The start of the week brings another pair of economic stimulus packages. This time it's the governments of India and Australia that are going to find ways of pushing money into their economies in an attempt to stave off the worst effects of slowing growth.
Recessions have a way of focusing the mind. They also help the "uber-rich" pull up the drawbridge, says Hugh Hendry of hedge fund group Eclectica, who was on "Squawk Box Europe" this morning.
How do US tax payers feel about supporting the liquidity of Dutch insurer Aegon?
Well, the group has joined the growing line of businesses holding out its hands for Federal Government cash.
The group is considering asking the US government for more than a $1 billion in support. The company may have to buy a US business to qualify for the cash and the speculation is that it could buy a thrift company called Suburban Federal Savings Bank, which is based in Maryland.
Suburban has about $300 million in assets and the transaction could see Aegon inject capital into the thrift to get its hands on the billion dollars. Because they are an insurer they don’t have the same access to the financial support program as the banking sector – without making the purchase.
Aegon has already received $3.8 billion from the Dutch government and insists the billion dollars in US government money is not needed to meet liquidity problems, but rather will give the company more financial flexibility.
Aegon has assets of $125 billion in the US currently, and the additional billion dollars represents a small percentage of their current position.
Aegon is not the first insurance company to consider buying a small savings and loans business to get access to Federal funds. The company, which runs US life insurer Transamerica says the US money would be used in its US operations.
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Now this might seem churlish when the UK bank bailout scheme is being hailed as a bold attempt to backstop the UK financial system, but let's spend a moment thinking about the bigger consequences.
Unlike the US TARP which will relieve the banks of toxic assets on their balance sheets, this UK plan will put the government in the boardroom of every participating bank (figuratively if not literally).
Can anyone tell me now what really separates the banks from the government?
Our liberal, equity-owning democracy has taken a major blow. With this precedent what incentive is there now for me to own another bank share? And if that is the case why should I be prepared as an individual to put my capital at risk recapitalizing the banks when at any point the government is going to help itself to the returns I have gambled on?
The British government is nationalizing the UK banking industry through its ownership of preference shares. The scheme now puts the government alongside bond holders ahead of the equity owner in taking their slice of bank profits. Gordon Brown will be feted by the left in this country as the Prime Minister who has rolled back two decades of Thatcher-led equity ownership.
Let's talk about responsibility.
The government is expecting the equity holder and bank management to suffer for conducting business legitimately in a regulated environment. If there is to be a day of reckoning then surely most of the blame should come back to the regulator and the government that removed the responsibility for oversight of the banking industry from the Bank of England to the FSA.
There are plenty in the city who believe Gordon Brown has over the years worked to undermine the returns for the prudent equity accumulating citizen whilst securing a gilt-edged retirement for public servants. This latest move by the Treasury appears set to hasten further now a greater role for the government in every part of the British economy.
Is it too much of a leap of imagination to ask whether loan officers will feel constrained in their future lending behavior knowing that the government is an important shareholder? Will management of the banks make important decisions on their own business model based on whether they suit the political color of the government?
They can hardly claim they were unaware of the problems the banks were facing. Northern Rock was a year ago!
Their delay in addressing the liquidity issue has resulted in the end for Bradford and Bingley, and now the forced takeover of HBOS. This week's dramatic decline in bank share prices was apparently the result of mismanagement of information about which banks would be interested in taking extra financial support. At each turn the government’s hands are all over this crisis.
That matters because the structure of wealth accumulation and pension provision in Britain is based on long-term equity ownership. Anyone expecting a decent retirement supported by a secure equity funded pension plan has just taken a knockout punch. Forget asking what profit there is in this rescue package for the taxpayer. Instead, ask how ultimately they will be forced to pay for the increased government role in every aspect of the UK economy through their pension fund.
They've worked hard, they've worked long and, through prudence, they've borne the additional cost of absorbing East Germany and being a founder member of the euro zone. And now the German worker has had enough.
The mark provided the credibility the single currency needed to make it off the drawing board –- but still there must have been nagging doubts in the Bundesbank and the Chancellery about giving the Irish, the Spanish and the Italians access to a hard currency.
