大象传媒

Corporate embarrassments don't come any bigger or more conspicuous than Northern Rock's near involvency last September, when it went cap in hand to the Bank of England for emergency financial support.

Which is why any severence payment to Adam Applegarth, the chief executive of the Rock at the time, was always going to spark controversy.

However the 拢760,000 he is receiving in monthly payments of just over 拢63,000 is less than his contractual entitlement.

And last December, when the board agreed Mr Applegarth's departure terms, even the was trying to persuade the world that the Rock had a future as a going concern in the private sector.

The Rock's accounts for 2007, to be published later today, will also show that it made a loss for the year of around 拢150m, largely due to writedowns of its exposure to US sub-prime through investments in Structured Investment Vehicles and Collateralised Debt Obligations.

Another controversial contributor to its loss was around 拢50m of payments to City firms and professional advisers made when it was struggling to avoid nationalisation - of which around 拢20m are costs incurred by the Treasury, the and the , together with contributions to the expenses of putative bidders, led by and .

But it's by no means all bad news. Ignoring the exceptionals, writedowns and one-off charges, pre-tax profit emerges at about 拢420m for the year, sharply down on the 拢590m made in 2006, but indicative of a business with a future.

As for arrears on mortgages, they rose sharply 鈥� but the arrears rate remains about half the industry average.

Now in state hands, that during 2010 it will have repaid all of the taxpayer-backed loan it has received from the Bank of England, which currently stands at around 拢24bn. Repayments have started and the loan is already about 拢3bn lower than it was at the end of last year.

The new nationalised Rock will say that after the Bank of England loans have been repaid, it will relinquish the guarantees the Treasury has given to other creditors.

And, finally, when it can be seen to be standing on its own two feet again, without the aid of any taxpayer crutch, it鈥檒l seek a return to the private sector 鈥� either through a stock market listing or a sale to another bank or financial institution.

Also to be published will be a so-called 鈥渃ompetitive framework鈥� document. The point of this will be to reassure other banks that it won't compete with them unfairly, now that it is probably the safest bank in the world as a subsidiary of HMG.

The Rock鈥檚 chairman, Ron Sandler, will endeavour to allay rivals鈥� fears by pledging that his bank鈥檚 products will never again be at the top of best buy tables, unless and until it returns one day to the private sector.

UPDATE 17:00 It's going to get much worse before it gets better. That was one of the messages buried in Northern Rock's business plan.

Today the state-owned bank had the indignity of being the only big British bank to announce a loss for 2007

That loss of 拢168m before tax was largely due to the impairment of investments linked to US sub-prime loans, the notorious SIVs and CDOs

But more disturbing for those who take an interest in the health of British banks in general was a trebling in the amount the bank set aside to 拢240m in provisions for future losses on regular British mortgages and unsecured loans.

Northern Rock added that it expected loan losses to rise further, because falls in house prices mean that it will recover less of what it's owed when forced to take possession of properties.

And the bank fears what it calls "an increased propensity" of customers to default.

So in the current year the bank expects to be significantly loss making again, in part due to costs associated with its plans to halve its size.

What's more, it doesn't expect to break even again till 2011.

In other words, the path back to the private sector will neither be quick or painless.

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• - What's this?

I鈥檝e spent much of the past few months investigating the causes and likely consequences of the credit crunch for a 大象传媒2 documentary, Super Rich: the Greed Game, which will be broadcast at 9pm on Tuesday.

And as scheduling chance would have it, a radio documentary I鈥檝e made on British attitudes to business, Britain鈥檚 Business Problem, will be transmitted on Radio 4 this Saturday at 8pm, in the Archive Hour slot.

As it turns out, the programmes are complementary.

At the heart of the television film 鈥� for which we interviewed some of the most influential players in global finance, including , , , , , , , and 鈥� is an examination of how remuneration practices at private equity, hedge funds and banking encouraged excessive risk-taking.

The first important point to grasp is that bankers, the private-equity partners, the hedge-fund managers were all using other people鈥檚 money for their deals.

Investment bankers invested the capital of the banks for which they worked. Hedge-fund and private-equity executives invested their backers鈥� funds.

And they topped this up 鈥� they 鈥渓everaged鈥� their deals 鈥� by borrowing enormous sums.

In some cases, they put modest amounts of their own wealth at risk. But their personal exposure to these deals was usually paltry.

The structure of their remuneration represented 鈥� in many cases 鈥� a rigged bet for them: heads they won, tails everyone else lost.

As for those winnings, when the going was good rewards were on a scale that were beyond most people鈥檚 wildest imagining: millions of pounds, tens of millions, hundreds of millions.

Of course, not all private-equity or hedge-fund players earned quite such fabulous rewards. And their activities can help the process of allocating capital in an efficient way - which ought to stimulate economic growth and should be of benefit to all of us.

But they created a system of remuneration whose consequences do not appear to have been benign.

Here are the rules of what one hedge fund manager called the 鈥済reed game.鈥�

The partners of the private equity and hedge funds would receive 20% of the gains made on investing their backers鈥� funds (and 2% of the value of the funds as an annual management charge).

And if there were no gains, only losses, the backers 鈥� which could be other financial institutions such as US pension funds or wealthy individuals 鈥� would feel all the pain: there would be no sharing of the losses with the partners of the private-equity firms or hedge funds.

That is what鈥檚 known as an asymmetric reward system. And it鈥檚 very nice work if you can get it.

Thus if a private-equity firm or hedge fund generated a capital gain of 拢1bn 鈥� and in the boom conditions of the past few years, that wasn鈥檛 unusual 鈥� the partners in the relevant fund would trouser 20%, or 拢200m.

But if there was a loss of 拢1bn, well only the backers would lose.

Why did the backers of these funds agree to be so generous? Because the better private-equity firms or hedge funds had provided them with good returns, even after paying the managers so much, for many years.

Also in the early years of this century, with interest rates very low and asset prices surging, most investors were carried away on a dangerous wave of euphoria that the good times could never end.

One consequence of this mouth-wateringly attractive remuneration system was a massive exodus of the brightest and the best from the investment banks and commercial banks into private equity and hedge funds.

That in turn prompted the banks to put in place analogous remuneration schemes in their own firms, to persuade their putative stars not to quit.

So the annual bonus for clever bankers became 鈥� in effect 鈥� 20% of the notional profit on the deals they carried out with their banks鈥� money. And it became commonplace for bankers to pocket millions and tens of millions of dollars every year.

Again it was a one-way bet for the bankers. If the deal went right, they received the enormous bonuses. If the deal went wrong and the banks made losses, what was the worst that could happen? The bankers wouldn鈥檛 receive a bonus for that year and might lose their jobs. But how much of a worry was that to those who had already earned many millions, more than enough than they could ever spend?

The remuneration system therefore encouraged those in charge of trillions of dollars of other people鈥檚 money to take much greater risks with that money than they would have done if their own money had been seriously at risk.

And, as we now know, the risks they took were 鈥� in many cases 鈥� crazy, and on a scale that has wreaked havoc on the global financial system, pushed the US economy into what many economists are already describing as a recession and is precipitating a serious slowdown in the UK.

If, for example, individual investment bankers鈥� own money had been invested alongside their banks鈥� and their clients, would they have been quite so enthusiastic to convert subprime loans into investments for sale to financial institutions around the world 鈥� and wouldn鈥檛 they have looked a little more closely at whether the borrowers of these subprime loans really could repay?

But with none of their own money on the line and the potential to generate colossal bonuses from selling these investments, many were seemingly seduced by their own propaganda: they apparently believed that structured finance was revolutionary financial technology for transforming poor quality loans into high quality investments.

There was an epidemic of Nelsonian Eye Syndrome on Wall Street and London. And bankers, private-equity partners and hedge-fund partners acknowledge 鈥� or at least some do 鈥� that the cause was good, old-fashioned greed induced by a turbocharged remuneration system that promised riches in return for minimal personal risk.

