Wednesday, October 22, 2008

A look at Northern Rock one year in

Northern Rock was essentially the start of the credit crisis in the UK (though before they imploded the Germans had to rescue some banks, as did the Americans).

In August 2007 the credit markets froze, and Northern Rock, which funded itself through the money markets, found itself in trouble. They approached the BoE for a loan, and the bank disclosed this, causing a run on the bank as excitable TV coverage convinced savers their money was under threat. The government responded by guaranteeing the savers of Northern Rock, extending £26.9bn in loans to be repaid by 2010 at an interest rate of 6.75%, and then nationalising the bank in Feb 2008, injecting 3.5bn in capital into the organisation.

At the time, an enormous fuss was kicked up by the opposition to these sensible measures. The Telegraph scaremongered in Nov 2007 that the taxpayer would never get their money back after Alistair Darling refused to "guarantee" that the loans would be repaid (what reasonable person could give such a guarantee?) When the bank was nationalised in Feb 2008, George Osborne called Alistair Darling a "dead man walking" and said that "We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s."

Alistair Darling appointed Ron Sandler to sort the bank out. At the time the Rock had 1 million savers, 800,000 mortgages and 6000 staff. At the time of nationalisation the Rock received just 25% of it's funding through deposits. Nationalisation tasked it to get this up to 50%. Sandler made 1500 people redundant, but the Rock still employs 4500 staff and has 70 branches.

Sandler's strategy was to halve the mortgage book, and in order to incentify mortgagees to remortgage elsewhere, they have the highest standard variable mortgage on the market at 7.34%. Why so drastic? Because it was a race against time. If the property market tanked many people wouldn't be able to get remortgages elsewhere. They had to be incentivised to move quickly. They also had to cap the number of savers they could take on to 1.5% of the savings market to comply with EU rules on nationalised industries. But they are well on their way to achieving their target of 50% of funding through deposits.

So far the strategy has paid off. They've repaid £15.5bn of their loan so far, leaving them with £11.4 bn still outstanding. The scaremongering from earlier in the year that the taxpayer would lose the lot was unfounded.

Some charity groups have been accusing the Rock of harshness in their repossession strategy. They repossessed 4200 homes, compared to about 2200 the year before. But in the context of the total number of mortgages they held when this saga started, this is low.

Some Northern Rock mortgagees took out the now infamous "Together" mortgage which constituted a 95% mortgage, plus an unsecured loan, that took total lending to 125% of the purchase price. Most of the Rock's unsecured loan portfolio comes from these "Together" loans. Unsurprisingly, the mortgagees appear to have blown all the money advanced to them, and other lenders are reluctant to take them on. They represent the biggest threat to Northern Rock achieving normality. Once NR have repaid their loan to the govt, expect new mortgage rates to drop for very secure customers with low loans-to-value, as a way to attract good customers and dilute the number of risky mortgages on their books.

Still, Northern Rock is well on it's way to being mended. Once they have repaid the loan to the government, and sorted out their funding, they should be in a prime position to be floated on the market. I expect the government will wait a few years though. It's never sensible to float in a depressed stock market.

Two people come out well from this. Alistair Darling's actions in nationalising the bank and appointing Sandler to run it turn out to have been the right thing to do. Darling is going from strength to strength - no way can he be termed a "dead man walking". Ron Sandler appears to be an excellent trouble shooter. If we need troubleshooters again, his name will surely be on the top of the list.


Screeds have been written on the convoluted goings on in Corfu, so I'll limit my post to the role played by Nathanial Rothschild.

I nearly fell off my chair when I read the letter he sent to the Times. It is curt and incendiary. It's almost unheard of for someone like him make a direct attack on a politician in such a public way. Without the letter, this would have been a minor story based on rumours and reports from "friends". But the letter is like an Exocet.

I was even more astonished to find that Rothschild was a Tory supporter, and his mother had donated £190,000 to the running of Osborne's office. Note the donation was not to general Conservative funds, but to Osborne. Apparently they are all supposed to be friends.

So what on earth has happened to make Rothschild fall out with Osborne to this extent? I can't believe he was being protective of Mandelson, who is Labour. People like Mandelson and indeed all Labour folk, are expendable to people like the Rothschilds. The other explanation that has been put forward is that this was an old boy put-down for gossip. But the Osbornes are more titled than the Rothschilds (though less monied) and why didn't he put down Murdoch as well for stirring the pot?

