Financials / Simon Denham / 13 October 2008 / Leave a comment

Daily View - 13th October 2008

So ends the great British Banking system. We now have a virtual clean sweep under the current administration. No growth, a huge public sector burden, no private pensions and now no Banks. After 11 years of Labour the FTSE is below the levels of 1997 which effectively means that any money invested since the ascension of our 'Glorious Leader' (and his previous incarnation the 'Sainted Tony') are now worth pretty much what they were back in the nineties minus tax and inflation.

The extreme falls in world markets will no doubt be laid at the doors of people other that the current administration but the fact will remain, forever, that the UK due to its profligate ways (both personal and public) was actually in a weaker position to withstand the downturn than almost any other. Iceland might have the odd finger pointed at it but their financial systems were pretty recent incarnations. The UK is probably the oldest major Financial Centre on the planet but in just a decade it has been effectively destroyed from a domestic point of view.

The dithering of the central bank and regulators over the past year has suddenly been replaced by the kind of straight jacket that makes growth almost impossible. By enforcing such restrictive capital requirements on our domestic banks meant that they were forced into the arms of the Government (whether they wanted to or not). In the current environment suddenly announcing that the banks must massively increase tier one capital, just in case there is an 'economic tsunami', guaranteed that the Banks would have to fall into the arms of the Treasury. Nobody was going to underwrite a rights issue of this size and who on earth would you persuade to buy it?

All the banks would have to do is agree to sign (with a gun against their heads) and then start lending once more, let joy be unconfined!

For the man on the street we will appear to have once again got a free lunch, yet another boost to the never ending gravy train of cheap money!

No wonder there were apparently major arguments over the last few days between the banks and the Treasury and FSA. The banks have now been forced, by sleight of hand, to accept government control at the expense of share holders (you and me via our personal holdings and our pension funds etc) and at the expense of future growth prospects. With the new restrictions bank lending will become much more expensive in the UK and it is not yet certain whether the Capital increases imposed on the UK institutions will be reflected elsewhere. The probability is that UK finance house will be competing with their European and US counterparts with one hand tied behind their back. Anyone who truly believes that Government influence is good should look at the Official numbers (not some right wing think tank) for state productivity versus the private sector. Whilst those outside state control have seen productivity increase by 2 to 3 pc each and every year those within the Public mantle have not. And not by just the odd percentage point. Average productivity of units under state control since the turn of the century is actually lower (!!!) than where it started from.

The really important news of the weekend was confirmation of my 'rumour' of last Thursday that the Central Banks look to be guaranteeing interbank dealing. It is this single piece of legislation that should get the interbank markets moving again as financial institutions can now lend to each other without the fear of a Lehman's event wiping them out. This is the one piece of the Jigsaw that should have been found months ago. If this had been put in place when the pressure started building up, most of the disasters need never have happened. Banks would have been able to borrow whilst writing off bad debts over a period and (yes) shown losses for a few quarters. Unfortunately they were left swimming with no clothes (with apologies to Mr Buffet) by the complete freezing of the credit markets. It must be remembered that property prices fell quite a lot more in the early nineties than they have this time round (so far) but the credit markets remained open so that the losses of the banks could be contained over time. The falls in property so far can be said to just be the 'froth' on top. Values became massively over extended as the dash to be a 'property millionaire' hotted up. I am very afraid that the falls of some 12pc from the highs are just a sort of 'throat clearing' before the fat lady sings.

This morning is likely to see a big bounce from last weeks sell off but investors should be warned that, if turning around world growth was as easy as a couple of weekends work from politicians, then my name is Santa Claus. Lending will continue to be very restrictive for many months to come and it is this fact alone that is likely to lead to a sharp slowdown in growth. Profits are likely to be very hard to come by in the next eighteen months.

Finally

I must here also state some personal axe to grind over the current situation. My Father worked his entire life for Westminster and then National Westminster Bank and left my Mother a sizable slug of Nat West (then RBS) stock. Mr Fred 'the Shred' Goodwin has certainly lived up to his name where my Mum is concerned. His extreme hubris in continuing with the ABN deal when everyone and his dog could see that he was not just overpaying but massively overpaying should be printed on his CV for the rest of his life. The suggestions in the press that he will...

a) get a huge payoff for deigning to resign and
b) probably get another job, pretty pronto, sticks in my craw.
Perhaps he could offer my Mum a bit of his largesse as it is plainly his decisions which have led to the complete collapse.

The Tradefair Spread Betting Team