Reform of this dangerous remuneration system probably ought to be a matter of some urgency for shareholders in banks, the backers of hedge funds and private-equity firms, financial regulators and politicians 鈥� though right now their priority seems to be weathering the current financial crisis rather than pre-empting the next one.

As for the reputation of the City, Wall Street and the global banks that underpin our economy, that鈥檚 taken a serious knock.

Which brings me back to my Radio 4 documentary on why the British appear to be no more in love with business than they were 30 years ago, even though we鈥檇 all be a lot poorer if there hadn鈥檛 been a serious improvement in the productivity and competence of our wealth creators over the past 30 years.

My primary thesis is that the widespread unease of many Britons with the profit motive and their wariness of the private sector 鈥� especially of our biggest companies 鈥� is not conspicuously founded on reason. But my case hasn鈥檛 really been helped by the irresponsible way many bankers and financiers played the Greed Game over the past few years.

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• - What's this?

Three-month sterling , the interest rate off which our mortgages and most other loans are priced, has risen to 6%, its highest level since December 28.

It shows that banks are still hoarding cash, still refusing to lend to each other, because of their concern that money is perilously tight for all banks.

The fundamental cause of this stress in the banking system hasn鈥檛 changed in months: it鈥檚 that the banks remain unable 鈥� as 鈥� to raise funds in the way they had been doing by selling off mortgages or other assets in the form of bonds.

What does it mean?

Well the cost of credit for all of us is still on the rise. That鈥檚 true for those with mortgages. It鈥檚 true for companies needing to borrow.

And it means that bankers will remain anxious about the stability of the financial system.

They will however breathe a sigh of relief that Mr King confirmed what I disclosed in my 大象传媒 blog last week, that the is examining how it might allow banks to exchange mortgages and other illiquid assets for loans from the Bank of England, to compensate for the closure of asset-backed bond markets.

He outlined two sensible conditions for the provision of these funds:

鈥� The Bank of England鈥檚 money should not be used by banks to fund future incremental lending, but only to allow them to meet their pressing current financial commitments

鈥� And the banks should retain 100% liability for any potential future losses from the assets they may pledge to the Bank of England in exchange for liquid funds

Or to put it another way, Mr King is still insisting that taxpayers should not pick up the bill, if the economy turns down so sharply that banks start to suffer serious losses on their mortgage lending.

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• - What's this?

The is a catalogue of mistakes, a tragedy of errors rather than a comedy.

The City watchdog admits to inadequate record keeping. Proper notes weren't taken of important meetings with Rock executives.

There was no rigorous assessment of the serious business risks being run by the Rock, both in the way that the bank was rapidly increasing its mortgage lending and in its financial dependence on selling these mortgages to investors in the form of bonds.

In some ways, it was the riskiest bank in the UK.

But here's what will shock many.

It was treated by the as though it was the least risky bank in the UK: it received deep assessments of its operations less frequently than most other banks; FSA staff had far fewer meetings with Rock executives than they did with executives at other banks; and unlike what happened at other banks, there was no attempt to force the Rock to reduce the risks it was running.

As the FSA itself says, this was not just a failure of more junior staff. Responsibility for these failings ultimately rests with senior FSA management.

Little wonder then that the FSA has committed itself to improve the quality of its staff and to serious reform of the way it supervises all those banks whose failure could damage all of us.

UPDATE: Here鈥檚 the most scintillating part of the FSA鈥檚 review, for those of us obsessed with the ideological differences between that watchdog and the Bank of England over what kind of loans should be made by the Bank of England to a dysfunctional banking system. The killer passage reads:

鈥淥ur understanding is that, during the review period, the FSA鈥檚 approach to liquidity reflected a presumption that, in the event of a crisis like that experienced in August 2007 (when money markets seized up), general market liquidity provided by the Bank of England would be increased and, in extremis, liquidity would be provided for systemically important institutions鈥�.

Which is formal confirmation that the FSA was urging the Bank of England to pump money into the markets over the summer 鈥� but the Bank refused, fearing that it would be in effect bailing out the banks for their past recklessness.

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Tata Motor Company, the Indian motor manufacturer, will announce on Wednesday that it has agreed to buy Land Rover and Jaguar for around 拢1bn from Ford.

The purchase agreement is likely to be seen by trade unions as safeguarding jobs in the UK for two reasons.

First, Tata will commit to following an existing five-year plan to invest in and develop the car manufacturing businesses. Jaguar and Rover employ just under 16,000 people, most of them in the Midlands and at Halewood near Liverpool.

Also, Tata will contract to buy engines and other parts from Ford until at least 2012, which should protect employment at Ford鈥檚 plants in Dagenham and Bridgend.

As of now, Tata has no plans to relocate manufacturing capacity to low-cost India. Instead it appears to see the purchase of Land Rover and Jaguar as a route into the middle to top end of the global motorcar market.

The deal represents one of the most ambitious purchases of a British based manufacturer by any company from the fast growing economies of Asia.

Ford will also try to reassure employees of Jaguar and Land Rover that they will face no financial risks from the takeover and that their pensions are safe 鈥� because it will inject 拢300m into their pension scheme, to eliminate any deficit.

Tata will be buying businesses that collectively made 拢250m of pre-tax profit in 2007. However that masks massively different performances from Land Rover and Jaguar, because Jaguar is lossmaking and all of that profit 鈥� plus a bit more 鈥� was made by Land Rover.

Land Rover is also three or four times the size of Jaguar by output.

Because Ford is a US company and Tata Motor Company鈥檚 shares are listed in the US, the purchase agreement will probably be announced early tomorrow morning in the US, or about mid-day in the UK.

Analysts are expected to say that 拢1bn for operations making 拢250m a year in profit 鈥� and without the burden of a pension fund deficit 鈥� represents a decent deal for Tata. But Jaguar and Land Rover require hundreds of millions in investment over the next few years. And returning Jaguar to profitability will neither be easy or without risks.

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The chief executives of Britain's biggest banks emerged from a meeting this afternoon with the Governor of the Bank of England optimistic that it will radically reform the way it provides them with emergency financial help.

Although the Governor of the Bank, Mervyn King, asked them not to divulge what they discussed, I have learned he signalled - for the first time - that he was sympathetic to their request that in an emergency they should be able to swap a wider range of assets, including their mortgages, for loans from the Bank of England.

The chief executives of the UK banks believe that they would be much less vulnerable to damaging speculation about their financial health if the Bank of England announced it was prepared to make good any hole in their finances stemming from the current crisis in banking markets.

It is understood that the Bank is examining whether it can provide support similar to the what the US Federal Reserve provides to banks through its so-called discount window.

The Fed's recently reformed discount arrangements allow US banks and security houses to exchange their mortgages for emergency funds.

Bankers believe it will take the Bank of England a few weeks to finalise the details of new support arrangements.

Until very recently, Mervyn King was reluctant to provide the kind of financial support demanded by banks, for fear he would be seen to be bailing them out for their own foolish lending and borrowing practices.

But it is understood he was alarmed by Wednesday's raid on HBOS shares, when its shares fell 20 per cent at one stage because of malicious and erroneous rumours that the leading mortgage bank was in financial difficulties.

Bankers believe that if there were an emergeny facility at the Bank of England that HBOS or any bank could tap in the event they suffer short-term funding difficulties, their share prices would be much less vulnerable to the impact of damaging lies propagated by speculators.

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• - What's this?

Bit of a shock from this morning 鈥� not the stuff about how much it has lost on collateralised debt obligations as a result of alleged 鈥渋ntentional misconduct鈥� by a few traders (which seems to be a bit less than it originally estimated), but its disclosure that it is likely to be .

It says that it was profitable until the end of February but that 鈥渋n light of the difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter.鈥�

That鈥檒l put a dent in the hopes of those who felt that just maybe 鈥� after all the evasive action by the Federal Reserve of the past few days 鈥� we could perhaps have seen the worst of the bad news from banks and the financial sector.

