In Tudor times,  begging outside of your home town boundaries was a crime punishable by the stocks. There, to humiliate and embarrass you, local people would throw rotten tomatoes and other vegetables.

 

Some 500 years later we’ve moved on from such uncivilised punishments.  Or have we? Last week’s bankers’ Treasury Select Committee ( TSC ) hearings looked awfully like the stocks to me.

 

Chairmen and Chief Executives of the major banks, who were found to have begged for new funding outside of their own countries, were told to sit in the glare of the TV cameras for hours at a time, answering question after insult.

 

Carefully prepared sound -bites, e.g “What are your feelings having destroyed one of Britain’s largest banks?” were thrown at the guilty and, rather like a rotten tomato, they slid off the face without lasting damage. None of us were much the wiser and everybody was assumed to be guilty.

 

It is not so much the substance I’m complaining about in this blog (although if anyone - banker, journalist, regulator or MP-predicted the world’s first ever peacetime liquidity freeze then I didn’t hear them ). 

 

 It’s the TSC process, where the questioners inevitably have less details than the questioned ( so few definitive answers given ),  and where the stocks occupiers, by slightly inclining their heads,  and   lowering their voices in a supplicant manner, walk away smelling of rotten tomatoes only as far as the next shower.

 

What has happened to the world’s economy, destroying household-name banks and  bringing others to their knees, is truly shocking. We need the most comprehensive enquiry. But the TSC isn’t it.

 

Does it matter if it isn’t it? Yes it does if people think that the two televised interviews achieved much more than pelting the bankers.

 

It could be obscuring the fact that our only solution to the current crisis-tapping the international capital markets with a return to simple transparent securitisation structures-is being ignored in a cloud of confusion, under which many new initiatives are having the reverse impact and actually reducing new liquidity in the market.

  

 

Predicting the bottom of the UK housing market is fraught with difficulties to the extent that several organisations that usually provide statistics in this area have declined to provide forecasts for 2009. Predicting prices at present is nigh on impossible, partly as any view has the potential to become a self-fufilling prophecy and partly because the factors driving the current decline are unprecedented and there is no clear roadmap.  

 We are however seeing increasing evidence that, in certain areas, price falls are beginning to slow and cash buyers are beginning to come into the market. This is being driven by more’realistic’ prices at the distressed end of the market and the reconigition that rental yields at this end are in many instances double digits. In addition, shortgage of property in more prosperous areas is having an impact.

There is a very good article in todays “Times”, focusing on the above. Whilst we are not claiming that this is the end, it may, in the words of Chuchill, “be the end of the beginning”.

 

  

 

Our full time Executive Chairman, Stephen Knight, is also non executive chairman of Cicero Consulting, a public policy advisory firm.  At a recent Cicero House of Commons breakfast meeting where Stephen, Vince Cable (Shadow Chancellor, Lib Dems) and Thomas Huertas (Director, Banking Sector, FSA) were all speakers, the article that appears as a blog below summarises the discussions.

For me, this was the most interesting part of the debate that took place at Cicero’s first House of Commons breakfast meeting of 2009 entitled “The Future of UK Financial services Regulation”.

Speaking in favour of nationalising the main high street banks was our host, Dr Vince Cable, MP, Shadow Chancellor for the Liberal Democrats. It’s hard to resist Vince Cable’s arguments, because he has been right on so many aspects of what we have come to know as the credit crunch.

Dr Cable believed that full nationalisation was inevitable, with the markets testing the banks’ share prices until this event was brought about. Better therefore to do it now, spend a period forcing the banks to lend more and then, after 5-10 years, attempt to return the banks to private ownership.

Opposing this view was our guest speaker, Dr Thomas Huertas, Director, Banking Sector, Financial Services Authority.  Dr Huertas, who reports directly to Hector Sants, Chief Executive of the FSA, is in charge, amongst other things, of implementing changes in the prudential regulation of banks. He was therefore the ideal person to consider Dr Cable’s suggestion.

