大象传媒

Rock: taxpayer repayment delayed

• Robert Peston
• 18 Jan 08, 10:04 PM

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.

• Permalink
• Comments

Bonkers bankers鈥� bonuses

• Robert Peston
• 18 Jan 08, 04:11 PM

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.

• Permalink
• Comments

All aboard the monoline Titanic

• Robert Peston
• 18 Jan 08, 07:47 AM

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.

• Permalink
• Comments