Which brings me round to the importance of between the chief executives of the UK鈥檚 biggest banks and the Governor of the Bank of England, Mervyn King.

It was originally arranged last week, to discuss primarily what they thought of the government鈥檚 proposals to reform the regulation of banks and the protection of depositors.

But the agenda has been widened, to include a discussion of the banks鈥� concerns that the Bank of England is not providing enough loans to them, and loans of long enough duration, to make good the current deficiencies in money markets.

The big and simple point is that the solvency of all banks depends on the confidence of their creditors.

For the avoidance of doubt, that means the confidence of most of us, as depositors in banks.

So at a time of high anxiety in financial markets, all banks are - in a sense - on the brink of insolvency.

If creditors believe - rightly or wrongly - that a bank is in trouble, well then out come the deposits, and the fear becomes self-fulfilling.

Which is why the authorities were so alarmed yesterday at the scaremongering that led to a sharp fall in HBOS's share price.

And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed.

As one bank chief executive told me, the Bank of England could eliminate all anxiety about the health of British banks by announcing that it is prepared to provide whatever loans are required by our banks until the money markets are functioning in an orderly and calm way once again.

It would require quite a change of heart by the Governor to give such an assurance. He's been concerned that the Bank of England would in a sense be giving banks impunity to behave impulsively and imprudently.

But I would expect the Bank, as a constructive gesture, to announce later today that it's rolling over the additional 拢5bn of emergency loans which it provided earlier this week and initially had to be repaid within three days.

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• - What's this?

The governor of the is meeting the chief executives or our biggest banks tomorrow.

They will discuss the desire of the banks for the Bank of England to lend them more money for longer periods and against the security of a wider range of collateral (especially mortgages).

The intention would be to reassure creditors and investors that there is not the faintest chance of any British bank suffering a .

It's perfectly sensible for the discussion to take place. And it will be interesting to see whether the Bank of England now feels it can provide additional three-month, six-month and even 12-month money.

However the fact of the looming meeting appears to have prompted hysteria in the stock market.

Wild rumours have circulated about and both facing funding crises. HBOS's share price dropped an astonishing 20% at one stage.

The speculation is crazy. I have checked - and neither HBOS nor Lloyds are in that kind of trouble. They both have ample liquid resources.

So ignore the scaremongers - who may well be motivated by the desire to cash in by shorting the shares of vulnerable banks.

Though don't assume that the banking system is in the finest of fettle. The basic issue of how to restore confidence that all our leading banks have sufficient access to liquid funds is a real and urgent one.

So let's hope tomorrow's meeting between their chief executives and Mervyn King is a constructive one.

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This statement in Next鈥檚 caught my eye this morning:

鈥淭rading conditions in the year ahead will continue to be difficult as increased costs and rising taxes put pressure on our customers.鈥�

Or to put it another way, the chairman of Next, John Barton, seems to be heaping responsibility on the chancellor for the slowdown on the high street.

Now you may think there鈥檚 nothing terribly remarkable about that. After all, Next鈥檚 chief executive, Simon Wolfson, is matey with the new generation at the top of the Conservative party and there was a tax-raising Budget last week.

But the typical rule at publicly listed companies is that they don鈥檛 dump on the incumbent government for stewardship of the economy 鈥� usually because those companies think it鈥檚 sensible to be on reasonable terms with those who have the power. Cohabitation with ministers is unavoidable and shareholders get a bit antsy if that cohabitation becomes fractious.

There is an exception to that rule. If the prevailing wind becomes so strong against a ruling party, then businessmen often rediscover their critical voice.

So it will worry Gordon Brown and Alistair Darling that Next has piped up. And they鈥檒l be fearful that other listed companies will join in the chorus of implicit criticism.

Also, Brown and Darling won鈥檛 welcome 鈥檚 threat to relocate some of his private-equity operation abroad, which he .

Hands believes that Darling鈥檚 changes to capital gains tax and the taxation of non-doms are damaging his industry.

But the political significance of Hands鈥檚 remarks is a little bit less than those of Next.

Privately owned businesses, like Terra Firma, have always found it easier to put the boot in to politicians.

They can say more-or-less what they like, because they鈥檙e not answerable to pension-fund shareholders and the millions of pensioners who depend on those funds.

By the way, Next鈥檚 shareholders might want to ask the retailers鈥� directors whether last year鈥檚 fall in sales at Next鈥檚 existing stores was all the fault of the government, or whether management shares some of the responsibility.

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Is there no British company that is so strategically important to the UK that it mustn鈥檛 be sold to overseas interests?

I ask the question following the disclosure that the of its 35.2% stake in , the nuclear company, to an overseas power business.

Possible buyers are the usual energy suspects: of France, and of Germany, of Spain and our own .

Even if the eventual purchaser didn鈥檛 want to acquire the whole of British Energy, that stake alone would bring with it great sway over British Energy鈥檚 plans.

The important facts about British Energy are that it owns eight of the UK鈥檚 ten operational reactors and most 鈥� or possibly all 鈥� of the sites for the next generation of nuclear plant.

Or to put it another way, if you agree with the government that nuclear is the power source of the future, because of its low emissions and putative reliability, then it鈥檚 hard to think of a company more vital to the future energy security of the UK than British Energy.

Does that mean we should be concerned that British Energy could be owned by French, German or Spanish interests?

Nuclear is, of course, a highly regulated industry. So perhaps the British interests that matter can be protected by regulation rather than insisting the owner should be British.

And maybe the entire issue is already a red herring, since British Energy will not be building the new nuclear plants alone anyway, but would only do so in partnership with overseas companies such as EDF.

Or to put it another way, since our nuclear future depends on overseas capital and expertise, the nationality of British Energy鈥檚 owner may already be irrelevant.

Perhaps the more important question is whether selling the stake would confer excessive clout to the new owner in the contest to build the new reactors.

But here鈥檚 a thought to ponder. Is there any conceivable, realistic vision of the future of Europe in which it would be possible for British interests to own nuclear plants in Germany, Spain or France?

Would their governments ever allow a UK company to own even a single nuclear reactor on their soil?

And if the answer to that is 鈥渘o鈥�, are they mad or are we mad?

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• - What's this?

The US central bank鈥檚 latest attempt to inject money and confidence into the financial system is its third in ten days 鈥� and arguably its most ambitious since the 1930s.

The has reduced the rate at which banks can borrow directly from it, trebled the length of time they can borrow and allowed 20 securities firms direct access to the same facilities.

It is also putting $30bn of US taxpayers鈥� money at risk by providing a lending facility to help acquire at a knockdown price.

That $30bn is secured against assets of questionable value. And if they turn out to be worth less than $30bn, well the loss will be taken by taxpayers, not by JP Morgan.

To digress for a second, the state-subsidised rescue of Bear Stearns is remarkably similar to the plan for Northern Rock to be acquired by Lloyds TSB last September, which was backed by the Financial Services Authority but rejected by the Bank of England and the Treasury.

The reason for the Fed鈥檚 emergency evasive action is that it has become very concerned about what bankers鈥� call deleveraging, or the process of lenders wanting their money back from any creditor perceived as risky.

That puts strains on important financial institutions, such as Bear Stearns, and on the health of the financial system 鈥� which underpins the global economy.

Will the Fed's latest initiatives - including an anticipated half-percentage-point cut in its main lending rate tomorrow - do the trick?

That's very unclear.

The continued fall in the dollar weakens the confidence of global investors in the US.

The Catch-22 for the Fed is that providers of capital may become even more risk-averse having seen quite how worried the authorities have become.

UPDATE 11.35: Finance is global, so the shortage of liquid funds in New York has led to a shortage in the London money markets too.

That's why the Bank of England this morning offered 拢5bn of emergency, short-term loans to British banks.

But here's the scary statistic. Our banks put in bids for 拢23.6bn of these three-day loans.

Banks wanted more than four times what the Bank of England made available - which indicates they are not exactly flush with cash right now.

Little wonder the , with those of and off more than 10%.

