Morning:
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I N almost any context, $1 trillion is a fabulous amount of money. When it comes to the latest American banking bailout, it barely scratches the surface, which shows the size of the mess in which that industry remains engulfed.
A mere trillion is just 8% of the $13 trillion of toxic assets that banks, by some estimates, have clogging their balance sheets, holding up the US economy from any hope of recovery.
US Treasury Secretary Timothy Geithner, who is masterminding the deal, hopes that by getting private investors including hedge funds involved, the pain - and hopefully the future rewards - can be shared between the taxpayer and Wall Street.
What seems more likely is that the private investors will cherry-pick the least toxic of the assets, probably at prices far below what the banks are currently claiming they are worth.
This in turn immediately weakens the banks' balance sheets, leaving them in need of further equity, which will have to come from what's left of the trillion or from another bailout using public money at a later date.
The government will also have to massively overpay for the bad assets Wall Street won't buy, leaving the taxpayer sitting on (another) spectacular loss.
Peter Cohan, a US management consultant and author who has been scathing about the set-up of each attempt to rescue the banks, puts it like this: "Pricing toxic waste is an enormous problem. Most banks have booked it at 60 cents on the dollar, but it's really worth five cents. If the banks sell it at five cents they take a 55% loss, which they have to make up for by raising new equity capital to the amount of the write-off in order to maintain regulatory capital levels. If taxpayers buy at 60 cents, they are left sitting on an enormous loss."
These banks that keep being described as too big to be allowed to fail increasingly look like they are too broken to be fixed.
There was a flurry of optimism two weeks ago when Citigroup let it be known that it was - shock - not presently losing money. Its shares and those of the big UK banks rallied hard on the news.
This looks down to momentum trading rather than fundamentals - brokers, fund managers and small-time punters reckoned bank shares would rise after Citigroup's strategic leak, so they bought, a self-fulfilling prophecy.
That news is now beginning to look old, and analysts are remembering the state of the balance sheets. Michael Helsby of Morgan Stanley reckons Barclays alone needs to raise another £4 billion of capital in the next two years.
The one UK fund manager who's been right all the way down about bank shares is Neil Woodford, below left, of Invesco Perpetual, who hasn't held any in his funds for years. At an investor conference last week, he said of the banks: "My view is that we've got further losses to see. My view is they will need further capital injections. I think they're really uninvestable from a equity point of view at the moment."
Britain's best fund manager, since Anthony Bolton of Fidelity retired anyway, says banks are uninvestable. Geithner's plan to save the world assumes there's value to be had in the SIVs, CDOs and the rest of the alphabet soup sitting on the bank's back books, and that by providing a market for them the world economy can move towards safety. One of them is completely wrong.
Don't take a punt on Barclays – Chepstow's safer
The stockbroker was three vodka tonics in — about the point on the conversational curve where the sales patter is dropped and the truth temporarily puts in an appearance, just before everyone starts talking utter rubbish.
I've been highly trained to take notes at this moment, though I usually subsequently lose them. I'd been wondering about the wisdom of buying a few bank shares and asking the broker to handle the trades.
“What else would you do with this money?” he asked. The 3.20 at Chepstow. “Hmm. Thing is, the 3.20 at Chepstow might be a sound investment. Shares in Barclays… now that's a flutter.”
In order to open even an execution-only account, I'd have to sign some fairly serious paperwork promising not to get shirty if I'm fleeced.
Execution-only is a no-advice, we-are-all-adults-here deal. That brokers are demanding extra waivers on these accounts which they can later show to the FSA indicates how nervous they have become.
To open this account so he could execute the trades at my behest, I'd have to tick the “high-risk” box, the one that says I almost expect to lose everything and won't complain if I do.
This wasn't to buy AIM-listed holes-in-the-ground masquerading as mining companies which trade at 0.34p — this was to get into firms that remain, despite everything, some of the biggest in Britain. In the long term, these shares will surely come good, goes the reasoning.
“It's a famously undulating course, but if you stick with it you can come out ahead,” said the broker. I assumed he was talking about Barclays shares. “Nah, Chepstow. What you got?”
Looks like my road to oil riches is blocked
Here's the 10-year bet I'd like to make if only the stockbroking industry would find a way of doing it that made sense.
I want to invest a small amount, say £50 or £100 a month, on the oil price rising - while also getting a slice of the chunky dividends the oil majors such as BP and Shell are going to pay over that time.
The simplest way would just be to buy Shell shares, but at commission of roughly £10 a trade I'd instantly be so far underwater that the oil price would have to go to $200 a barrel before I'd be in the money.
I'm not sure that it is going that high, I just reckon that it can't end up much lower than it is now and that it's bound to be somewhat higher.
To my mind, it's a low-risk, safe investment on which I can't really lose, if only someone would let me make it. One possible way would be through Exchange Traded Funds, but the commission on these is also too high.
They are geared up for clients who want to make a single lump-sum investment, not those who want to drip in a little each month, like many of us do with insurance schemes that are usually terrible value for money.
There are doubtless unit trusts that invest in oil stocks, but those funds are also nearly always a rip-off - much of the upside disappears in fund management fees.
I asked a spread better, a stockbroker and a fund manager how I make this bet and they all said: you should be able to, but we don't know.
Those with solutions, write in.
Can Horlick pull off a reversal of fortunes?
What next for Nicola Horlick? The fund manager has been quiet, at least in public, since her Bramdean Asset Management emerged as one of the victims of the great Bernie Madoff fraud to the tune of £12.4 million.
Horlick blames this loss on US regulators who failed to spot a “systemic failure”, and the wider economic crisis on young men, no longer being sent off to war, who instead take wild risks on stock markets. “This is the new battlefield,” she opined — valid views both, doubtless.
Behind the scenes, Horlick is under some pressure to explain to her investors, who include Vincent Tchenguiz, why she didn't do more due diligence on Madoff and what she plans to do now.
One proposal she is said to have begun suggesting is to reverse the asset manager into the quoted arm. The effect of this would be to make investors in the listed business pick up the tab for the trouble caused by the fund-management arm.
Shareholders in Bramdean Alternatives haven't yet been consulted on this, and may not be thrilled by the idea.Horlick was too busy to discuss this notion yesterday, merely noting via email that it is “business as usual” and that the net asset value of Bramdean is doing well. She didn't mention the share price, which is less praiseworthy.
Horlick is hardly the only fund manager who misread Madoff, and if she thinks she gets unfair attention because she's female, she may have a point. Perhaps. But there's growing talk that she could need to pull a rabbit out of the hat...