If this is really about mere irritation at blabbing, all I can say is that they do friendship differently in ToryWorld than everywhere else. A Labour person irritated with another Labour person would have expressed their anger in private and smiled through gritted teeth in public. But then Labour is tribal.

Going public like this, with a mission to destroy, is on a whole other level than irritation. Either aristos have a truly weird idea of friendship or there is something else going on here.

Sunday, October 19, 2008

Kirsty Allsop is still the Tory "Housing Tsar"

Kirsty Allsop, the Channel Four property cheerleader was appointed Tory Housing Tsar in October 2007. As I wrote at the time, not only was she relentlessly pushing houses on national TV and telling everyone that "rent is dead money", but she had developed a feud in 2004 with, whom she accused of "talking down the market".

In fact even as recently as April 2008 she tells the Telegraph that

The people she finds most irresponsible are those who are trying to whip up fear. "There is a website called and I am their deadliest enemy. They all rent and have a vested interest and enjoyment in watching others suffer. That's sick. Schadenfreude is absolutely disgusting and a terrible trait. There has been overpricing in some areas but this is not America. We are not going into freefall unless we panic ourselves into it."

It turns out that the denizens of are worried about her connections to the Conservatives. One of them wrote to Cameron and posted the following reply he received onto the board on August 8th 2008:

"I am replying on behalf of David Cameron to thank you for taking the time to write to us with your concerns about Kirstie Allsopp's involvement with the Conservative Party.
Kirstie Allsopp has, and continues to be, a valued contributor to the home buying review which the Conservative Party is currently undertaking. She has been extremely helpful in adding a public face to what has been, in the past, a largely closed process.
Kirstie is very experienced in the home-buying and selling process, having been a property search agent for over 10 years. Every week she travels over the UK dealing with the fears, worries and frustrations of buyers and sellers and she sees the full extent of the resulting stress that they all too often suffer in the process. Reducing this stress through increased certainty and speeding up the process is a key objective of the Conservative Home-Buying Review and as such, Kirstie’s involvement in the review has been useful and worthwhile.
You should not feel that because Kirstie is the most visible face of the home buying review that she is by any means the only contributor. We are endeavouring to ensure that all relevant parties are involved to the greatest level possible with the process.
If you are interested please take the time to look at our website: which also gives you the opportunity to contribute to the review and put forward any concerns you have.
Thank you, once again, for writing.
Yours sincerely,
Lara Moreno Perez
Office of the Leader of the Opposition
House of Commons
SW1A 0AA "

So it looks like the Conservatives are keeping her on, which is interesting. Kirsty Allsop has cheerled for the housing bubble in a way that no-one in the Labour party ever did.

Indeed she opposed every attempt by the Labour government to slow down the market. And Labour has been trying to slow the property market. Brown abolished MIRAS in April 2000, when it became clear that some people thought that the tax relief was incentive to load up on mortgage debt and never repay/overpay it.

He then introduced stamp duty of 3% on homes over 250k and 5% on homes over 500k in 2003, when it became clear that big bonuses in London were creating a top-down bubble in housing - the classic theory is that if you increase transaction costs, people stop trading houses constantly as though they were shares and instead increase the length of time they stay put (and pay down the mortgage debt during the period they stay put). In particular people with existing houses just below £250k were incentivised not to move - people think twice before moving if they are presented with a stamp duty bill they must pay in cash (whereas the mortgage is borrowed money and doesn't seem quite as "real", even if it is a way bigger amount). That slowed the market for a good six months.

When the market resumed it's upwards trend Mervyn King made a famous statement in June 2004 where he stated that house prices would fall. His words managed to slow the market for all of six months.

The govt then introduced HIPs, which also slowed the market down for a few months. Each slowdown paused the market and allowed people's earnings to catch up a bit, and some more debt to be repaid. They added up to several years of pause, which is why the market didn't surge up so sharply in the last three years before the top in the way the American one did.

But Tories opposed all this, and Allsop in particular resented any attempts to slow the market. Presumably David Cameron appointed her, and keeps her on because he approves of the way she pushed and keeps pushing the housing bubble. Indeed Allsop is campaigning for all stamp duty to be removed so that houses can indeed be traded like shares.

When Tories criticise Labour over the housing situation, we need to shout "Kirsty Allsop" back at them - or "Krusty" as like to call her.

