really it would be a partial privatisation, or a public-private partnership.

Which is still a bit of a humiliation for the Government, because it was never its explicit ambition to go into business with a provider of commercial mortgages.

What鈥檚 more, the Chancellor can鈥檛 be certain that a private-sector rescue will be agreed, even with the provision of so much taxpayer help.

So he also lays out the basis on which the bank would be nationalised, if all else fails.

As I鈥檝e said before, nationalisation would be carried out through legislation.

And the Treasury would pay to shareholders what it thinks the shares would be worth absent any taxpayers support 鈥� which it believes would be pretty close to zero.

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• - What's this?

Gordon Brown's decision to provide a Government-guarantee for up to 拢25bn of new Northern Rock bonds means something startling.

The prime minister is promising that the taxpayer will finance the bank for five years or until markets recover enough to allow it to stand on its own two feet again.

Make no mistake, there is an element of nationalisation in this.

If Sir Richard Branson, or Olivant, the company itself or any other potential rescuer agrees to do a deal on this basis, the risks at Northern Rock would be shared between the owners of the business and the taxpayer for many years to come.

It would be a public-private partnership, or a partial nationalisation, depending on your point of view.

In fact, I expect the Chancellor to say on Monday that the Government may end up owning a piece of the Rock -- though initially it will probably take an option on shares, via what are known as warrants.

It would make sense for the public sector to end up with a stake in the Rock.

Because if we as taxpayers were to shoulder many of its business and financial risks going forward, surely we should be rewarded with any future gains - if there turn out to be any.

Alistair Darling will also say that he'll decide which of the rescue plans, if any, will be agreed -- and that the Rock's board and shareholders will become almost bystanders

Why this sudden determination to take charge? Well he's the one with the money -- provided by all of us as taxpayers -- that the rock so desperately needs.

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• - What's this?

The Chancellor will imply on Monday that were Northern Rock to be nationalised, shareholders would receive nothing or next to nothing.

What Alistair Darling will say, in a Stock Exchange announcement and in a statement to the House of Commons, is that a valuation of the Rock鈥檚 shares, were to it be nationalised, would be based on what the business would be worth in the absence of the Government鈥檚 current financial support to the troubled bank.

In the absence of that 拢55bn of taxpayer loans and guarantees to Northern Rock, the bank would be in administration under insolvency procedures 鈥� and the Rock鈥檚 shareholders would have to wait in line, probably for years, to receive anything for their shares, pending the total dismantling of the business.

Mr Darling鈥檚 motives in making the threat to shareholders are transparent.

He wants to scare them into accepting any deal the company and Treasury were to reach with the private-sector groups still vying for control of the Rock 鈥� even if that deal gave little to shareholders.

Many in the City will see the Chancellor鈥檚 statement as giving a particular boost to the prospects of the Virgin consortium, since its takeover proposal was regarded as particularly hostile to the interests of the Rock鈥檚 shareholders.

This determination to scare shareholders into submission is also why both the Chancellor and the Prime Minister said last week that nationalisation remain a very live option for the bank.

And it鈥檚 why they have made detailed contingency plans for a nationalisation, which included appointing Ron Sandler 鈥� the former insurance executive 鈥� to chair a nationalised Rock, and preparing legislation as their preferred route to nationalisation.

The Chancellor and Prime Minister felt they won a victory at the bank鈥檚 extraordinary meeting on Tuesday, when two big hedge funds failed in their attempt to win shareholder support for their attempt to severely limit the ability of the bank鈥檚 board to sell the business without their approval.

There鈥檚 only one problem for Gordon Brown and Alistair Darling.

Their other actions this weekend tell a very different story.

They have signalled that they are deeply scared of the political ramifications of nationalising Northern Rock, and are prepared to accept almost any price to avoid nationalisation.

That鈥檚 apparent in the way that they have massively sweetened the terms on which they are prepared to support any private-sector group wishing to take control of the Rock.

By accepting the proposal from Goldman Sachs, the investment bank, to convert a taxpayer loan 鈥� which is currently around 拢24bn 鈥� into bonds for sale to international investors, they have decided to provide public-sector support on a greater scale and for much longer than they had initially said they would do.

Those bonds would be guaranteed by the Government. And the Bank of England will endeavour to sell as many of them to investors as it can, as quickly as market conditions permit.

But unless there is some miraculous improvement in conditions in money markets, it means that taxpayers will continue to prop up the Rock to the tune of tens of billions of pounds for years 鈥� because the loans will be guaranteed by the Government until such time that private-sector insurers are prepared to take over that guarantee at an acceptable price (no chance of that right now).

And because these bonds have a five-year term, the Government will be promising to provide taxpayer support to the Rock for at least five years.

That鈥檚 quite a change from what the Treasury was saying before Christmas, when it was demanding that any private-sector rescuer should repay between 拢10bn or 拢15bn of those taxpayer loans straight away.

