O tempore

This written in 2002...."Japan's banks are undeniably in worse shape than Germany's: some of their balance sheets are propped up by little more than regulatory indulgence."

John Lanchester on the UK Bank Bail-Out

Put simply, this is an insurance scheme. The government is insuring the banks against losses on their assets. There’s nothing unusual about such schemes: they’re a standard feature of the banking world. In fact, they are one of the sources of the current crisis. In the commercial world, a deal in which one financial institution insures another against defaults, in return for a fee, is called a credit default swap, or CDS. In effect, the UK government has undertaken a CDS with our imploded banks.

John Lanchester on the rise and fall of RBS

During the 17th century, Scottish investors had noticed with envy the gigantic profits being made in trade with Asia and Africa by the English charter companies, especially the East India Company. They decided that they wanted a piece of the action and in 1694 set up the Company of Scotland, which in 1695 was granted a monopoly of Scottish trade with Africa, Asia and the Americas. The Company then bet its shirt on a new colony in Darien – that’s Panama to us – and lost.[1] The resulting crash is estimated to have wiped out a quarter of the liquid assets in the country, and was a powerful force in impelling Scotland towards the 1707 Act of Union with its larger and better capitalised neighbour to the south. The Act of Union offered compensation to shareholders who had been cleaned out by the collapse of the Company; a body called the Equivalent Society was set up to look after their interests. It was the Equivalent Society, renamed the Equivalent Company, which a couple of decades later decided to move into banking, and was incorporated as the Royal Bank of Scotland. In other words, RBS had its origins in a failed speculation, a bail-out, and a financial crash so big it helped destroy Scotland’s status as a separate nation.

Warren Buffett on airlines

The interesting thing of course is that if you go back in time….from Kitty Hawk, net, the airline transport business has made no money. Just think if you’d been there at Kitty Hawk and you’d seen this guy go up and all of a sudden a vision hits you that tens of millions of people would be doing this all over the world some day. It would bring us all closer together and everything. You’d think, my God, this is something to be in on. Despite putting in billions of dollars, the net return to owners for the entire airline industry, if you’d owned it all, and you’d put in all the money, is less than zero. If there had been a capitalist down there, the guy should have shot down Wilbur. One small step for mankind and one huge step back for capitalism.

NYRB on John le Carre

If you feel that good novels are the lie that reveals the truth, then it will always be thrilling, in any given period, to come across works that manage to be much more revealing than the evening news. John le Carré made that kind of thrill into a genre, capturing the dowdy, fatal, realistic weather of European espionage at a time when the subject was covered on the BBC as if it were merely a parlor game beloved of donnish existentialists.

Even today, with his most groundbreaking novels behind him, le Carré continues to be the world's most reliable witness to the vicissitudes of international paranoia: his books conceive of a Western world that has a costly obsession with its possible enemies; he shows you this world's secret missions, its botched jobs, its manifold attempts to thwart the corrupting and sometimes terrifying idealism of others, while keeping the reader close to the exact lineaments of the way we live now.

Buiter on the potentially parlous state of European FX reserves

Recently, interest in the Bank of England’s US dollar repos has petered out, but at the beginning of the programme, amounts close to the $40 bn limit were taken up. If those US dollars were borrowed by banks like RBS and HBOS, both insolvent except for past, current and anticipated future government financial support, they may well have been lost. These banks (and other UK banks that are still standing more or less on their own two feet) had (and continue to have) very large US dollar exposures on which they made massive losses - well in excess of $40 bn. These banks also have few liquid foreign currency assets.

Assume one or more banks that borrowed US dollars from the Bank of England cannot pay them back. The Bank of England takes the collateral that secured these US dollar loans. Eligible collateral for these loans consists of those securities that are routinely eligible in the Bank’s short-term repo open market operations and Standing Facilities, as published on the Bank’s website, together with conventional US Treasury securities. Assume that little if any of the collateral offered for the US dollar loans from the Bank of England consisted of US Treasury securities. So the Bank gets a mitt full of sterling securities back in lieu of the US dollars it has lost. Nice, but not good enough. When the swap arrangements expires, the Bank of England has to repay the Fed in US dollars, not in sterling securities. So unless the swap arrangement is extended, or extended and expanded, the Bank of England would have to send the Fed an ‘Oops’ note.

If the full swap line was lost ($40 bn), the UK would be completely out of (net) foreign exchange reserves - if we consolidate the foreign exchange assets and liabilities of the government and the US dollar swap exposure of the Bank of England. Not a good place to be. Of course, the beauty of swaps if that they are off-balance sheet items.

I haven’t checked the details about the official foreign exchange reserves of Switzerland and the Euro Area nations, nor do I know much about the foreign exchange losses of Swiss and Eurozone banks, although I expect that these losses are vast. It is possible that the earlier use of the swap lines by the ECB and the SNB has also made a rather large dent in the net foreign exchange reserves of Switzerland and the Eurozone nations.

In any case, the Machiavallian interpretation of the redundant second announcement of the central bank swaps is that it was intended to divert attention from the dire condition of the official foreign exchange reserves of a number of European countries, especially the UK. Extending the duration of the swaps delays the moment that the loss of the US dollars will have to be recognised. If this was indeed the case, it is bound to fail. Markets can be stupid, but not that stupid. This will not reduce the risk that Reijkjavik-on-Thames will have to seek IMF assistance at some point.

J K Galbraith on margin rates

A great river of gold began to converge on Wall Street, all of it to help Americans to hold common stock on margin. Corporations also found these rates attractive. At twelve percent Wall Street might even provide a more profitable use for the working capital of a company than additional production A few firms made this decision. Many companies started lending their surplus funds on Wall Street. By early 1929, loans form these non-banking sources were approximately equal to those from banks. Later they became much greater. 

There were still better ways of making money. In principle, New York banks could borrow money from the Federal Reserve Bank at five per cent and re-lend it in the call market for twelve. In practice they did. This was, possibly, the most profitable arbitrage operation of all time. Only a drastic increase in the Fed's rediscount rate would have made it unprofitable. In fact, higher interest rates would have been distressing to everyone but the speculator.