While the Germans worked and paid their taxes the Irish and southern European economies boomed on easy credit. While the Germans had their spending controlled through domestic fiscal policy, the rest of Europe appeared to pay lip service to spending rules.
On current guidance Ireland is likely to SUBSTANTIALLY exceed the 3 percent deficit to GDP target; France will probably be just under and Greece the same. Germany will most likely be in balance or will show a modest surplus.
Sovereign debt prices and credit default swaps already display market concern at the higher default risk in the economies on the rim of Europe.
A Europe-wide bailout plan would explicitly do what Germany has always resisted –- give the market the impression that the Bund is no more creditworthy than the Italian BTP or French OAT.
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Here's an e-mail doing the rounds of the financial community that gives an interesting perpsective on the latest market turmoil -- and where some might wish they had invested given a second change.
"If you had purchased $1,000 of United Airlines parent UAL stock one year ago, you would have $200 left.
With Fannie Mae, you would have $2.50 left of the original $1,000. With AIG, you would have less than $15 left.
But, if you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash. Based on the above, the best current investment advice is to drink heavily and recycle."
Lots of investors might need a cold beer nowadays. Check out our slideshow of Top 20 Beer Drinking Countries to see who knocks back the most per year.
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How should you respond to the failed US rescue package? Get drunk, take a vacation or string up a few CEO’s.... Just a few of the suggestions from you our viewers this morning.
It's an unscientific survey, but I suspect reflects the predominant will on Main Street that shot down the rescue plan. I would say a good two-thirds of you who took the trouble to write thought the plan was a bad idea.
Sell-off, close down or take into public ownership. These are the options facing Europe's financials. There is no comprehensive US style package for buying up toxic debt and no prospect so far that one will emerge over the horizon to re-liquefy balance sheets. Is that a good thing?
In the opinion of Giles Keating, our guest host this morning and Head of Research at Credit Suisse, this is a failure of European cooperation. The lack of coordinated action to relieve the banks of their bad debts will only leave us in a longer, more protracted, period of credit-rationed economic anemia. The market appears to be pricing off the prospect for aggressive policy response, and it is not getting that in Europe.
The US Treasury has addressed the financial distress as a systemic threat to the US banking system and economy. In Europe our politicians are still of the view that this is a story of isolated poor lending practices and that when a few of the bad apples are closed or nationalized then stability and the status quo will be restored. Are they right?
How you answer seems to depend on how thick you like your hair shirt.
The US plan is either a blight on the purity of the capitalist system for purging and cleansing; or a necessary evil for allowing an orderly reconstruction of the financial system. There are few undecided.
The experience of previous banking crises is that a bad bank/good bank model is invariably part of the solution.
Hive of the good parts of the business and quarantine the bad parts – selling on what can be sold and slowly winding down the parts that can’t. Public funds always play a role in the solution. Right now the question in the US is really not whether the US taxpayer makes a profit or not from the toxic debt, but whether not using public funds to lighten the banks' load will result in a more harmful economic outcome for the US economy. So far so Japanese – the difference will be in the speed and strength of the intervention as to whether a decade or so of economic drift can be avoided.
Europe’s politicians don’t have such clear economic insight.
"The US government takeover of the GSEs......makes the US the most socialist system in the world, outside of places like North Korea and Cuba. It will have 75% of its current housing finance and the majority of its remaining capital allocation being financed with credit that is directly and indirectly the result of government and Fed intervention," according to Independent Strategy.
Thanks to our friends over at Independent Strategy for their provocative analysis this morning. The point has also not been lost on the French leader writers who (according to our Paris correspondent, Stephane Pedrazzi) noted in morning editions of La Tribune and Les Echos the irony of the situation.
US politicians have enjoyed pointing to the 'anti-capitalist' bailouts of Credit Lyonnais and most recently Alstom by the French government as signs of weakness; evidence of a morally corrupt political system that was unprepared to let businesses go through the natural process of failure and rebirth that strengthens liberal economies.