The way to see all this is as a game of chicken between the Prime Minister, Gordon Brown, and the two hedge-fund shareholders, SRM and RAB.

The hedge funds want to make as much money as they can from their 18 per cent holding in the bank.

Mr Brown wants a private-sector deal that tilts the rewards away from shareholders and towards the taxpayer.

In this game of chicken, by signalling how reluctant he is to push the nationalisation button, it was the Prime Minister who blinked this weekend 鈥� and the hedge funds may well be feeling pretty chipper.

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• - What's this?

The Treasury still talks about looking for a private sector solution to the woes of Northern Rock.

But it鈥檚 no longer demanding that any private-sector rescuer repay more than 拢10bn of taxpayers鈥� loans to the Rock at the moment of taking control of the business.

What Gordon Brown has in effect decided is that the Government will go into a long-term business relationship with one of the groups vying for control of the troubled bank.

It's what he might call a public private partnership

The heart of the plan is the conversion of taxpayers' loans to the Rock of about 拢25bn into bonds for sale to international investors.

But these bonds would be sold off only in dribs and drabs as conditions improve in money markets - and they would be guaranteed by the Government.

What is means is that taxpayers would be supporting the Rock to the tune of many billions of pounds for years.

Even that doesn't guarantee that nationalisation of the Rock can be avoided.

But it massively reduces the prospects for nationalisation.

The biggest risks are that any deal would breach EU rules banning state aid - and that opposition politicians will accuse the Government of using taxpayers funds to subsidise future gains for the Rock's private-sector controllers.

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• - What's this?

You may think it鈥檚 all been doom and gloom at investment banks over the past few months: horrendous losses on sub-prime and holdings of poisonous securities; declining share prices.

But, except for the unfortunate few who鈥檝e had the heave-ho for doing particularly stupid deals, it鈥檚 actually been another golden year for the employees of the great Wall Street banks.

According to research by , the online comment and analysis service, total compensation at the five largest US investment banks was just under $66bn last year, almost 9% higher than in the previous year.

But here鈥檚 the shocking comparator: that $66bn of remuneration delivered a $50bn reduction in their aggregated stock-market value over the course of 2007.

Or to put it another way, the bankers at , , , and were each paid $350,000 on average, for diminishing the value of their businesses by $274,000 each.

That鈥檚 not a terribly brilliant demonstration that markets are efficient at pricing capital, whether physical, financial or human.

And how marvellous that it should be the very archangels of global capitalism that should manifest this utter contempt for the owners of their businesses.

This disconnect between their remuneration and their productivity is a microcosm of one of the resonant trends of our age: that bankers were massively rewarded over the past few years for doing deals that turn out to be toxic for the global economy; and even though many of them have trousered massive rewards and can afford to sit on a beach forever, the rest of us are paying for their misguided financial engineering in the form of slower economic growth.

My old friend Hugo Dixon, the founder and chairman of Breaking Views, puts it rather brilliantly: 鈥淢arxism is a bankrupt philosophy. But its critique of capitalism 鈥� that profits are privatised but risks are socialised 鈥� always had an element of truth.鈥�

And what do the bankers themselves think of their bumper payments for failure?

In a poll conducted by Breaking Views, just 54% think they鈥檙e worth it 鈥� which presumably means that the other 46% can鈥檛 believe their luck.

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• - What's this?

What disturbs me most about the current mess in debt markets is the apparent inability of banks and investors to act in a rational and co-ordinated way to prevent a relatively small, local financial difficulty turning into a global meltdown.

I鈥檓 talking about the buffeting of the monoline insurers, whose shares 鈥� notably those of and 鈥� have been taking a beating.

The importance of these companies is that they provide guarantees to bonds with a value of $2400bn.

It鈥檚 their sole business, which is why they are called 鈥渕onoline鈥�.

They exist to provide insurance that turns good-quality bonds into bonds that are supposedly of impeccable quality, almost as good as US Treasuries, because there are certain risk-averse investors that can only buy the best triple A securities.

They have typically provided this service for bonds issued by US municipalities 鈥� which is stuff that is intrinsically okay 鈥� and bonds linked to US subprime mortgages, which is stuff that is intrinsically stinky.

So as fears have increased about how much sub-prime lending will eventually be written off, estimates have risen about future payouts that the monolines will have to make.

Which is why the ratings agencies are reviewing the credit ratings of Ambac and MBIA for possible downgrade.

If the monolines lose their own triple A ratings, then the bonds they insure will 鈥� automatically 鈥� lose their premium ratings.

Those bonds will 鈥� also as a matter of automaticity 鈥� fall in value.

estimates those losses would be $200bn.

