Tonight:
4°c
Next Wednesday should be a riot in the City. In fact, if it's not, it will prove that we Brits have turned into docile dolts who will swallow anything the Government cares to feed us. While the G20 circus will officially paralyse Docklands, the protesters will be doing their best to do the same in the Square Mile, and it's hard to disagree with many of their sentiments.
The banking crisis has destroyed the public finances, and those responsible for getting us here have escaped. The price will be paid by the mostly young protesters who face decades of taxes to service the public debt, and we can look forward to a G20 summit somewhere between farce and fiasco, culminating in the inevitable drivel of a meaningless communiqué.
Our Dear Leader, intoxicated by his opportunity to save the world, can be relied upon to blame everyone else, as usual. Yet to some extent he is right. No government has a convincing proposal to get us out of the morass.
Tim Geithner, the US Treasury Secretary, managed to trigger a relief rally on Wall Street with his bailout plan, but the chart here shows why it is yet another gift to speculative investors.
The buyers of the assets under the plan will borrow six-sevenths of the price from the Treasury at about 2%, which would also buy half the equity. As a result, the maximum loss is the tiny, one-fourteenth slice of equity, while the profit is potentially unlimited.
The US administration, like the UK Treasury, is clutching the idea that this crisis is one of liquidity, when it is really one of solvency, because the banks' assets are worth too little to cover their liabilities. The market senses this, which is why only governments will put up cash to meet their liquidity needs.
The potentially fatal weakness of the Geithner plan is that the incentive offered will not bridge the gap between what the buyers will pay, and the loss the banks can afford to crystallise. Disclosure is all very well, except when it discloses that your bank is bust.
So far, the pain has been borne by the shareholders and the taxpayers, but if we are to get through the crisis, it must be spread much further.
Willem Buiter, a former member of the Bank of England's monetary policy committee, asks: "Why are the unsecured creditors of banks deemed too precious to take a hit or a haircut since Lehman Brothers went down?"
The answer is that nobody anticipated the extent of the shock waves that followed Lehman's collapse. Establishing just who is entitled to what from the wreckage, when what is compulsory in one jurisdiction is forbidden in another, will keep the administrators in fees for years to come. Understandably, the authorities are reluctant to risk a repeat, or further damage to what's left of the market's confidence, should they let another bank be seen to fail.
Yet once again, the market is ahead of them. Despite the timely payment of the due interest on Bradford & Bingley's unsecured bonds (for example), they are priced for failure, with a running yield of more than 40%.
Buiter's argument comes back to the solution that governments have resisted; the good bank-bad bank split, with the depositors protected in a new, solvent institution, and the other creditors left to salvage what they can. Such a radical move may stop the rot, but it doesn't deserve to stop the riot.
Time for fair shares of the iShare glory
Martin Taylor was not a success as Barclays' chief executive. He ran into the quicksand of an established bureaucracy, and quit after four years in 1998. While there, he persuaded his colleagues to buy an obscure California-based fund management business that offered big investors a way to buy an index, paying with cash or individual shares in the index.
Its index-tracking iShares have been called the most important innovation in fund management of the last 20 years. Low-cost and relatively low risk, they propelled Barclays Global Investors into one of the world's biggest fund managers. Now, after some shabby dissembling from the bank, Barclays has confirmed that the business is up for sale.
It's nonsense to call iShares the jewel in the crown, since it has precious little to do with banking. Rather, the sale reflects its increasingly desperate efforts to keep the British Government off its share register while not triggering a reset of the terms of its last fundraising from its friends in Abu Dhabi. The £4 billion-plus price that Goldman Sachs, among others, is prepared to contemplate is one-third of Barclays' current market value, even after the recent jump in the share price.
A sale might realise enough for the bank to tell the truth about its other assets. John Varley is unlikely to say so, but he should be grateful
to his predecessor for providing him with such a valuable, saleable investment.
If you've ever wished you could give Gordon Brown a piece of your mind, when he can't interrupt, or fail to answer the question, then clock this nailbiting 31/2 minutes where he's forced to sit and hear it told like it is in the European Parliament:
Well done, Daniel Hannan MEP for getting that off your chest on Tuesday this week. You've made us all feel just a little bit better.
You need savings protection, okay?
Oh no. Just when you thought it was safe to switch on your telly again, Sir Alan Sugar's back with his mental-cruelty programme. You may have felt forced to watch it last night. Worse still, his 'orrible mug will have spoiled your journey home on Tuesday, jumping out of the Standard in a threatening National Savings ad.
Do you want a little protection? It would be terrible if something nasty happened to your money, wouldn't it? Suralan is just the chap to persuade you to see things his way, and he may have a point. Inflation measured by the Retail Prices Index has stopped, but the world's governments are desperately trying to get it going again.
Index-linked National Savings certificates are, frankly, dull. However, they do return 1% plus the increase in the RPI, are safe, and are easily turned into cash if you need to. The prices of their big brothers, index-linked gilts, imply that inflation won't average more than 1½% over the next six years, but the biggest player in this market clearly doesn't believe it.
The Debt Management Office, the Government's cat's-paw, needs to raise £148 billion next year, but only £21 billion will be in index-linked stock, with its in-built protection against inflation. Investors buying the remaining £127 billion will be repaid in devalued currency, and yesterday's failed auction of long-dated stock is the first indication that the penny is at last beginning to drop.
Conventional gilts have had a great run, but are grossly overpriced, so don't muck about. Get yourself some protection, as Sugar might say.
