Archive for March, 2013

Too little bank capital forces taxpayers to act as equity

March 28 2013 1 comment

Euromoney is bizarrely adamant that British banks should have as little capital as possible.

“It’s all too easy to be seduced into fear over the capital positions of UK banks,” it rightly says, while clearly resisting the temptation itself. Indeed, Euromoney isn’t worried at all. It seems to think that a vague 7% equity buffer is more than enough capital to protect taxpayers from ever having to foot another bail-out — or perhaps it just doesn’t care.

As long as bank investors earn a return for risking none of their capital and bankers get overpaid on the subsidised spread, all is for the best in the best of all possible worlds. Though it’s unclear what journalists get from the deal. Free banker love?

The situation is much simpler than is often portrayed in the press, as described in a book called The Bankers’ New Clothes by Anat Admati and Martin Hellwig, which does an excellent job of explaining why banks should fund themselves with a lot more equity, just as every other type of company on the planet does.

Admati and Hellwig have done the research (published in previous academic papers), and it shows that the funding mix a business chooses — the ratio of debt and equity — has little to no effect on its operations.

Bankers often make it seem as though equity is somehow set aside for a rainy day and thereby restricts their lending ability, but this is nonsense. Beware bankers whose lips move. The difference between equity and debt is that equity doesn’t have to be repaid. The proceeds from both end up in the same pot.

Because debt has to be paid back, businesses that are too dependent on it can quickly become swamped if the value of their assets depreciates. And this is as true for Citi as it is for Apple (which has almost zero debt).

To put that in terms that all homeowners will understand: the financial crisis caused the banks to fall into negative equity because they were mortgaged to the hilt. And the response to the crisis has only made things worse — they continue to be heavily mortgaged because their borrowing costs are so cheap due to an implied taxpayer guarantee through too-big-to-fail.

The only beneficiaries of this are the bankers and the investors. It makes no positive difference to bank customers or to the financial system. In effect, taxpayers are the equity.

Needless to say, this is not an efficient way to run the financial system. The discipline imposed by funding with equity is almost completely removed, yet the safety cushion is still in place thanks to the captive equity unwittingly provided by taxpayers.

This blatant moral hazard is cause for celebration over at Euromoney: “Importantly, there is no trigger for any fresh equity issuance, with a new recommended end-2013 capital target of ‘7% of RWAs’.”

Hurrah! That’s a 93% mortgage on the entire banking system — assuming that the banks don’t cheat, which they obviously do.

Does anyone outside The City think that’s a prudent margin of safety for the most important sector of our economy? Seven percent. Would people be surprised to find out that their home enjoys more secure funding than the bank that’s providing it? I think so.

When it comes to the national economy, politicians love to draw comparisons with small businesses and households and common-sense notions of thrift. But what happens to those sentiments when it comes to discussing the banks? The plain wisdom of the greengrocer is quickly forgotten and, instead, we’re treated to mind-boggling banker gibberish that is ultimately a lesson in the benefits of maximum leverage.

Given the level of deliberate obfuscation, it’s perhaps not surprising that some people misinterpret what’s really being said. “Equity is expensive,” they wail, as if bank investors are somehow a different breed of animal to the people buying Apple stock. They are not, of course.

Bank equity is only expensive when compared to taxpayer-subsidised bank debt, but the cost of that subsidy is very real. Bankers can safely ignore those costs because they’re not on the banks’ balance sheets, but from a national perspective it doesn’t make any sense to say that bank equity is expensive — because the nation does bear the cost of guaranteeing the debt.

So, the question is really about choosing a capital structure that maximises the safety and the utility of the banking system, rather than the current arrangement that simply maximises compensation for the bankers themselves.

Categories: banking, economics Tags: , ,

Droning about drones

March 8 2013 Leave a comment

predator drone (creativecommons)I don’t understand the drone debate. Even the Huffington Post is asking why more Democrats weren’t on hand to support Rand Paul’s tedious and pointless stunt.

What am I missing about these drones? They’re basically remote-control aeroplanes, so I find it quite baffling why everyone seems to think the president needs to explicitly state that they can’t be used on American soil. What the feck?!

To be clear, the missiles that can be fired from a drone can also be (and much more commonly are) fired from other weapons systems. And it doesn’t mater what type of platform fires it, you won’t see it coming. So what’s the significance of the drones?

Dozens of countries have these things and I’m not aware of a similar issue in any of them. I’m also not aware of any other weapon system that has caused politicians to demand an express promise that they won’t be used domestically — including nerve agents.

Indeed, America has in fact used nukes domestically (for testing). Has there been pressure not to use tanks or B2 bombers at home?

The stupidest thing about it all is that the controversial aspect of drones is — almost exclusively — related to their use against people in Pakistan and other countries that America is not at war with. It has nothing to do with the president wanting to use them against Americans.

If Barack Obama wanted to drop a Hellfire missile on your ass, he wouldn’t have to use a drone. He could use any type of plane he fancied. Or any Navy vessel. Or he could just set up a tripod on the White House lawn. What difference a drone makes is completely beyond me.

And why supporters of Obama go along with it is just bizarre. Isn’t the whole thing just another shameless Republican excuse for holding up the normal functioning of government…?

Categories: war & peace Tags:

Spreading fear about Hong Kong’s prison homes

March 8 2013 Leave a comment


A Hong Kong prison home (Jerome Favre/Bloomberg)

A Hong Kong prison home (Jerome Favre/Bloomberg)

Hong Kong prison homes spur virus risk decade after Sars, according to Bloomberg, though I’m not sure the article makes its point.

The worst Sars outbreak in Amoy Gardens was caused by poor sanitary conditions (human excrement getting blown in through the ventilation system?!) rather than cramped “prison homes”. And Hong Kong’s role in global outbreaks is surely related to its proximity to China (where animals and humans are in close contact) and its highly transient population.

However, the risks are not uniform. People who live in prison homes face a terrible existence, to be sure, but they are probably not super-spreaders who are going to hop on a plane to New York. Nor are they likely to work in offices. New strains do not originate in places like this and are not spread by people who live in such places. Those folk are most likely at risk from the rest of us, rather than the other way round.

Yes, we should care about the conditions these people must endure, but it’s surely not necessary to stigmatise them further by making the dubious assertion that their existence poses a biological risk to the whole world.

We should draw attention to their plight because it is inhumane, not because it’s scary to folk in Springfield.

Categories: science & nature

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