But it鈥檚 impossible to be precise about this 鈥� because if risk-averse investors were to dump several lorry-lorry loads of this stuff on the market, who knows how far the prices could fall.

There is a simple solution.

The banks and investors most at risk from a bond meltdown could pump fresh capital into the monolines, to prop them up. The few billions needed by the monolines are trivial in comparison with the potential losses that would be generated throughout the global financial system were they not to be mended.

But the current spirit on Wall Street is anarchic sauve qui peut.

All the big banks are so pre-occupied mending leaks in their own respective hulls that they appear to be blind to the looming iceberg.

Let鈥檚 hope they are capable of taking collective evasive action at the last, because otherwise we could enter a horrific new phase of the credit crunch.

Oh, and you may remember that the great hope of the government is that it will persuade one of these insurers to guarantee billions of bonds that would be created out of its loans to Northern Rock.

That鈥檚 the sine qua non of a so-called commercial rescue of the Rock.

But it is literally the worst time in recorded history to buy such insurance.

The one or two reinsurers still in business can charge what they like for this service.

Would it be in taxpayers interest for the chancellor and prime minister to pay out eye-watering amounts of our money for this bond-wrap or guarantee?

Mr Brown and Mr Darling be make a tasty dish for the Public Accounts Committee if they even thought about doing so.

Update 09:29: Oh to have been a fly on the wall in the offices of , the fund manager, when its share opened more than 40% lower this morning, knocking more than 拢130m off the value of the company. The reaction from - New Star鈥檚 strong-willed founder who is probably best known for having made some colourful remarks about the Germans a few years ago - would probably have been great theatre. But then the news out of New Star was horrendous: poor investment performance; an outflow of funds; a savage dividend cut; a shocking profits warning. It doesn鈥檛 come much worse than that.

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• - What's this?

If it weren鈥檛 that investment bankers have tough hides and short memories, I鈥檇 wonder whether could bounce back from the humiliating losses it has announced today.

The damage is not just financial, although the scale of its losses almost defies comprehension.

For a firm of its size , and just under $9bn for the whole year, is life threatening.

Merrill has only survived thanks to lifesaving capital provided by investors from the new bosses of the global economy, the cash-rich economies of Asia and the Middle East.

But perhaps worse for Merrill is the damage to its reputation.

To have been the market-leader in the business of converting sub-prime into CDOs is not a great brand.

Merrill and its peers said they were processing poison into healthy, wholesome investments for consumption by the banks and investment funds on which we all depend.

So confident was it in the nutritional value of this stuff, that it consumed super-sized portions itself.

Merrill and its clients are now feeling quite sick.

And having lost all that financial capital, the risk for Merrill is that its most valuable human capital 鈥� those of its execs untainted by sub-prime 鈥� will flee.

What are the implications for the rest of us?

Well unless Merrill and Citigroup have chronically overstated the collapse in value of CDOs and related investments, other banks and financial institutions will announce increased writedowns in coming weeks.

Which will further squeeze the capital available to finance economic activity 鈥� and reinforce an economic slowdown already in train.

That said, it鈥檚 an ill wind鈥� But not for , the former chairman of the .

The current economic mess is laid by many at this door, for the way the Fed cut interest rates too much and held them down too long after 9/11.

And he was also a champion of the kind of financial innovation that fuelled the bubble in US sub-prime lending.

Anyway, a number of hedge funds have made a mint out of sub-prime lending.

The biggest winner has been the New York firm, , which is thought to have made $12bn in profits from the sub-prime meltdown.

And guess who has just become an adviser to Paulson? Yup, Mr Greenspan.

That鈥檒l fuel a few mad conspiracies among the financial blogerati.

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• - What's this?

The Treasury has begun the search for a new chairman of the .

It has appointed the headhunters Egon Zehnder to find candidates, and has put an advert in today's Financial Times.

In the wake of the , there will be speculation that the current chairman, , has been forced out.

The FSA has conceded that it failed to spot the risks being run by the way Northern Rock financed itself in wholesale market, till it was too late.

But my understanding is that he always intended to serve just the one term, which ends in September of this year. He will be 64 this year.

The FSA chairmanship will be a difficult job to fill, not least because the Chancellor, Alistair Darling, has already announced that there will be significant changes to the financial regulatory system but has not precisely specified these changes.

Right now, any candidate would not know what kind of organisation he or she would be taking over.

Mr Darling has however indicated that the FSA will have great powers to intervene when banks run into trouble, to pre-empt a repetition of the massively damaging run on the deposits at Northern Rock of last September.

In the City, there have been rumours that the likely successor would be , a former chief executive of HBOS, the big bank 鈥� who is currently deputy chairman of the FSA.

However, Mr Crosby has told friends he is uninterested in becoming chairman.

Other possible candidates would be the former second permanent secretary at the Treasury, Sir Steve Robson, and Lord Turner, the former director-general of the CBI who came up with the blueprint for the new national pensions saving scheme.

