Archive for the ‘finance’ Tag
A good friend of mine from university went to work for Lehman Bros; I haven’t seen him for a while, but the last time I heard he was still working there. Very wealthy too he was; he lived in a lovely old manor house outside Beaconsfield; lucky chap.
Like most people working in financial services, he’d done very well since the 1980s deregulation. Although he’ll probably have to tighten his belt a bit now, he won’t be destitute. Losing a job is one thing; losing everything is another.
There will be many people picking over the bones of Lehman to try to work out why it collapsed, and more importantly, to try to prevent its collapse bringing down the rest of the industry. Is financial services really just a house of cards? It will be very bad for both the UK and the US economy if – as I somewhat suspect – the whole edifice is broken. So what has been happening with Lehman – and Fannie Mae and Freddie Mac? Superficially, the root of the problem is the sub-prime mortgage market. Lenders lent money to people who couldn’t afford the repayments; these deals were often pushed by brokers on commission. These dodgy loans were backed by mortgages on the properties bought with them, and in a rising property market they looked like a one-way bet. If the borrowers managed to keep up the repayments, all well and good; if they didn’t, just evict them, reclaim the property and sell for more than the outstanding debt. The key is, “in a rising property market”. The problem is that the property market was rising only because of the availability of these inappropriate loans.
To get money to continue lending, retail banks in the US, advised by the big boys on Wall St, “securitised” their mortgage books. Wholesale investors would buy the securities, and the retail banks would have more money to continue lending. But, as it became apparent that sub-prime borrowers were defaulting on their loans, the mortgage-backed securities became harder to sell. The banks who had underwritten the deals were left with lots of unsold securities on their books. With no new money to lend, the retail banks stopped issuing mortgages, and the US property market collapsed. As it did, the value of the properties backing the mortgage-backed securites did too.
This is the main story as to why Bear Stearns, Lehman Bros and Merrill Lynch have now collapsed. Fannie Mae and Freddie Mac are casualties of the collapse of the US property market; they were not directly involved in the market for sub-prime, mortgage-backed debt.
But there is another story, and it concerns wholesale money. Eight years ago, the Bush administration took over a thriving US economy, with a fiscal surplus measured in trillions. Even so, its trade balance was negative; a thriving US economy sucks in imports of oil from OPEC countries and manufactured goods from the Far East. This trade imbalance means that Arab oil exporters and Chinese manufacturers have lots of surplus dollars. They need to put those dollars somewhere safe, and Wall Street had just such a place: the mortgage-backed securities market. Not, by any means, the only place it offered, but a pretty good alternative to their preferred place: US Treasury bonds. With the fiscal account in surplus, the US Treasury had no need to issue quite so many bonds; but then came 9/11 and the Iraq war. Spending on the war rapidly tipped the fiscal account into deficit, so the Treasury needed to issue bonds, and these bonds absorbed a lot of the wholesale money which had been used to buy sub-prime debt. Ergo, the collapse of Lehman Brothers is the consequence of the war in Iraq. And of stupidly lending money to people who can’t afford to repay it.
The share price of United Airlines fell by 75% today because somehow a six-year old story about its filing for bankruptcy got resurrected via the website of an obscure regional newspaper, whence it was automatically plucked by Google News, and then picked up by an analyst who didn’t check quite as much detail as he should have done: see this report of the fiasco in the Register.
Question: could it have happened had UA used Open-Book Accounting? Answer: no, because analysts would have all the information they needed from direct access to the airline’s books, and wouldn’t need to rely on flaky bot-generated stories on Google.
Second question, in the interests of balance: had UA used OBA all along, would they still be in business? Answer, much more difficult – but quite possibly not, given the generally appalling nature of airline profitability.
This blog is about building a progressive new liberal enterprise economy on the foundation of total openness in public and commercial life, using technology as the key.
Since financial accounts are nowadays, almost without exception, kept in electronic form, and since every electronic resource is, with the all-pervasive nature of the internet, connected in one way or another, it should now be possible to make the accounts of every government department, every public corporation and every non-profit open so that interested parties such as taxpayers and shareholders can see exactly how their money is being used.
That’s the aspiration.
There are, of course, obstacles to realising the aspiration: the culture of commercial confidentiality, corporate firewalls both cultural and technical, vested interests in the form of pigopolists who’d rather not let us see their snouts in the trough, and perfectly legitimate expectations of privacy on behalf of the individuals who transact with governments and corporations.
But, if the aspiration is worth pursuing, the obstacles can be overcome.
The US government has just had to bail out the financial services industry with at least two hundred billion dollars, creating a liability for the beleaguered US taxpayer (who has already been lumbered with the debts of the Iraq war and the associated public larceny, but that’s another rant) of three trillion dollars.
The meltdown in financial services arose because, fundamentally, the industry had been creating opacity. It’s what it does; and eventually, things go wrong. In this case, the opacity was created by securitisation of sub-prime mortgages. Those who invested in this securitised (wrong word, by the way: there was no security in the process) sub-prime debt were deprived of the transparency they needed to make a fair assessment of the risk. They couldn’t see that they had bought loans given at impossible income multiples to people to whom, frankly, no sane financier would ever lend. If sub-prime investors (who were mostly big institutions) had been able to see what they were getting into, they wouldn’t have bought the debt, and if their shareholders had been able to see what they were up to, they would have kicked the miscreants out long before the balance sheet became so broken.
Are we ever going to be able to trust financial capitalism again? Many of us have been burned twice in less than a decade – first with dot.coms, now with the securitised sub-primes. We put our money in managed pensions and savings, and the so-called experts get it wrong. Who could blame us for putting the money under a pillow? Except that, when we do that, our governments rob us by devaluation.
We need an efficient, trustworthy, reliable and well-capitalised financial services system; we need efficient capital markets to support emerging industries; capitalism needs to rebuild trust. I maintain that transparency is the only way trust can be rebuilt, and that today, technology can bring transparency to everything that capitalism does. It’s time for capitalism to embrace transparency and for us, as taxpayers, borrowers and investors, to demand transparency in everything that banks, governments and corporations do with our money.