Saturday, October 18, 2008

The Bank Rescue

The Times has a fascinating behind-the-scenes account of how the bank rescue was put together. It's marred only by the title they give the piece - "How Gordon Brown took the credit for his sidekick’s rescue plan".

Certain sectors of the press and all Tories have been criticising the Bank rescue, not on the details of the plan (it's a very good plan, so hard to pick at it), but on the basis that Gordon Brown shouldn't get any credit, because he didn't come up with the plan personally. It speaks to an bizarre view of how government works.

In this blog I've always referred to the plan as the Darling plan, as it is clear to me (and to anyone who has given thought to it), that something that comprehensive could only have come from the Treasury. Number 10 doesn't have the resources to do it.

The job of the Prime Minister/leader is not to think of everything himself, but to task others to come up with solutions - and then to decide and choose correctly which solution to pick from the vast array presented to him. There is always a range of solutions presented. Even in the lead up to the Iraq war, the MoD will have presented several plans, one of which would have included the benefits of not deploying at all.

Leaders vary in how much of a steer they give their cabinets. Eisenhower used to insist that his cabinet presented him with a summary no more than a page long. He then read the submissions, decided, and went off to play golf in the afternoon. Roosevelt took a slightly different tack - he always set up two separate streams of ideas flowing to him, one official and one unofficial, and let both know in advance that the other existed. In his opinion, that was the only way to catch out people out when they tried to withhold information, or use their proximity to power to steer him by suppressing ideas they personally didn't like but which were beneficial to the nation. He felt that his decision-making benefited from as broad a range of information and ideas being presented to him as possible. Thatcher by contrast, didn't trust anyone's ideas but her own. She had mirror departments in No 10, which made the actual decisions, sidelining the people in the real departments (to the frustration of people like Nigel Lawson).

The Treasury under Labour has really blossomed. It's gone from being a department that under the Tories was convinced it could get nothing right, into a big powerful department that attracts the best civil servants and is confident of it's abilities. It should surprise no one that they came up with such a good plan. It should surprise no one that the current incumbent of No 10 trusts the Treasury.

At the end of the day the Prime Minister looked at the options on the table and decided. With such big sums at stake, he was the one who had to sign things off. It's his plan because the responsibility for it lies with him. If it works, it's because he chose it. If it doesn't work, it's down to him for choosing it. That's what being prime minister is about.

But clearly the Tories and parts of the press don't share this view of what the job of prime minister is about at all. I believe their strange ideas stem directly from the top of the Conservative party, where Cameron and Osborne operate a tight cabal and believe that if they haven't thought of an idea themselves, it's not allowed the light of day. Which is a juvenile or novice idea of how large organisations are run. And it would create no end of problems if they were ever to get into power. Another reason to keep them out.

Thursday, October 16, 2008

Trends in Personal Lending

The graph left comes from page 30 of the FSA's Financial Risk Outlook report, which was published in January 2008 (though it is 70 pages long, it's well worth a read, as it is quite prescient).

For me the most interesting thing has been a collapse in credit card lending since 2005 (mainly due to lenders withdrawing 0% deals). Unsecured lending also drops. If the extreme lending in 2003-2004 was unsustainable, so too is the lack of lending in 2008. By contrast, a return to 2007 lending means a return to very prudent lending indeed, compared to the last fifteen years.

Tuesday, October 14, 2008

A look at New Zealand

The USA isn't the only country going to the polls in November. On Nov 8th, New Zealand votes for a new government too. Labour has been in power in New Zealand since 5th December 1999 - coming up to nine years.

And in the past year, New Zealand Labour have been trailing the right-wing National party by over twenty points. At one point in June 2008, the Colmar Brunton poll put the National party on 55% with Labour on 29%.

But the polls have been narrowing dramatically. Two weeks ago the gap between the two parties had closed to 11 points apart. By Friday 10th Oct, the Morgan poll put the National party on 40.5% with Labour on 37.5% - a mere three point difference.

All indications are that the credit crisis is helping the left. 42.7% said new Zealand Labour would handle the economy best in a crisis, compared to 41.2% for the National party.

I think this is down to the nature of this crisis, which is very different to the storms that hit the global economy in the early 1990's. In the early 90's, the market was seen as good, and the government seen as a source of ill. Reagan's quip that the nine scariest words were "I'm from the government and I'm here to help" was taken to heart.