Mr McCarthy, who is a former investment banker and has also worked at the Treasury, is widely liked and respected in the Government, not least because he was regarded as a highly successful regulator of the energy industry.

The first term of the Governor of the Bank of England, Mervyn King, also expires this year - and there has been no announcement about whether he will be re-appointed.

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• - What's this?

Let鈥檚 not get carried away with woe about the Northern Rock mess and what it supposedly shows about the fragility of our banking system.

The 鈥� till recently the world鈥檚 biggest bank 鈥� provides useful context.

The loss of around 拢5bn it incurred in just the last three months of its financial year would have wiped Northern Rock from the face of the planet.

If Northern Rock鈥檚 loans were in as parlous a state as Citigroup鈥檚, there would be no argy bargy about whether it would be right to nationalise the bank or whether shareholders should receive a penny.

The Rock would simply be in liquidation. The game would be well and truly up for shareholders and depositors.

And Citi is not an exception.

In the US, the assets of Merrill Lynch, Morgan Stanley and Bear Stearns have all suffered write-downs that would have been sufficient to topple any medium size British bank.

And in Germany, a number of banks are feeling very from their exposure to US sub-prime.

So by all means wring your hands about Northern Rock.

And don鈥檛 hesitate to point out that the Rock is a special case because of the sheer size of the financial support being provided to it by British taxpayers.

But please take some small comfort from the demonstrable truth that both the Rock and other British banks have been more astute lenders than many of their overseas counterparts.

As I鈥檝e pointed out many times, the problem for the Rock is that it was a terrible borrower 鈥� which is a cardinal sin for any bank.

Its mistake was to be too reliant on money markets for its funding.

But although it may end up incurring substantial losses on some of its consumer and mortgage lending, especially on those loans made in the last 18 months or so 鈥� at the top of the UK鈥檚 housing bull market 鈥� there is no evidence as yet of crippling loan losses.

The other tragedy for the Rock is that because it is so narrowly focused on the UK housing market, it鈥檚 not terribly attractive to the Asian and Middle Eastern sovereign investors which are bailing out the US banks.

Citi and Merrill alone yesterday announced aggregate capital injections of more than 拢10bn from investors, much of it from the Government of Singapore Investment Corporation (which had earlier bailed out UBS of Switzerland), the Kuwait Investment Authority and the Korea Investment Corporation.

Sadly, even Goldman Sachs 鈥� the mighty investment bank advising the Treasury 鈥� cannot persuade these new financial superpowers to gobble up the Rock and thereby rescue the British taxpayer.

As I鈥檝e already disclosed, Goldman has come up with a cunning plan to significantly reduce the taxpayers鈥� 拢55bn Rock exposure.

This would involve converting much of the 拢26bn of the Bank of England鈥檚 loans to the Rock into asset-backed bonds for sale to international investors.

The problem is that the deal would only fly if wrapped or guaranteed by a reinsurer.

And the cost of such reinsurance would be crippling.

Transferring the Rock-risk off the public-sector balance sheet would require the Treasury to make huge subsidies in the form of payments to the reinsurers for the five-year term of these loans.

That鈥檚 why the Rock is heading pretty fast towards nationalisation 鈥� because the costs of propping it up in the private sector are very large and would continue till well after the next general election (see yesterday on the Treasury鈥檚 contingency planning for emergency legislation to transfer the Rock鈥檚 shares into public ownership).

So long as nationalisation were predicated on a ruthless plan to sell assets, shrink the business and then privatise when market conditions became more benign, nationalisation could look better value to taxpayers.

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• - What's this?

The pillars of what defined Gordon Brown as Chancellor have begun to look distinctly wobbly since he became premier.

There was the ditching last autumn of that powerful symbol of his entente with Britain鈥檚 wealth creators, the 10 per cent rate.

And now the Northern Rock debacle is set to blow out of the water a resonant manifestation of his financial prudence, the sustainable investment rule.

This was one of two so-called fiscal rules designed to stop any Chancellor from spending and borrowing too much.

Under the sustainable investment rule, public-sector debt must be no more than 40 per cent of British economic output or GDP.

Though Mr Brown has frequently been accused of creative accounting to prevent the rule being broken, the ratio has always been below 40 per cent under his tenure 鈥� and is currently forecast to be 38 per cent in April.

But if Northern Rock were nationalised, all the troubled bank鈥檚 liabilities, minus its liquid assets, would come on to the public sector balance sheet.

That鈥檚 about 拢100bn, equivalent to around 7 per cent of GDP.

It would lift the ratio of debt to GDP from 38 per cent to 45 per cent.

But the Treasury expects to be forced by the to include a big chunk of the Rock鈥檚 balance sheet 鈥� or perhaps all of it 鈥� in the public-sector accounts, whether or not it鈥檚 nationalised.