Dr Huertas felt that it was not the role of Government to run banks. This was best done by the professionals in charge. The only reason the Government invested in the first place was to safeguard the banks’ future and protect customers.  As soon as appropriate these shareholdings would be reduced or eliminated.

Many of our clients, and potential clients, had views on this subject and a fascinating debate ensued.  My guess is that there was an overall balance in the room. It certainly got me thinking. However, even though Dr Cable always impresses me with his insights, on this occasion I was with the regulator.

In my view the Government was right to step in when they did with the two banks in question.  But I think they should be clear with the markets that full nationalisation is a step too far. For a start, it would be imprudent in the extreme for a Government department, i.e. the Treasury, to be responsible for policy formulation, policy implementation and regulatory supervision of major clearing banks.

It is already happening with a smaller specialist mortgage bank, Northern Rock, with muddled consequences. For example, NR was told to repay Government borrowing and increase its lending at the same time. They were told to increase their profitability and their capital base while suffering punitive coupons and guarantees for the use of Government funds. This is containable at NR, but would have wider consequences at a major clearer.

In fact, every initiative the Government has taken in this sector has resulted in an outcome which is the reverse of the good intention. Gross lending is projected this year to be one-third of 2007’s level, and some bankers think it will be lower than that, yet the Government wants increased lending.

One of the most crushing blows to the availability of liquidity is an action designed to stimulate lending, namely base rate reductions. These are now at a level where savers are ‘enjoying’ a negative real rate of return. The savers are therefore taking their money out, seeking higher rates with foreign institutions or via corporate bonds.

It is pretty much a ‘given’ that savers will not stay for a negative real rate of return, absent of really threatening economic conditions. The first thing that Government should do is therefore to remove any prescription or criticism as to where the banks set their savers’ and mortgage rates, to ensure available liquidity.

The liquidity freeze is primarily responsible for the dramatic fall in property prices, and they will keep on falling until actions are taken that directly increase liquidity.

One such action, discussed at the breakfast meeting, would be to extend the Government’s ‘hold, purchase and guarantee’ regime for mortgage-backed securities to wholesale lenders, who could as a result re-introduce liquidity from the capital markets to our domestic mortgage market.  In fact, so many of the clearing banks (not all) have  blown up on service that this is the only way to immediately and dramatically increase the availability of mortgages.

For the capital markets to be interested these would need to be highly conservative structures (maybe 98% AAA) at ten times the return (say LIBOR + 90bp versus 9bp at the height of the boom for AAA quick pay pieces). But these returns, on lower LTV lending, and backed by a Government guarantee, could get the market moving again.

The other problem in the UK mortgage market is that you can pretty much get the loan you want today at 75% loan-to-value (LTV) or below. Yet that is where the Government has targeted many of its new initiatives.

Help is actually needed up to 90% LTV, and the Government could achieve this by supplying itself, or maybe being a stop-loss partner with an insurance company, the equivalent of a mortgage guarantee where the premiums of the many would cover the claims of the few, and return a profit. The Government is already effectively in this space with its 100% LTV shared equity HomeBuy scheme, so why not extend that?

Of course, we don’t expect the Government to have intimate and practical knowledge of how specific markets work. That’s why they shouldn’t run banks.

The other major topic to engage our guests at the breakfast was the issue of pan-European, or even global, regulation. Here there was almost unanimity: it wouldn’t work. And the meeting was right-our vibrant markets would suffer if one (lowest common denominator) form of regulation was applied to a number of culturally diverse set of financial institutions.

As I said in my opening remarks at the breakfast, the credit crunch makes it even more important for financial institutions to engage with public policymakers of all types: to listen, learn and input. I’m proud of what we do at Cicero to help our clients navigate the legislative and policy-making agenda. And there will be more House of Commons breakfasts in 2009 once we have put across our clients’ views at the forthcoming G20 summit.