Wall Street's problem is our problem.

UPDATE 12.25: Here is another scary trend. The dollar has been sinking like a stone against the yen, the euro and the swiss franc. Which tells you how nervous international investors are about the US economy.

But what should alarm us over here is that the one currency that hasn't strengthened against the dollar is our own, sterling.

That tells you that those who control the world's cash reserves fear that the UK economy is like the US economy in all the wrong ways, notably that our housing market is over-valued and we're too dependent on a financial sector under considerable strain.

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• - What's this?

Bear Stearns was taken to the very brink of insolvency over the past 24 hours by a sudden collapse in confidence on the part of its hedge-fund clients.

There was a wholly modern hedge-fund run on the investment bank.

Here鈥檚 how it happened.

One of Bear Stearns鈥檚 most profitable businesses was its prime brokerage, which provides lending and admin services to hedge funds with a fixed-income bent.

These hedge funds deposit their assets at Bear Stearns, which the investment bank uses as a source of liquidity.

But 鈥� according to a banker close to Bear Stearns 鈥� in the last day or so a number of those hedge funds decided to terminate their respective relationships with Bear Stearns.

They were spooked by the rampant speculation about Bear Stearns鈥� fragility and its supposedly excessive exposure to US mortgages.

The hedge funds stampeded to withdraw their assets, so the investment bank was deprived of a vital source of liquidity.

That鈥檚 why it had to go cap in hand to the New York Fed for financial succour.

Perhaps the most shocking aspect of this episode is that help was in sight for Bear Stearns at the very moment the hedge funds pulled the plug.

As of March 27, Bear Stearns would have been able to exchange its illiquid holdings of mortgage-backed securities for high-quality, liquid US Treasuries, under a scheme announced last Tuesday by the US Federal Reserve.

That would have provided Bear Stearns with sufficient liquid funds to continue as a going concern.

But its hedge-fund clients weren鈥檛 prepared to stick with it even for 13 days.

It鈥檚 a very frightening manifestation of the nervousness of even sophisticated investors such as hedge funds.

In today鈥檚 highly uncertain markets, they are not prepared to give an 80-year-old Wall Street firm the benefit of the doubt for even a fortnight.

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• - What's this?

demonstrates that the worst of the global credit crunch is not yet behind us.

As an incident, it is America's Northern Rock.

But the run on Bear Stearns hasn't been a run of small savers, as happened at the Rock.

There has been a wholesale run on this leading investment bank, a withdrawal of capital by leading financial institutions.

Bear Stearn's creditors have become progressively concerned about Bear's exposure to mortgages - not subprime mortgages but AAA good-quality home-loans.

Why? Because on a daily basis there's been more and more disturbing news about the deterioration in the US housing market and the difficulties faced by borrowers in repaying their debts.

This is what did for Carlyle Capital Corporation earlier this week. And it meant that in just the last 24 hours Bear Stearns came close to running out of the cash or liquidity it needs to meet its daily requirements.

So enter the New York Federal Reserve. It is promising to supply whatever liquidity is required by , the leading bank, to help Morgan provide whatever funds are required by Bear Stearns.

Since JP Morgan is saying there is no risk to its shareholders, this represents a central bank bailout of Bear Stearns

So, as I say, this is America's Northern Rock.

UPDATE 16:40: A bit of context on Bear Stearns.

First, please don鈥檛 overstate the analogy with Northern Rock. Bear Stearns is an investment bank at the heart of Wall Street. It is not a retail bank like the Rock.

Second, it is 鈥� like the Rock 鈥� what regulators classify as a high impact firm. Or to put it another way, it is too big to fail.

Why? Because its businesses had consolidated assets $395bn at the end of November 2007 鈥� which would make it roughly twice the size of Northern Rock.

If it had gone down, and there had been a fire sale of assets, there would have been a double whammy for the financial system.

First, there would have been losses for those institutions and individuals that have provided $383bn of credit to the various bits of Bear Stearns (there was also $12bn of equity supporting all that debt).

Second, the market price of all sorts of financial assets would have collapsed. And that could have caused solvency and liquidity problems at other banks and financial institutions.

So the New York Fed had no choice but to rescue Bear Stearns.

What鈥檚 unclear is whether the main problem at Bear Stearns is 鈥� like it was at the Rock 鈥� mainly one of technical insolvency caused by an inability to raise finance.

Or whether there is already a deficit between the value of Bear Stearns鈥� assets and its liabilities.

The trigger for the rescue of Bear Stearns was that the liability side of its balance sheet has gone wrong; it is in danger of running out of cash to fund itself.

But are its assets of reasonable quality?

As of November 30, it had $46bn of exposure to mortgages. And it is a fall in the market-value of mortgage-backed securities that has spooked Bear Stearns鈥檚 creditors.

The big question is whether creditors鈥� anxiety is hysterical or rational.

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• - What's this?

When a chairman or chief executive appears on 大象传媒 television or radio, he or she is typically talking to millions of people in the UK and across the globe via our assorted programmes and channels and platforms.

That鈥檚 appealing to a minority of business people, such as of or of . Their visibility, they believe, sends out a strong message of confidence in their respective businesses to their customers, employees and shareholders.

Other executives are more reclusive, they cherish their privacy 鈥� which is understandable.

It鈥檚 part of my job to persuade them they have a duty to be accountable, via the 大象传媒, to the many different groups which have an interest in their respective companies.

As the power of global companies is perceived to be increasing, it is arguable that those who run them have a greater responsibility to explain themselves in public forums.

Even if a chief executive insists on sticking to the traditional view that it鈥檚 only shareholders that really have the right to put him or her on the spot, those shareholders are the many millions of us via our pension funds.

And in an era when media is fragmenting, there are few more public spaces than appearing on the 大象传媒.

That said, broadcast interviews are scary 鈥� especially if it鈥檚 not just the interviewee鈥檚 reputation which is at stake, but that of a big business with thousands of employees and subject to brutal competitive forces.

However those who have fought to the top of big organisations are normally pretty good at presenting themselves and dealing with difficult questions. For all the anxiety of business people about appearing on TV or radio, I can鈥檛 think of a single one who has been damaged by the experience in the two and a bit years since I joined the 大象传媒.

There are times when I am genuinely surprised by the reluctance of executives to appear on television or radio.

For example, the chief executives and chairmen of almost every bank refused to do interviews with any broadcaster over the past few weeks when each bank was disclosing its respective financial performance for the previous year.

It was a big moment for all of them, because of the massive swing in their fortunes caused by the credit crunch.

I had assumed that 鈥� on the Stuart Rose model 鈥� they would want to appear on television and radio to reassure their customers and shareholders at a time of high anxiety.

I was wrong: , , and all said no.

Their senior executives were happy to talk off-camera or away from a microphone. They were happy to be intermediated by me. But they didn鈥檛 want you, the viewer and listener, to hear their voices and see their faces.

There was a notable exception: , chief executive of , gave a to me which went out on TV and radio.

I think that reflects well on Barclays 鈥� but I have a vested interest in thinking that.

What are your views on all this?

I asked a couple of bank bosses why they and their teams were being so shy.

The reason they gave was that conditions in money markets remain exceptionally difficult, the confidence of bankers remains fragile, and the outlook for their businesses is hugely uncertain. And in those circumstances they and their executives have to weigh their every word with care.

Given that they can鈥檛 yet predict all the consequences of the unwinding of years of excessive lending, they are fearful of talking to millions of people through a medium (viz, the 大象传媒 or any broadcaster) they can鈥檛 control.

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• - What's this?

, the leveraged-mortgage vehicle of the famous, eponymous private-equity firm, said over night that it has been unable to stabilise its financing and that its 鈥渓enders will promptly take possession of substantially all of the company鈥檚 remaining assets鈥�.

So almost within the blink of an eye, a business that had borrowed $21bn from the world鈥檚 biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput.

Such is the whirlwind blowing through global financial markets.

What鈥檚 the damage? Well the equity in the business, about $670m, looks as though it will be wiped out.