At a minimum, taxpayers鈥� exposure to the Rock of 拢55bn 鈥� in the form of direct loans by the and guarantees to other lenders 鈥� will soon be counted as part of the national debt.

Which would lift the ratio to 42 per cent.

How serious would this be?

Well it would be a big stick for the opposition to use in beating up Brown and the Treasury.

But it shouldn鈥檛 affect taxation and spending policy, because the Treasury would regard the Northern Rock debt as a special case.

However it explains why the Treasury has become less afraid to nationalise the Rock 鈥� since the breaching of this important rule looks inevitable whether or not the bank is in a formal sense in public ownership.

UPDATE 20:10 The public-sector accounting rules are a bit odd in stipulating that all of the Rock's borrowings should count as part of the national debt, rather than just any shortfall between those borrowings and the value of the bank's assets (which would be a much smaller number - in fact, in theory, there is no such shortfall at all right now). But the Treasury tells me that's how the rules work, and it ought to know.

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There are times when you see a price and you know that it鈥檚 wrong.

One of those was the $1m quoted by many last week and over the weekend for what the huge US bank, is paying Tony Blair for his advisory services.

It felt far too low.

I am not making a judgement about the value of what our former prime minister will actually do for Morgan.

The proof of that will be in the pudding.

But I spend my life speaking to people with money to spend on Blairs and other forms of what is pretentiously known as human capital 鈥� and in that world $1m buys a few days of legal or public relations advice, but not continuous access to a politician with a global brand (oh yes) who can pick up the phone to anyone.

Whatever your political bent or view of the Blair years, it would be a national humiliation if the sticker on his forehead said $1000k.

His franchise is worth more.

For a million dollars to be the number on his ticket, Wall Street and the City would be in total meltdown and we would be in the grip of a worldwide recession (we may get there yet).

It couldn鈥檛 be the right price 鈥� especially since Blair takes advice from a bunch of astute business people and he isn鈥檛 famous for knowingly underselling himself.

So when the Daily Telegraph that he is being paid 拢2m a year, I thought that was more like it.

But it still didn鈥檛 feel right.

My intuitive view was that you couldn鈥檛 have a Blair for less than $5m a year.

And having now spoken to bankers close to this deal, I am told $5m is what JP Morgan is paying (though Morgan鈥檚 and Blair鈥檚 office are refusing to publish the pecuniary details).

Which for most of us would be a big pile of wonga 鈥� although if Blair had been on the market a year ago, before the pricking of the global financial bubble, he could perhaps have had double.

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If anyone doubted that the Treasury is serious about taking control of Northern Rock, were a commercial rescue to prove impossible, those doubts must now be dispelled.

The recruitment of Ron Sandler to be executive chairman of a Treasury-controlled Northern Rock shows that a full plan for nationalisation of the troubled bank is in place.

Mr Sandler a former chief executive of the Lloyd's of London insurance market, is well known to the Prime Minister, Gordon Brown, and has done lots of the work Treasury as an adviser.

All of us as Taxpayers are exposed to the Rock to the tune of 拢55bn through direct loans made by the Bank of England and guarantees to other lenders made by the Treasury.

On Tuesday, recalcitrant shareholders risk annoying the Treasury by voting to restrict the ability of the company's board to sell assets.

Shareholders are voting too on whether the newish chairman, Bryan Sanderson, and some recently recruited non-executives should remain in place.

If they were voted off, the Treasury would regard that as a sign that the company is now ungovernable - and that nationalisation had become the least worst option.

A decision will also be taken imminently by the Treasury on whether competing proposals for a commercial solution to the Rock's ills are worth pursuing.

The Chancellor would prefer not to take this business into formal public ownership.

But if all the competing deals turn out to be either impossible or prohibitively expensive, Mr Sandler would find that he had taken on a huge and challenging job.

That momentous nationalisation decision is probably only days away.

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At last a bit of good news for Northern Rock and the taxpayer.

It has sold a chunk of assets 鈥� some equity release mortgages 鈥� and will repay a bit more than 拢2bn of the 拢26bn lent by all of us to the troubled bank.

So our overall exposure to the Rock, including guarantees for other lenders, comes down from 拢57bn to 拢55bn.

Which may not be huge progress, but at least the trend is in the right direction.

And, what is perhaps more important in a symbolic sense, the Rock does not appear to have received a fire-sale price. It is receiving a 2.25% premium to book value from Tony Blair鈥檚 new employer, .

What of the chancellor鈥檚 hopes 鈥� which he to the Treasury Select Committee 鈥� that we as taxpayers will ultimately get all our 拢55bn back?

Well, I can reveal that the Treasury has already incurred a notional loss on one element of its exposure.