But that's reversed now. The markets are seen as self-destructive, mad and bad, and government is all that stands between the ordinary voter and Armageddon. Because right-wing parties around the world have spent the last thirty years bashing government, they now find it very hard to say convincingly the sweetest words you could hear in a crisis - "I'm from the government and I'm here to help."

Monday, October 13, 2008

Save the Bankers, Save the World

The New York Times had a column by Nobel Laureate Paul Krugman simply entitled Gordon Does Good, which begins "Has Gordon Brown, the British prime minister, saved the world financial system?" He then goes on to praise the clarity, decisiveness and speed with which Gordon Brown and Alistair Darling have reacted to the crisis.

The comments to the Krugman article were instructive too. Anna, New York writes "Did we make a mistake in 1776? Is it too late to correct?".

Lisainvan, vancouver, bc writes "Can someone please just state the obvious? Brown was able to do this because he is the leader of the Labour Party. Labour, unlike the leaders of other leading nations at this time, does not have an ideological opposition to 'nationalizing' infrastructure".

And twofold, detroit, assesses the American presidential candidates and concludes that "Unfortunately, our choices for president are limited this year. Only a few weeks ago McCain was saying the fundamentals of the economy were sound. He also claimed little knowledge of economic issues at the start of the campaign season. Frighteningly Sarah Palin has shown less grasp of the subject. I would not trust Mr. and Mrs. Maverick with my financial matters. This leaves us with Obama, who at least shows a grasp of the facts. I feel his over all philosophy is more in tune with Gordon Brown’s."

Bless. You know something has changed when Americans are looking for the a leader "in tune with Gordon Brown".

It's always lovely when Britain leads the world and is praised for it. And our Gord is now de facto Leader of the Free World at least until the new American president is inaugurated in January 2009 and finally gets control of that rudderless state.

Friday, October 10, 2008


The Daily Mail reports that Barclays is thinking of trying one last attempt to raise private capital before tapping government offers to recapitalise them:

"Barclays is hatching a plan to bolster its capital base by £3billion by offering existing investors first refusal on preference shares before seeking cash from the government's £50billion rescue fund.

It is thought the bank is talking with backers, including Middle Eastern and Asian funds like Qatar Investment Authority, China Development Bank, and Singapore's Temasek, about buying the stock.

However, if they rebuff the plan, Barclays ... would go to the taxpayer-backed capital pool."

Why does Barclays think it is better off with state-owned money from the Middle East or China rather than UK state money? Because they think the UK taxpayer is a bit hard - wanting to curb bonuses and whatnot - whereas they think that Middle East and Qartari sovereign funds will let them continue as before.

They are in denial at the sea-change that has taken place over the last week. Things are not going to be able to continue as before. The sell-off in the western markets shows that ordinary shareholders (and foreign sovereign funds) are as leery about risks and excessive behaviour as the British taxpayer.

The Darling plan depends on British banks facing up to reality post haste and tapping the funds he has made available. It's regrettable that the boards of companies like Barclays are still in denial, and by delaying, putting their ordinary shareholders, bondholders and customers in jeopardy. Boards that delay too long in facing reality should walk the plank - and bow in public and express deep regret for their foolishness.

Thursday, October 09, 2008

Kudos to Alistair Darling

Unlike Hank Paulson's rescue package, which was universally derided (and will probably not work), Alistair Darling's rescue package was universally acclaimed as well-designed. Indeed, Italy, Spain, Sweden, and Denmark have said they will be copying it. And Paulson in the USA now says he might change his plan and adopt ours after all. Markets are rallying on the hope that now a credible plan is on the table, every government affected will copy it.

It's actually very hard to produce a sane and comprehensive resuce package under pressure (as we have seen from responses in the USA, Ireland and Germany), so Alistair Darling turns out to be the man of the moment. It also turns out that Alistair Darling was speaking straight when he told the Guardian some months ago that we might be seeing the worst global storm for 60 years. Many, including myself, thought he was being hasty. Actually, he was merely a man completely on top of his brief and making preparations for the worst - and his plan is well-designed because he understood before others what was at stake and took the time to start preparations in the summer.

I'm glad he is chancellor.

Saturday, October 04, 2008

Welcome back Peter Mandelson!

I felt hugely cheered when I heard Peter Mandelson had come back to the government. I became a fan of his when as EU Trade Commissioner, he took on the French in defending free-trade (a core Labour policy since we ran on a free-trade ticket in 1923) and asking the French to to support the abolition of CAP, which prompted that fool Sarkozy to attack him.