In the scale of credit-crunch losses, that鈥檚 an 鈥渙uch鈥� rather than a 鈥測ikes鈥�. The suppliers of that equity include Carlyle鈥檚 own partners. They鈥檙e a bit poorer than they were.

More worrying is the explanation for why lenders are seizing the assets, which are US government agency AAA-rated residential mortgage-backed securities (RMBS).

Carlyle says: 鈥渘egotiations deteriorated late on March 12 when, among other things, the pricing service utilized by certain lenders reported a drop in the value of RMBS collateral that is expected to result in additional margin calls鈥�.

That statement will reverberate through global markets today.

Why?

Well, the point of Tuesday鈥檚 dramatic $200bn intervention by the Federal Reserve in mortgage-backed markets was to stabilise the price of US government agency AAA-rated residential mortgage-backed securities and 鈥� by implication 鈥� to encourage the big banks NOT to seize assets in the way they鈥檝e been doing at Carlyle.

Right now, it鈥檚 not clear that the Fed鈥檚 medicine has worked.

In fact, it鈥檚 arguable that the banks鈥� seizure of Carlyle鈥檚 $20bn-odd in assets has actually been encouraged by the Fed's mortgages-for-Treasuries offer. Because the Fed鈥檚 new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle鈥檚 assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.

If that鈥檚 the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It鈥檚 a process known as de-leveraging the global financial economy, yet another manifestation of the puncturing of the debt bubble.

Many will see it as a healthy cleaning of the Augean stables. But if it is, it certainly won鈥檛 be completed in a day 鈥� and, as I鈥檝e said many times, it won鈥檛 be painless for the rest of us, because de-leveraging also means they'll be less credit for all of us.

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• - What's this?

So here are a few of the messages from Alistair Darling's first budget.

1) Don't be a four-wheel driving, cigarette-smoking, non-domiciled, boozer. Life is becoming much more expensive for you. Perhaps it's time to move to Switzerland, where at least you're allowed to smoke in public places and they don't look too closely at what's inside your bank account.

2) If you run a power company, you're being pressurised to cut prices for those with lowest incomes. You can't relocate your business abroad. And if you fail to comply, you can expect the government to name and shame you, or even use statutory powers to reduce the tariffs on pre-pay metres.

3) Most of us will notice tax rises, especially after 2009. But most of them are expenditure taxes and therefore avoidable.

4) The Treasury is sailing closer to the wind, in respect of the health of the public finances, than it has been for many years. It is projecting a 拢5.8bn fall in tax revenues in 2008/9 compared with what it had been expecting last October. But it has chosen to allow public borrowing to rise rather than make good that shortfall with immediate tax increases.

That makes sense, at a time when the confidence of businesses and consumers is fragile. Tax increases that bite straight away could have seriously damaged the economy.

But there are many economists who believe that the Treasury's central growth forecast of 1.75% to 2.25% for this year is far too optimistic. If they're right, the public finances may end up in worse shape than the Treasury expects. And with the public finances projected only just to meet the fiscal rules, there's little margin for error.

For Alistair Darling, as for the rest of us, 2008-9 looks like being a hair-raising time, economically speaking.

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• - What's this?

The Treasury is raising 拢550m in 2010-11 鈥� which is not trivial 鈥� by removing the biofuels duty differential.

That sounds like a fairly major policy shift away from promoting biofuels.

On the changes to Vehicle Excise Duty, to extract more from owners of gas-guzzlers, that is forecast to raise 拢465m in 2009-10 and 拢735m in 2010-11.

So that鈥檚 a pretty big incentive to buy a green car.

And as for those increases in alcohol duties, boozers will be 拢400m worse off next year, 拢505m the following year and 拢625m poorer in 2010-11.

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• - What's this?

Bad news for energy companies and - presumably - good news for those on lowest incomes.

The chancellor wants the power businesses in the current year to treble to 拢150m what they spend on 鈥渟ocial tariffs鈥�. That would mean they would charge less for gas and electricity to those who have least.

There was no detail on precisely how he鈥檒l extract these subsidies from them.

And many of them will grumble.

And there鈥檚 a whammy for power generators.

From 2012, they鈥檒l have to bid for their permits to pollute under the emissions trading scheme (they were given them in the first phase of this scheme).

The reason that the power generators, as opposed to other companies, will be hit first with a cost that could be significant is that they are not in competition with overseas companies, but only with each other.

So they would not be put at a competitive disadvantage by this de facto tax.

But when they are hit with this new cost, they will presumably simply pass it on to us.

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• - What's this?

Alistair Darling is confident that the UK will avoid recession. He expects UK economic growth to slow down this year by a third to between 1.75% and 2.25% 鈥� but that would be faster than most of our major economic competitors, and is likely be massively better than the US, which may already be in recession.

But he acknowledges that this is no time to take money out of the economy through tax increases that bite with immediate effect. The main impact of tax increases will be after 2009.

So in 2008-9, he forecasts a relatively sharp increase in public borrowing to 拢43bn.

That won鈥檛 be seen by many as disastrously high, but still more than would be ideal at a time when the economic outlook is highly uncertain.

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• - What's this?

This is the credit crunch budget.

We are all feeling the impact of the accumulating losses of banks and financial institutions from their unwise lending of the past few years 鈥� and their growing reluctance to lend as much to us as they were doing or as cheaply as they had been doing.

And if we feel poorer and more constrained in our spending, so too does the Chancellor, Alistair Darling.

His receipts from taxation come under pressure.

Yesterday I described how revenues from stamp duty and capital gains tax suffer as a result of the credit crunch-induced softening in the housing market and the stock market.

But there is even likely to be a VAT squeeze.

Why? Well, the rise in energy prices means we鈥檒l spend more on fuel 鈥� which incurs a low VAT rate 鈥� and rather less on those items that are taxed at the full VAT rate.

What鈥檚 more, in a slow down, we tend to spend relatively more on shop-bought, no-VAT food, in preference to eating out in VATable restaurants.

So the chancellor will receive less in tax revenues than he hoped only last October.

But although he鈥檒l put up taxes to make good those losses and prevent a severe deterioration in the public finances, it would be very dangerous for those tax-increases to bite in the coming financial year 鈥� when the confidence of businesses and consumers is likely to remain fragile.

I therefore expect the Treasury to let public borrowing to take the strain of lower revenues next year.

So the first big question for me will be: how much will public sector borrowing rise next year from the forecast made last October of 拢36bn?

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• - What's this?

The global financial economy looks increasingly like an over-pumped old tyre, on to which the central banks are desperately trying to apply patches.

But just when they鈥檝e mended one puncture, there鈥檚 that unmistakable hissing sound again.

The latest crisis, as I mentioned on Friday, is the collapse of investors鈥� confidence in regular US residential mortgages.

With delinquency rates rising and the severity of the US slowdown impossible to predict with confidence, no-one wants exposure to Mr and Mrs Average of AnyTown, America.

Except, that is, for the , the US central bank.

It did this remarkable thing yesterday by announcing that it would swap $200bn of US Treasuries 鈥� supposedly the best credit in the world 鈥� for mortgage debt.

This offer is only available to primary dealers, the securities firms with which it deals directly.

But these are America鈥檚 major banks, so in theory it delivers succour to an important part of the system.

There are two possible ways in which the mortgages-for-Treasuries exchange should help.

It would provide direct succour to any bank suffering a funding crisis from its own holdings of illiquid mortgage assets.

And it could 鈥� but I stress this is hypothetical 鈥� restore a bit of confidence to banks so that they lend to other institutions, such as hedge funds or structured finance vehicles, that are on the brink of insolvency as a result of their own exposure to mortgages.

It鈥檚 a bit of clever financial engineering by the Fed, in that 鈥� unlike many of its other money-market initiatives of the past few months 鈥� it does represent net additional credit for the financial system.

But it鈥檚 high-stakes stuff.