You may remember that back on November 19, I pointed out that the so-called 鈥減remium鈥� on the interest payable to taxpayers by the Rock is being rolled up into subordinated term debt rather than being paid in cash.

John Kingman, the Treasury official in charge of steering the government through the Rock crisis, told the Treasury Select Committee yesterday that the Treasury鈥檚 holding of this subordinated debt is less than 拢100m so far 鈥� though the holding is increasing all the time at a rate of about 拢6m every week.

Here鈥檚 the thing.

The Rock had already issued about 拢750m of this subordinated debt to investors. And the current market price of that 鈥渓ower tier 2 subordinated debt鈥� is 65p in the pound.

Which implies that the Treasury is incurring a 35p loss on every pound of subordinated debt it receives from the Rock.

If the Treasury鈥檚 holding is around 拢100m, which is what Kingman implies, the loss to date would be 拢35m 鈥� hardly calamitous, but the price of a school or two.

By the way, with this subordinated debt trading at substantially less than par, the Rock鈥檚 shares should in theory be worth zilch 鈥� since shareholders are last in the queue in any wind-up of a business.

But what strikes me about the pricing of the subordinated debt is that if the government were to nationalise this bank, there would be a most compelling punch-up between the hedge funds who hold the bank鈥檚 shares and those who hold its debt 鈥� with each claiming the moral high ground and first right to any spoils.

Other gloomy news this morning is the disclosure of a 拢100m deficit in the Northern Rock pension scheme 鈥� which is a worry for current and future Rock pensioners and is one more liability for any potential rescuer of the troubled bank.

I also have a bit more detail to add to what I wrote yesterday on 鈥檚 scheme to convert between 拢12bn and 拢15bn of the taxpayer Rock loans into triple-A rated bonds for sale to international investors.

In an attempt to reduce what would be colossal fees of 拢250m payable to the underwriters and arrangers, the Bank of England鈥檚 own name would go on the deal as one of the lead managers 鈥� along with Goldman, and .

And to achieve that all-important triple-A rating which would make the bonds sellable, Goldman has been talking to 鈥� the huge US insurer 鈥� as well Buffett (whom I mentioned yesterday).

Goldman鈥檚 hope has been that one or both of them would share the liability of guaranteeing or 鈥渨rapping鈥� the bonds, to reduce the exposure of the government and all of us as taxpayers.

The deal hinges on two considerations. Will Brussels allow it, or will the Eurocrats rule that the deal falls foul of rules prohibiting state aid to the private sector? And would it be prohibitively expensive for the Rock?

Those are substantial hurdles to surmount.

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Northern Rock was laid low in September by its excessive dependence on wholesale money markets, especially the securitised mortgage market, for the financing of its lending.

So it is either apt or appalling 鈥� depending on your bent 鈥� that Goldman Sach鈥檚 solution to the Rock鈥檚 current plight would be to securitise the taxpayers鈥� emergency loans to the Rock.

The 拢26bn odd that has been lent to the Rock by all of us would be repackaged into bonds, for sale over time to investors.

But in order to make them sellable, these new Rock bonds would need a triple-A credit rating.

And that would require them to be guaranteed 鈥� or 鈥渨rapped鈥�, to use the jargon 鈥� by the government.

In other words they would be the equivalent of gilt-edged stock.

鈥淲hat on earth鈥檚 the point of all that?鈥� you might well ask. 鈥淪urely they would remain a public-sector risk. We would all still be on the hook to the Rock鈥檚 plight, as exposed as we ever were.鈥�

And you would be right.

What鈥檚 more, the Eurocrats in Brussels would doubtless see such a deal as state aid, and therefore illegal.

So this deal will only fly if Goldman can find some other 鈥渨rap artists鈥� (ha ha).

It needs to persuade financial institutions called reinsurers to take over some or all of the Government guarantee.

In theory this is do-able.

Reinsurers 鈥� such as the one run by , the world鈥檚 most successful investor 鈥� still have immensely deep pockets, even after the credit crunch.

But they would charge for taking on the Rock risk from the government, for providing the cherished triple-A rating.

And the big questions, which Goldman has not yet answered, is whether the re-insurers can do this at a price that isn鈥檛 excessive and in a way that placates the Eurocrats.

To be clear, this is not some intellectually fascinating bit of obstruse financial engineering.

Goldman鈥檚 success or failure in securitising this debt will decide the very future of the Rock.

If the securitisation can be done on sensible terms, it means that a rescue deal with the consortium led by or with (or, as a very long shot, the Gooding/ group) may yet happen.

Virgin 鈥� which yesterday gave an update to the Rock鈥檚 board 鈥� remains remarkably bullish about its prospects.

Which is a bit odd, since the big shareholders in the Rock tell me they are profoundly uninterested in what Virgin has to offer 鈥� and those shareholders have the power of veto (much to the chagrin of the Treasury).