I think he's been one of the best UK commissioners we've ever had, and now that the Doha negotiations are dead (killed off by the Americans trying to get the Indians and Chinese to open their markets to US agriculture, and India and China balking), he is best deployed at home, where his vast experience of how international trade works can help the UK weather this crisis. Any changes to financial regulation in the EU will be negotiated by the Council of Ministers, the decision-making body of the EU, and having Mandelson as a partisan within the UK government, as opposed to a neutral Commissioner observing the proceedings, will help enormously. I was disappointed that most of the television networks yesterday only focussed on his UK government experience, and said practically nothing of his European experience.

Of course the return of Mandelson is also political. Mandelson, Blair and Brown were the founders of New Labour, and were later joined by Alastair Campbell. As John Kampfner pointed out, the New Labour tribe is re-grouping again. The only one missing is Blair, and I keep expecting him to start doing election rallies in Bill Clinton style.

People like Matthew Parris in the Times write hopefully that the re-grouping will result in disaster and predict feuds to break out. They misunderstand the nature of founders of New Labour. They were a band of brothers. They may have squabbled among themselves from time to time, but always closed ranks against the common enemy. If you read Alastair Campbell's diaries, you understand how hard they all worked to put Labour into power. They are not about to let it all go now.

Mandelson also helps in that he is a big beast. In 2007, Gordon Brown gave the next generation their chance to strut their stuff by promoting them to the cabinet, but for the most part they've been disappointingly timid. Mandelson with his intellect and confidence lends enormous ballast to the team. Labour won in 1997 by a massive team effort. In recent months people have forgotten this and tried to claim that the job of winning was solely down to the leader while everyone else sat on their hands. That will change as teamwork starts kicking in again.

I must say a word about Margaret Beckett. She's the great survivor of the Labour party, with experience dating back to the 70's. She has seen and experienced it all. She was first elected in 1974, and served in both Harold Wilson's government and Callaghan's. She was then defeated in 1979, in the electoral tsunami that brought in Thatcher (something few current MPs have experience of). But she dusted herself off and got re-elected again in 1983, and supported Kinnock in his battle against Benn. She was elected Deputy Leader of the Labour party in 1992, she served briefly as leader when Smith died and stood against Blair for the leadership in 1994. When Labour came to power in 1997, she served in the Labour government being moved sideways, down, up, you name it and became the first woman Foreign Secretary. And now she's back as Minister for Housing.

The thing about Margaret Beckett is that she has no ego - her aim is simply to serve the Labour government and Labour party, she's not worried about status. Other prima donnas who flounce out of government because they arn't promoted or given the job they want, should take lessons from her. She's achieved a state of grace by being so calm in the face of over three decades of political turbulence.

Thursday, October 02, 2008

Senate approves the Bailout bill, but...

In order to pass the "Bailout Bill", now belatedly renamed the "Economic Recovery Plan", the Senate added $150 billion in tax breaks, none of which are revenue neutral. Which made the bill $850bn.

From reading the American forums, reaction has been bad. On the Washington Post forums there seems to be universal denouncement of the package, with people saying things like "How do tax cuts help this disaster? That’s like saying you’re going to offset your increased credit card debt by reducing your payments", "451 pages of Bushit","Why did the Senate have to add the pork to this Bill?", "the no golden parachute clause (read pages 32 - 33) covers NEW agreements, not existing agreements. How convenient - the tax payers will fund all those existing agreeements", and "how can we afford universal healthcare now?".

This whole thing has turned toxic. Paulson botched initially by simply introducing a plan that handed over money in return for nothing and with no oversight as to how it was spent. It's just gone from bad to worse since. The House may pass the bill due to the additional pork, but pressure on them from voters will only grow.

Voters are also frustrated that both Obama and McCain voted for this bill, and there is a lot of talk about "3rd candidates". If Ross Perot was in this race he'd be swept into the White House. There are other candidates in this White House race - Ralph Nader, Bob Barr for the Libertarian party, Chuck Baldwin for the Constitutional party, Cynthia McKinney for the Green party, Alan Keys for America's Independent Party, Gloria La Riva for Party for Socialism and Liberation, and Charles Jay for the Boston Tea Party.

If the poison doesn't get out of the situation soon, some protest votes will undoubtedly be given to these "3rd candidates" in a way that is already happening in Europe, and which will make the outcome of this election very unpredictable. We live in very interesting times.