It shows that the Fed believes that capitalism has entered one of its more dysfunctional phases, when foolish lenders have to be protected from the consequences of their own folly.

We鈥檙e in the mess we鈥檙e in because financial institutions en masse lent far too much to the wrong people and businesses over the preceding few years.

But, the Fed feels, they can鈥檛 be allowed to suffer the full consequences of their stupidity, for fear of the damage wreaked on the US economy in particular and the global economy by extension.

In other words, the Fed is now wholly committed to a full-scale rescue of the financial system.

Its latest initiative may not work, but that鈥檚 not the point.

What is relevant is that it has signalled that it will do whatever it takes to minimise the pain for banks, insurers, hedge funds and so on.

It鈥檚 coming pretty close to making a commitment to buy up all and any financial market that runs into difficulties, almost to nationalising capitalism.

And that鈥檚 why stock markets rose across the world, because of the intent signalled by the Fed rather than because of confidence that it will succeed with this latest gambit.

That said, the next possible crisis in this wave of crises may be particularly intractable.

For the past few weeks, strains have been worsening in the market for credit default swaps 鈥� that multi-trillion dollar market in debt insurance.

The price of that insurance has been going through the roof.

There is some cost to the companies whose debt is insured, but they are almost an irrelevance in this market.

The real significance of credit default swaps is that they are instruments for speculating on the fortunes of companies by hedge funds, banks and other financial institutions.

They represent one of the most disturbing manifestations of the debt bubble, in that trading in them has been massive and opaque.

If they were to become impossible to trade or value, the damage to many financial institutions would be immense.

And in those circumstances, it鈥檚 really difficult to see quite what the Fed could do.

Would it begin to take credit default swaps as collateral for high quality US government debt?

That really would be to swap exchange ordure for gold.

But let鈥檚 keep our fingers crossed and hope that it never comes to that 鈥� and that the Fed鈥檚 evasive action sees us through this crisis in reasonable shape.

Would that mean we had got off scot-free?

No.

When the Fed bails out the system in the way it has done, it sends a powerful signal to the players that they are too big and important to fail.

That gives them all the confidence they鈥檒l need to make new and even more stupid lending mistakes when the economy returns to its next benign phase.

So at some point, the US authorities will presumably have to ask themselves searching questions about the nature of the capitalism they hold dear.

Do they really feel comfortable with a market system in which modest folly is punished but an outbreak of grand delusion is excused?

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• - What's this?

The story of this year鈥檚 Budget will, I think, be new and higher green taxes to fill a potential black hole in the public finances.

Or to put it another way, the badly needs to raise money.

So the imposition of assorted green taxes 鈥� on gas-guzzling cars and flying 鈥� will not be matched by cuts in other taxes.

There, I think, is where any political row will ignite, because the Tories claim they would wholly offset any green levies with reductions in other taxes, so as not to increase the overall burden of taxation through environmental initiatives.

And although there may be many who will applaud the taxing of environmental bads, there will be plenty of others who will see the new taxes as disingenuous.

But what are the strains on the government鈥檚 finances that the green taxes are supposed to ease?

Well they stem from last summer鈥檚 pricking of the , which has taken its toll on property and share prices and will prompt a consequential fall in projected tax revenues from transactions in shares and property.

In the of 9 October, the Treasury had expected stamp-duty proceeds to rise 5% to 拢15.8bn in 2008/9 and the contribution from capital gains tax to increase by 13% to 拢5.4bn.

Both of those forecasts look absurdly optimistic, even allowing for the incremental revenues that should flow from the controversial reform of CGT.

The All Share index has, for example, fallen 14% from the level that was built into the Treasury鈥檚 audited assumptions of last autumn.

That decrease automatically reduces the Treasury鈥檚 revenue projections.

Also, the level of housing sales is running 14% below where it was a year ago.

And although there are regional variations (the Scottish market is still pretty buoyant, for example), house prices are beginning to fall.

Lower share prices, lower house prices, and fewer transactions: collectively they would reduce the take from stamp and CGT by many billions of pounds.

And it gets worse, because the outlook for corporation tax isn鈥檛 brilliant either.

There is likely to be a fall of between 5% and 10% in profits reported by British companies in the coming year, according to City analysts.

That should mean they鈥檒l pay less tax.

However there is a credit-crunch skew to this corporate slowdown: the prospects are gloomiest for our big banks, which, as it happens, pay a massively disproportionate amount of all corporation tax.

So on the revenue-raising side of things, the prospects could be at their least benign since Labour took office in 1997.

And that鈥檚 on the assumption there鈥檚 simply a modest economic slowdown this year, and that we avoid a sharp rise in unemployment or a recession.

In other words, and to state the bloomin鈥� obvious, if the government is to avoid humiliating cuts in its public-spending plans, the Treasury has to find additional revenues. Taxes will have to be increased.

Which is why Gordon Brown and Alistair Darling are presumably counting their lucky stars for global warming.

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• - What's this?

I am suffering from a 鈥榝lu-like鈥� virus which 鈥� according to my doctor 鈥� is afflicting 鈥測oung adults鈥� all across North London.

鈥淵oung adult鈥� must be a technical, medical term. It was a bit of surprise to be categorised as such, but far be it from me to disagree with expert opinion.

But through the viral fog, I鈥檝e been trying to discern the shape of the price settlement for our leading airports.

And from what I can see, the has blinked. In fact the airlines will probably complain that the CAA has shut its eyes and is refusing to open them.

The airlines will squeal because from 1 April by far more than could have been expected.

will express disappointment with elements of the settlement, notably that there has been no increase in the cost-of-capital assumptions that underpin the pricing proposals.

But BAA is largely trying to spare the blushes of the regulator. The fact is that today鈥檚 settlement is very good news for the airports operator and its owner, the consortium led by Ferrovial of Spain.

So the first and big point to make is that there will not be a financial crisis at BAA.

With money markets still in turmoil, it may not be an ideal moment for the Ferrovial consortium to refinance the 拢9bn of debt it took on when buying the airports in 2006 (see last week鈥檚 blog on this).

However if there was doubt it would be able to find new loans, the CAA has laid that doubt to rest.

Or to put it another way, it has provided some comfort to future purchasers of regulated British businesses that if they don鈥檛 do their sums quite right, well the consequences should not be too severe.

The governor of the Bank of England would describe that, I think, as an increase in moral hazard.

But the Treasury, which thinks Britain has benefited from the sale of important companies to overseas interests, will be relieved that future buyers from abroad of great British businesses won鈥檛 be scared off.

Now, let鈥檚 look at those chunky increments in what Heathrow and Gatwick can charge.

Actually before I get on to that I am going to be horribly pedantic and point out that the CAA in today鈥檚 statement seems to have confused percentage points and percentages 鈥� which would be amusing, except that it鈥檚 an economic regulator and is presumably supposed to know the difference (actually its possible, I suppose, that the CAA doesn鈥檛 know how to round to the nearest whole number, which would be even more upsetting).

Anyway, Heathrow is being permitted to charge 7% (鈥減er cent鈥� NOT 鈥減ercentage points鈥�) more than what the (the increase in percentage points is 8).

And Gatwick can charge 12% more than the November recommendation.

As a result of the wonderful power of compounding, that represents a massive increase in the airports鈥� cash flow over the five years of this settlement: the increment will compound at 7.5% plus RPI inflation every subsequent year.

That means, according to my calculations, that by 2013 BAA will receive 拢1.26 more per Heathrow passenger than it had expected to receive just three months ago 鈥� or about 拢95m in gross incremental revenue.

Not all of that will be profit.

It鈥檚 to state the obvious to say that there have been massive increases in security-related costs for airports over the past few years. But I鈥檓 not clear quite how security demands have changed since the last price-control proposals were published on November 20.

Understandably the airlines, which incur these charges, will moan.

However their argument that landing at Heathrow is becoming uneconomic isn鈥檛 strengthened by their propensity to pay huge amounts to each other to acquire landing slots at what some regard as a circle of hell too horrible even for Dante鈥檚 imagination.