The other generic option is partial nationalisation.

Full nationalisation seems to have been more-or-less ruled out.

Instead the Treasury鈥檚 fallback plan would effectively be the status quo, except that new senior management would be parachuted into the Rock and the Treasury would take a minority stake in the business (possibly via a warrant or share-option arrangement).

A lot of preparation has been made for this partial nationalisation. A senior banker has been lined up as a possible new chief executive.

For the Treasury, it鈥檚 an insurance policy 鈥� since a private-sector rescue may turn out to be impossible.

And it鈥檚 a realistic option, because retail depositors have at last stopped withdrawing their funds from the Rock: retail deposits have stabilised at something over 拢9bn, which reinvents Northern Rock as a small-to-medium bank.

Many taxpayers may take the view that a partial nationalisation would make the best of a bad job.

What I mean by that is that we鈥檙e all exposed to the Rock to the magnificent tune of 拢57bn through direct loans and guarantees for other lenders.

Under none of the available options 鈥� those proposed by Virgin, Olivant, or the Gooding/Five Mile group 鈥� would this taxpayer support fall to some minimal level in the coming weeks and months.

Taxpayers would continue to prop up the Rock for a considerable period.

The big point is that if there is a profitable future for the Rock, it would only exist because we as taxpayers prevented the Rock from collapsing.

But 鈥� at the moment 鈥� there is no proper reward for taxpayers for all this succour.

And the one benefit of a partial nationalisation is that it would give to the government and taxpayers a slice of any future capital gains generated if the Rock were to become a thriving going concern again one day.

There is therefore an argument that a tweaked, semi-nationalised version of the status quo 鈥� which would endure only till markets recovered sufficiently to permit a full privatisation 鈥� is the best of the lousy options available to the Rock and the Treasury.

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The great British shopper has kept our economy moving forward since the early 1990's.

But this autumn has seen a turning point. The high street boom is over.

The symbolic manifestation is today's dour trading statement for the 13 weeks to the end of December from the totemic market leader, Marks & Spencer.

Its chief executive, Stuart Rose, tells me that conditions in the clothing market are tougher than they鈥檝e been for a decade 鈥� though he adds that there is a dual economy, with certain sectors like food faring better.

The most worrying numbers from Marks are those relating to general merchandise, or clothing and homeware.

In those areas, overall sales were down a fraction; and sales adjusting for new selling space, or like for like sales, were more than 3 per cent lower.

To achieve even that uninspiring performance, Marks had to charge 6 per cent less than in the previous year.

The savage deflation worked, in that shoppers bought more items. But the aggregate value of those items fell.

Marks and its rivals may well have to cut prices by even more this year, to prevent turnover from falling off a cliff - which should, at least, lessen the inflation anxieties at the Bank of England.

The picture in food was better - though Marks's food-sale stats will look worse than those of Tesco and Sainsbury (possibly because it doesn鈥檛 own petrol forecourts and can鈥檛 woo custom by offering cheap petrol).

Does it all mean that Marks' remarkable recovery under Stuart Rose has stalled?

Will he join the ignominious roll-call of his immediate predecessors who tried and failed to restore the business to its post-War glory?

Well Marks鈥檚 share price has taken a battering in the past few weeks - and its market value is no longer spectacularly greater than what Philip Green said he would pay for the company in 2004 (though that鈥檚 to ignore a substantial share buyback).

But it would be premature to argue that M&S鈥檚 board may yet be shown to have been misguided when rebuffing Green.

Here are reasons why Rose and Marks probably deserve the benefit of the doubt.

1) The previous reversals at Marks over the past decade came when many of its competitors were doing well and the overall market wasn't in bad shape. This time, retail sales in general are flat and much of the competition is also in a mess.

2) Marks hasn't yet resorted to the kind of savage price-discounting we are seeing from its rivals. So it has ammunition in reserve.

3) It has the strongest balance sheet and best property portfolio on the high street. It is therefore better fortified than most for any worsening in the economic climate.

4) Marks has not yet had to sacrifice substantial profit margin. Its pre-tax profits for the year as a whole should still rise to something just over a billion pounds 鈥� though analysts will today reduce their profit forecasts by a few percent.

However, all that is simply to say that Marks may emerge as the best of a battered bunch. For most retailers in 2008, growth in sales, profits and cash-flow will be desperately elusive.

UPDATE 08:30AM: There has been a bloodbath of retailing shares this morning: M&S down 17 per cent (yikes), Debenhams down 10 per cent, Home Retail (Argos) 7 per cent lower, Burberry down 5 per cent, Kingfisher down 5 per cent, Kesa down 5 per cent, French Connection down 7 per cent, Smiths down 4 per cent, DSG down 4 per cent (they were already mullered in the previous few days), Next down 8 per cent (ditto), even Tesco down 3 per cent.

