Tonight:
4°c
I recall someone who was then Deputy Governor of the Bank of England telling me years ago that the financing and accounting of Freddie Mac and Fannie Mae - the American agencies that securitise and refinance half the US home mortgage system - was extremely dubious because of the confidence trick implicit in the suggested, but not official, government guarantee of their financial health. It was, in his view, an accident waiting to happen. It's been a long wait, but the businesses went into a dangerous skid at the end of last week. Even now, though, the accident is unlikely to happen because if there were ever agencies that are too big to fail, it is these two.
The dilemma faced by the US Federal Reserve and the Treasury, therefore, is not whether the agencies should be rescued, but how best to do it. They want to keep as much of the current structure intact as possible because that is the least costly option. But they must not appear so mean that their actions seem to fall short of wholehearted support.
They will be conscious, too, that they only really have one chance to get it right if they want to avoid being sucked into guaranteeing the whole business and its balance sheet, as the British Government had to do thanks to its dithering over Northern Rock. Just as allowing Rock to get funds from the Bank of England would have solved its problem had it been offered early enough, giving access to funds from the Federal Reserve should do the trick for these agencies because that will restore confidence in them. There is no economic or financial reason for this particular difficulty to get out of hand.
The problem, if there is one, is political. congress is likely only to sanction a bailout that saves the institutions but wipes out shareholders, so something more than simple access to the Fed window may be required - perhaps along the lines of a massively dilutive issue of new share capital in return for the support. The Fed might even seek to do the whole exercise at arm's length through the commercial sector, as it did with the Bear Stearns rescue, so it does not appear to be a government bailout.
The danger is that, in trying to get the political judgment right, they screw up the economics. But assuming that does not happen, the problems of the two agencies are not the end of the world as we know it - just another milestone on the road of financial destruction caused by the great de-leveraging.
Eastern promise for air industry
The Farnborough Air Show has come round at a good time. We need to be reminded that there are some great manufacturing and engineering businesses in this country, some British and some foreign-owned, but all tapping into a well of embedded scientific and technical knowledge. Rolls-Royce is the obvious example, but there are literally hundreds more, tiny in scale next to the leviathan, but hugely important nevertheless. And this business remains in remarkably good health. Defence spending continues to run high and while civil airlines in the ferociously competitive Western markets are beginning to struggle under the impact of economic slowdown and higher fuel prices, the booming economies of Asia tell a different story. The growth right across the region has caused a huge expansion in the demand for air travel, and airlines there are growing at rates which we in the West have not seen for years.
New airports are being planned and opened at a truly astonishing rate as governments create the infrastructure to meet this demand. And, of course, there is a significant upgrading and expansion of the fleets.
Old hands could teach dark arts
City brokers and bankers must now have a policy on rumours, according to the latest instruction sent out this week by the Financial Services Authority.
What this policy is - whether firms or individuals can apply for designation as an authorised rumour spreader or rumour suppressor - is not made clear, but whatever it is, it has to be incorporated in the compliance manuals.
Given that everything in compliance manuals invariably leads to a training course, perhaps a few of the more colourful brokers of the past could come out of retirement to run courses in the art of rumour creation: the timing; the art of making it just credible enough to be believable but unforeseen enough to provide a jolt to the share price; the skill in making it hard to deny so it has longevity; knowing how to start it in the first place and most important, how to cover your tracks so the FSA does not pick you up ... and how to deny all knowledge if it does.