The point is that Heathrow has an enormous share of the market. Many of us have to use it: there鈥檚 no real choice for some destinations at certain times.

Which means that the airlines will be able to feed the increased charges through to us. Passengers will pay.

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• - What's this?

The vicious credit cycle currently ruling our global financial economy has entered a new and worrying phase.

What began in the autumn of 2006 with a rise in defaults on US sub-prime loans is now manifesting itself in growing delinquency rates on US mortgages in general and the growing unease of lenders about ostensibly good quality mortgages.

That was what caused the . The lenders to demanded their money back after its holdings of mortgage-backed securities start to fall in value.

And an investment vehicle of the substantial is in schtuck because its lenders are demanding increased collateral against holdings of more than 拢10bn in US government agency AAA-rated residential mortgage-backed securities.

Only last week calculated it had sufficient liquidity. Now it's warning that it may run out of liquid assets and that its capital may be impaired.

Why does any of this matter? Well it shows that contagion from sub-prime to other assets is becoming serious.

That will further deplete the capital of the financial institutions - the banks and insurers - upon which we all depend for credit.

It also suggests we are still early in the process of returning to the mean from all those years of under-priced debt and over-priced assets.

Returning to the mean, or a sensible level of pricing, was never going to be painless. But the pain - in the form of the impact on the real economy - could be pretty horrible if we overshoot in the other direction and debt becomes punitively scarce and dear.

UPDATE 04:45PM: The US Federal Reserve has taken emergency action today to (in its words) 鈥渁ddress liquidity pressures in the funding markets.鈥�

It has identified lenders鈥� growing distaste for all classes of mortgage-backed securities as a serious source of further strains in credit markets and has announced increases in the size of its credit auctions to $100bn 鈥� and it is also making another $100bn available through term repurchase operations.

The Fed has signalled its determination to do all it can to restore confidence in the financial system by saying it stands ready to provide even greater funds if necessary.

The 28-day repurchase agreements will allow primary dealers (banks and broker dealers that trade directly with the Fed) to borrow against all and any class of securities, including the agency-backed mortgages being shunned by many private-sector institutions.

The effect of the Fed鈥檚 measures is to supply banks and financial institutions with the liquid funds that they can鈥檛 currently obtain on the commercial markets.

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• - What's this?

When BAA was taken over in 2006, there wasn鈥檛 much fuss or controversy whipped up about the deal.

Our most important airports 鈥� those vital to the prosperity of the South of England 鈥� were to fall under the sway of a Spanish construction and transport group, Ferrovial, in partnership with a Canadian manager of pension funds and an arm of the Singapore Government.

But it was 鈥� and is 鈥� par for the course for Britain鈥檚 largest and most famous businesses to come under the control of overseas interests.

So, true to form, the various regulators nodded it through.

However a few of us raised a concern about another characteristic of the takeover: the financing of the deal with a spectacular amount of borrowed money. BAA was bought by Ferrovial鈥檚 consortium at almost the peak of what was a bubble in debt markets, when it was possible to borrow enormous sums on advantageous terms.

Ferrovial and its partners borrowed 拢9bn, but hoped to replace that with cheaper finance in the subsequent two to four years.

Refinancing on advantageous terms looked a sure thing when they acquired BAA. Debt was cheap and plentiful, and financiers had become convinced that this deluge of cheap money would last forever.

Well, flood turned to drought last summer. Suddenly debt is neither easy to obtain nor cheap.

And although Ferrovial is not facing demands from its lenders for immediate repayment and has a year or two to sort itself out, it will not be easy to replace that 拢9bn with new loans on attractive terms.

There鈥檚 another headache for the Ferrovial gang of three.

In just a few days, the Civil Aviation Authority will announce new caps on what BAA鈥檚 airports can charge their customers. Barring a last minute change of heart by the regulator, BAA will be permitted to earn significantly less revenue per unit of invested capital than it had been doing 鈥� about a fifth less, on average.

So Ferrovial and its partners are seemingly in a painful vice.

The costs of financing operations and investment at Heathrow, Gatwick, Stansted and so on are turning out to be significantly greater than they hoped, due to the global crisis in money markets. But their ability to generate incremental revenues looks set to be significantly restricted.

How bad could it get for the Ferrovial troika?

Well the value of their investment in BAA could be severely impaired, perhaps almost wiped out.

There鈥檚 only a remote possibility that BAA would actually go bust 鈥� because however much customers moan about the experience of flying from its airports, they are top quality assets that would always find a buyer.

In the worst case where the consortium could not obtain sufficient finance from debt markets, they could raise capital by selling a lesser airport, such as Gatwick. They may indeed be obliged to do so, if an investigation into BAA鈥檚 virtual monopoly by the Competition Commission goes the wrong way for them.

Or, in extremis, the owners could sell a substantial stake to one of those deep-pocketed sovereign wealth funds 鈥� which are currently on a mission to own a few pillars of the western economies.

But it would be na茂ve to assume that all the risks of BAA鈥檚 agony are with Ferrovial and friends. They also fall on us. If our airports are less than best in class, that鈥檚 detrimental to our economic growth prospects.

We all have a powerful interest in seeing those airports transformed into world-leading hubs. They are in need of billions in investment, an estimated 拢10bn over the next decade.

In order to secure that investment, it is just possible that the CAA will relax the price controls it had been planning to impose on the airports.

But many would see that as bailing out Ferrovial and its partners for their foolishness in borrowing too much.

It鈥檚 a proper old mess. And the regulators must shoulder some of the responsibility, in permitting our airports to be engulfed by debt.

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• - What's this?

It wasn鈥檛 just Northern Rock that flogged off its mortgages to international investors in the form of asset-backed securities.

More or less every British bank used this global market as a source of cheap funding: something like a quarter of all British mortgages are financed by the sale of mortgage-backed bonds.

With around 拢200bn of British mortgaged-backed bonds trading, yours could actually be owned by a hedge fund or an Australian pension fund, even if you think it鈥檚 on the books of the Halifax.

So when the market for asset-backed securities closed down last summer, it wasn鈥檛 just Northern Rock and its shareholders that were mullered.

Most of us were hurt by the disappearance of a source of cheap finance, because it meant that the price of mortgages would rise, and their availability would shrink.

Hey presto, many of us feel a bit poorer and the oomph goes out of the housing market.

Now there鈥檚 nothing intrinsically wrong with plain-vanilla, mortgaged-backed bonds.

It鈥檚 their twisted, hybrid cousins, the collateralised debt obligations made out of US subprime loans, that have wreaked the serious damage.

The poisoned CDOs have wreaked havoc on the more straightforward mortgage-backed bonds in two ways:

1) There鈥檚 been reputational contagion to any security backed by property.

2) Structured finance vehicles, such as the notorious SIVs and the collateralised debt obligations, were big buyers of all mortgage-backed securities, including the British mortgage-backed securities, but they鈥檝e been slaughtered and are no longer buyers of anything.

But even if there鈥檚 nothing intrinsically wrong with the simplest mortgage-backed bonds, the market for them refuses to return to anything like normality.

Global investors don鈥檛 want the stuff.

It鈥檚 all a bit odd, but the loss of their appetite may stem in part from the widespread view that the British housing market has too much in common with the US one, viz that it鈥檚 over-valued and heading south.

Certainly that鈥檚 the implication of the way that futures markets are pricing the outlook for UK houses. According to Morgan Stanley, futures markets are implying there will be a 10 per cent fall in UK house prices over the coming year.

However it would be pretty serious for all of us if the market for mortgage-backed bonds fails to revive a bit.

If the availability of housing finance in the UK were to shrink over the long term by a fifth, well that doesn鈥檛 bear thinking about 鈥� mortgage interest rates would rise very sharply and the impact on house prices would be scary.

Which is why on 6 February, the Chancellor Alistair Darling said in a speech that he would 鈥渃onsult on a new 鈥榞old standard鈥� for covered bonds and mortgage backed securities鈥� that would increase the confidence of investors that a British mortgage-backed bond is 鈥� to coin a phrase 鈥� as safe as houses.