As we wrote in our blog yesterday, it is easy to get drawn into a pessimistic view of econmomic events when news and events are less than positive (nothing sells like bad news…). It was interesting therefore to read an article in The Times by Anatole Kaletsky on Monday about events at Davos.

 

Whilst unbridled exuberanace and a less than cautious approach to risk clearly wasn’t the right response (with hindsight) to events in the lead up to the current crisis, equally pessimism, caution and negativity isn’t the appropriate response to current events. Things are tough, things may well get worse before they get better but they will get better. To read the full article please click here.

 

The opening comment by the recently deceased Ante Circin-Sain’s (obituary Times 26.01.09) was in direct reference to the current financial crisis. With this mind, I attended the British Property Federation annual conference a week ago to give a short speech. What struck me most of all was the often strong difference on opinion, and sometimes opposing views on the housing market from some of the delegates. Ranging from optimism along the lines of ‘bricks and mortar is always the safest bet’ to ‘ we are heading into a severe depression’, it was interesting to see how people could with theoretical access to the same information, form two very contrasting views.

 

Whilst pessimists seem to be in the significant majority at the moment (perhaps a natural human reaction to the events of recent months), what is needed in times like this is neither optimism nor pessimism but realism. As the title of this article implies, over-reaction  and negativity can become a self-fulfilling prophecy if enough people fall into that way of thinking. However simply telling people (as I have seen some industry commentators try and do) that they need to be more positive is akin to telling a manic depressive to cheer up. The sentiment may be right but it isn’t on its own going to work. Arguments, opinion and sentiment ultimately rest (or rather should) on facts.

 

I made reference to the one of the assertions by the now much maligned Jim Rogers  earlier this week simply as I believe that all of us in this industry have a duty to address inaccuracies where we see them. If we don’t opinion often seems to somehow to morph into ‘fact’. To this end it was very refreshing to listen to the opening speech given by Fionnuala Earley from Nationwide at the conference. Free of opinion and sentiment and concentrating only on the economic facts, Fionnuala made a number of very interesting observations but two slides on access to funding particularly stuck out.

 

 

 

As the table from Nationwide clearly illustrates, liquidity for the mainstream prime borrowers is relatively unaffected. This is particularly the case for prime remortgaging which has seen very little change.  

 

 

 

 

We may argue about whether prime rates should be cheaper than they are, but borrowing itself for the prime market does not appear to be an issue. Increasingly liquidity here therefore is going to have little impact on the market as a whole. As we iterated in recent blogs, it the more ‘risky’ sectors where liquidity is desperately needed. Unless we can provide liquidity to the ‘riskier’ sectors of the housing market, the market is going to remain very ‘constipated’ for some time to come.
 

Whilst the recent government initiatives are welcomed, the problem remains that the government is asking or expecting too much from too few. The large deposit-taking institutions, where the support is focused, do not have the capacity or arguably the ability to bridge the £200 billion shortfall between 07 and 09 gross lending. In fact, they can’t supply half of that figure! If you seriously want to get lending again, the market needs the return of wholesale funders. With the margins that are potentially available, with the right level of support and encouragement this is not only possible but probable.

 

Wholesale funding has been much maligned as the catalyst for much of the present mess. However it is important to recognise that wholesale funding in this context would be a very different beast. Supported by government guarantees (either on the bonds or on the individual mortgages by way of MIG or preferably both) and focusing on the wholesale markets represent an opportunity to pump liquidity into the housing markets in the places where it is needed most. To have a healthy, functioning market you need competition. We don’t have this at present and the longer the demand/supply imbalance continues the more painful the housing market becomes.

 

As I stated this blog with a quote from Ante Circin-Sain, it is appropriate that I need with the full quote so that we keep the current issues in context.  “To panic is to evoke the devil. If you do it often enough, he will come. But there is no reason either to panic or to evoke the devil.”  Enough said.