UPDATE 9:50AM: The Marks & Spencer share price is now 409p, just a hair鈥檚 breadth from the 400p per share which Green said he would pay for the company in the summer of 2004. It鈥檚 a fair comparison, because the subsequent buyback of shares by M&S was at less than 400p. This is potentially pretty embarrassing for Rose and the M&S board, given the colossal sums they鈥檝e spent on modernising the stores and advertising.

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SRM, a hedge fund that controls 9.9 per cent of Northern Rock, has written what it says is a constructive letter to Chancellor Alistair Darling about the future of the troubled bank.

In the letter, sent before Christmas, it says that it has been advised that if the Rock were nationalised at less than a fair price for the shares, shareholders would have a strong case for damages.

SRM's view of a fair price would be the book value of Northern Rock's assets at the last balance-sheet date - or more than 400p a share.

It says that ministers would be vulnerable to a charge of "misfeasance" if they expropriated the Rock for less - and that there could be a breach of the 1998 Human Rights Act.

SRM has not made a direct threat that it would sue. But since the letter talks of shareholders pursuing ministers through the courts, the implication is unmissable.

The epistle makes the curious statement that the chancellor has already formally ruled out nationalisation.

If he has, I missed him doing so. And so did his officials.

They sent a reply to SRM on the chancellor's behalf at its Monaco offices last week. In it, the Treasury says that the Government would comply with the Human Rights Act at all times - and that all options, including nationalisation, are on the table.

What the discourse shows is the gulf between the Treasury as the leading creditor and the Rock's biggest shareholder.

Can that gulf be bridged?

Only if there is a rescue of the Rock that keeps the bank in the private sector and leaves the current shareholders with the bulk of its shares.

Will there be such a rescue?

There is a frenzy of activity by putative bidders, bankers and the Rock itself to secure one.

Putting a probability on their prospects is impossible - though conditions in money markets are less tight than they were, so it looks a bit less bleak for the Rock than it did before Christmas.

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The with the is perhaps more interesting for what he doesn鈥檛 spell out, rather than what he makes explicit.

Alistair Darling says:
鈥淭丑别 has two clear responsibilities: one is monetary policy and the other is financial policy. I won鈥檛 do anything that impairs or affects the Bank of England鈥檚 duties with regard to monetary policy鈥�.

However he pointedly refuses to give the same commitment that he won鈥檛 erode the Bank of England鈥檚 powers relating to the maintenance of the stability of the financial system.

That鈥檚 a pretty clear nod that, as the tries to mend the gaps in the regulatory net exposed by the Northern Rock debacle, the Bank of England will be a loser 鈥� with the empire of the likely to be expanded.

Otherwise, he gave a sense of direction without committing the Treasury to the detail of future reform.

This is what I took away from it:

a) In any future financial crisis, the Chancellor would be firmly in charge through a emergency committee. The FSA and the Bank of England would be relegated to an advisory role, as opposed to their current status in the so-called 鈥渢ripartite鈥� as full decision-making principals.

b) A new insolvency system would put be put in place for banks, to address the inadequacy of the current corporate bankruptcy regime as it applies to banks that run out of funds. In the case of Northern Rock, the Treasury has not dared put it into administration under insolvency procedures, because the Rock鈥檚 depositors would be unable to draw on their funds for weeks and possibly months. Darling wants a new system that would allow retail savings and deposits in a troubled bank to be ring-fenced 鈥� such that depositors in that bank could have confidence that they would still be able get hold of their precious cash.

c) In the application of this new bank insolvency system, powers would be given to the Financial Services Authority to break up any seriously troubled bank into a 鈥済ood bank鈥�, that would hold the retail deposits and the decent assets, and a 鈥渂ad鈥� bank, that would hold the rest.

d) Once any bank asked for emergency funds from the authorities, its board would no longer be in charge. The directors of the bank would lose their ability to direct the organisation as a condition of receiving help 鈥� and the rights of the bank鈥檚 shareholders would also be reduced in the process. That would prevent a recurrence of the extraordinary stand-off at the Rock, where the taxpayer is exposed to the tune of 拢57bn but where the power of the Treasury to direct the bank is highly circumscribed.

All that said, many vital questions remain unanswered by the Chancellor. These include:

1) What would constitute the kind of 鈥渆mergency鈥� that would put the Chancellor in the hot seat in this way?

2) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?

3) Would shareholders in a troubled bank lose all rights when that bank is given emergency support?

But what Alistair Darling really needs to explain is why the FSA deserves to receive more powers. Arguably if it had exercised its existing responsibilities in a more rigorous way, Northern Rock would never have been allowed to lend so much money underpinned by so little capital 鈥� and we as taxpayers would not now be propping it up to the tune of 拢2000 for each and every one of us.

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