Now according to this morning鈥檚 , there would be 鈥渁n official seal of approval鈥� 鈥� a kitemark 鈥� for those-mortgage backed bonds whose underlying mortgages meet the most rigorous lending standards.

The word 鈥渙fficial鈥� is certainly resonant.

Does it mean the Treasury would issue the kitemark?

The Treasury tells me there is no possibility of that.

And you can see why it would want to distance itself from that notion. If the Treasury were to put its stamp on asset-backed securities, investors might understandably believe the bonds were guaranteed by HMG.

The bonds might sell like hot cakes. But the might insist that the whole lot come on to the public-sector balance sheet 鈥� which would put an atom bomb under the fiscal rules that are supposed to keep public-sector debt within reasonable bounds.

Who instead would issue this kitemark? Well it would be very odd if the allowed its name as the regulator of banks to be used to explicitly underwrite their fund-raising. That would put the FSA in cahoots with banks, and would wholly undermine its role as watchdog.

So the FSA can鈥檛 do it.

Which leaves only the banks themselves, or their trade association, the .

But it鈥檚 not obvious why investors would place faith in a seal of approval agreed and policed by the very banks from whom they鈥檙e buying the bonds 鈥� unless, that is, the bonds were aimed at the innocents in the retail market (that鈥檚 you and me, by the way).

Anyway, for years there was a perfectly good system for providing confidence to investors that they were buying good bonds backed by decent assets.

The credit-rating agencies, Moodys, S&P and Fitch, provided certificates of credit-worthiness that were widely trusted.

Their reputation may have been battered by their wholesale failure to spot the risks intrinsic to bonds created out of US sub-prime mortgages.

And anger at them may be well directed.

But if they reform the way they assess the quality of bonds and the way they present their findings, they may be able to win back that squandered trust 鈥� and in the process contribute to a resuscitation of the asset-backed bond market.

The Treasury鈥檚 idea for a kitemark may well be seen by many banks and investors as introducing a new layer of bureaucracy that would yield little financial benefit.

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Gold closed yesterday at just over $981 per ounce and seems set to continue its remarkable upward path towards the magic $1,000 number.

In nominal terms, it reaches new highs on a daily basis 鈥� though adjusting for inflation it remains significantly below where it was in the inflationary world of almost 40 years ago (its nominal high back then was $850, which was briefly touched in January 1980).

What鈥檚 going on is that investors are again seeking out gold as a putatively inflation-proof store of value in uncertain times.

It looks oh-so solid and reliable compared with all those poisonous securities manufactured by brainy bankers out of defaulting US sub-prime loans.

But it is the Federal Reserve鈥檚 current mission to slash interest rates that is giving the big push to the gold price right now.

Many investors fear that the Fed has 鈥� at least for now 鈥� abandoned any notion of keeping a lid on inflation, in its apparently desperate attempt to revive the ailing US economy (which was as in recession 鈥渂y any common sense definition鈥�).

So there has been a flight out of the dollar, which has been tumbling in value, and into the shiny yellow stuff.

Which brings me to one of the least well-timed investment decisions of this or any age, Gordon Brown鈥檚 sale of 395 tonnes of our gold in 17 auctions between July 1999 and March 2002.

The average price achieved in those disposals was $275.6. Gold has since risen in value by 256% 鈥� a rate of return which would bring pride to even the cockiest of hedge-fund superstars.

Or to put it another way, 395 tonnes of gold from our official reserves that was sold for $3.5bn would now be worth $12.5bn.

So we appear to have lost out on $9bn of gains 鈥� or about $300 per taxpayer.

However, that鈥檚 a slightly simplistic view of the scale of our loss.

The $3.5bn of revenue raised in the sales was invested in interest-bearing assets denominated in dollars, euros and yen to the extent of 40%, 40% and 20% respectively.

So to calculate the true net loss to the taxpayer, I would have to adjust for the yield on these assets and movements in the value of those currencies. And I don鈥檛 have enough information on precisely what was bought and when to make that calculation.

It is probable, however, that the effective net loss on Gordon Brown鈥檚 great gold sale would be a bit less than $9bn 鈥� but it would still be a very significant loss.

So why did Gordon Brown as chancellor dispose of all that gold? Well, my recollection of conversations with him and his advisers at the time is that they hated what they perceived as the intrinsic laziness of gold. It simply sat in the vaults gleaming but earning no interest.

They wanted assets that appeared to earn their keep, by generating interest payments.

They also hoped and believed that rampant global inflation was a thing of the past, and that the days of gold鈥檚 soaraway success would never recur.

To be fair to them, they weren鈥檛 alone in reducing their gold holdings. The Swiss, the Belgians and the Dutch also sold very significant amounts.

Also, the gold loss is spilt milk 鈥� and, as any great investor will tell you, it鈥檚 fatuous to weep over it.

But the stewards of our wealth would surely try to learn from their mistakes. And, in this case, Gordon Brown鈥檚 error was probably to place too low a premium on gold鈥檚 bothersome habit of retaining its intrinsic value over the very long term.

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• - What's this?

I almost feel sorry for our gas and electricity companies.

They operate in a competitive market largely devised by this government.

The wholesale price of gas has been rising very sharply.

And yet when they push up the prices they charge us, they are accused of profiteering.

Now these businesses are not as transparent as would be ideal.

Many are part of giant overseas businesses.

Some, like our own , do a good deal more than sell power to consumers.

So there is plainly the scope to fudge and obfuscate the true profitability of supplying energy to households.

But it would be little short of a miracle if any of them were making much of a return right now 鈥� and it is highly unlikely that any will do so over the next year or so.

The point is that over the past 12 months the wholesale price of gas has risen by more than 50%.

But the price charged to you and me has gone up recently by around 15%.

That means profit margins are being eroded very significantly.

Excess profits are not being generated.

That said, there was a period last year of two or three months when wholesale prices fell much faster than the retail tariffs imposed on us by power companies.

It led to a blissful period for the power giants of fattened earnings.

But the fat times didn鈥檛 last, because there is an effective consumer lobby which exposes when these energy businesses show the slightest inclination to profiteer.

What should be a concern to all of us is that forward wholesale prices for gas next winter are 22% higher than the current price.

So the recent increase in consumer tariffs may not be the last.

In that context, it is understandable that the Chief Secretary to the Treasury, Yvette Cooper, is having private meetings with each of the power giants, to discuss initiatives to provide affordable energy to those on low earnings, to combat what鈥檚 known as fuel poverty.

There has been much chat that she鈥檚 thinking of imposing a windfall tax on them, if they fail to come up with effective proposals.

Don鈥檛 hold your breath for that new tax, because there is no windfall being generated in their mainstream power businesses.

Which the Treasury now concedes.

And the chancellor, Alistair Darling, has also made clear he has no intention on following through on a proposal from 鈥� the energy regulator 鈥� to levy some kind of one-off tax on a genuine windfall, the surplus value of emissions-trading allowances given to generators.

Instead the government strategy appears to be to shame the power giants into providing cheaper energy to those who can afford it least.

What it would like is an eye-catching announcement in the forthcoming Budget.

But there are risks for the Treasury.

First, if all the companies are coerced into behaving like good corporate citizens, there鈥檚 no incentive for any individual company to behave better than the others 鈥� which could in the long run have a deleterious impact on corporate behaviour.

Second, if energy companies view any fuel-poverty initiative as a de facto tax, they may well be minded to drag their feet on making much-need and very expensive investments in new, low-carbon generating plant.

Third, any reduction in prices for those on low incomes is almost certain to lead to increased energy prices for those on higher incomes. There would be a cross-subsidy from the energy haves to the fuel poor.

In other words, a programme to combat fuel poverty could be seen by most energy consumers as a stealth tax. Would they blame the energy companies for those increased tariffs? Or would they blame the Treasury?

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• - What's this?