Let the French enjoy their moment. This GSE bailout is far from the market lead solution championed by the US. Individual borrowers who couldn't really afford their homes and institutions that dabbled in the underlying mortgage debt are being supported by the US taxpayer. Washington says the GSE's are too big to fail and that catch all justifies the intervention.
History is being written on the hoof here, and hindsight will legitimize or otherwise the first reactions. Asset markets have decided that losses are being nationalized - and the risk appetite for equities has returned. We will have to see whether this rally can last more than a few days as investors ask what has really changed.
The GSEs apparently already enjoyed the government's lender of last resort guarantee. The market has tested the promise and Hank Paulson has shown the government is unwilling to abandon the eighty percent of the mortgage market represented. But the housing market and the balance sheets of the financials remain 'broken'. The Federal deficit is only set to grow as the GSE portfolio is managed before being shrunk.
Will this move increase home buyers access to credit? We do not know the answer yet. Will foreign investors become less confident about owning US assets? Unlikely. But the commitment the Treasury has now entered into appears open-ended, which can hardly make owners of US government debt happy.
The e-mail to the show this morning from all over the world (but especially America) was mostly angry. Angry that main street is going to bail out Wall Street. Angry that reckless borrowers may have their 'loans reclassified as solvent'.
And angry that government intervention presents the US in a weakened light.
The new US President will be under pressure to identify those to blame, and to tighten oversight of the banking system. Of course to argue the country is becoming more socialist as a result of this bailout is a little flippant. But there is a serious point to be made. American taxpayers deserve and will probably get greater financial regulation. The light touch has led to negligent lending practices and an excess of cheap money.
It might also be appropriate for American critics of French interventionism to bite their tongues - for the time being at least.
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Remember Superman the movie, where Lex Luther takes away the super hero’s powers with a Kryptonite necklace? Well we’re here again. Only this time it is the financial equivalent of the man of steel – the hedge fund manager that has met their own version of the power-draining substance. Barely a day passes it seems without one of these masters of the universe crashing to earth with swinging losses in their fund, or non-survivable business issues.
RAB Capital star, Philip Richards, has stepped down from his role as CEO of the business in the wake of a profit warning and a plunging share price. Mr Richards has already taken some flak taking a large position in ailing UK bank Northern Rock before it was nationalized. Now he goes back to focusing on the group's special situations fund. So at least he keeps the day job, but this is an embarrassing development for the company.
RAB’s news came just a day after Dwight Anderson’s group Ospraie declared a high-profile commodity fund would be closed down having lost a quarter of its value in August alone.
Now there are some who will revel in the Zeitgeist – the hedge fund community is not known for its modesty. Not me. It is not nice to see other people losing money, even worse if they lose their jobs and their livelihoods. But there are set to be more announcements like this over coming weeks and months. Judging by the rough performance data for July and August, the hedge fund industry appears to have been badly caught out by the strengthening dollar and weakening commodity prices.
Let's get this clear from the outset – I am a fan of Absolute Return.
I have always struggled with the idea that a money manager should have to go into battle with the market everyday restricted by a mandate. This is the definition of the traditional long-only industry. The terms of engagement prevent the manager fully exploring good market short ideas, or even the combination of other asset classes or geographies that could bolster performance. As a result all sector or geographical funds under-perform when the cycle goes against them. Full Stop. Tough. So investors need to be smart enough to switch their funds themselves.......but, er, isn’t that why we gave the money to a professional...because we don’t have the resources to make that decision ourselves.
Ok, there are developments on the theme with 130/30 products etc...but the industry has not walked very far away from the mandate model. Cynics have also long contended that too much of that industry is concerned with asset-gathering (getting in new funds) rather than performance of existing assets under management, which requires much harder work.
That is where the supermen and superwoman came on to the scene. The hedge fund became the vehicle of choice. With their opportunity to pursue a freer range of asset classes and use hedging instruments they challenged the status quo. They didn’t talk about relative performance....they talked about never losing your money. Okay, they wanted to be well rewarded for their work...but, hey, why should I care...they were never going to lose my money. Right? Wrong, as it turns out.