I have the suspicion that politicians on both sides of the pond and more significantly their economic advisers, failed to understand the nature of the financial monster they had created. My reasoning is that if they had they would have taken urgent steps to put the breaks on long before the crashing commenced.
I will not pretend that I understand what has happened and why but I am attempting to find out in order to establish where the responsibility rests. The more urgent interest is to understand the implications of what has happened and of what is being done
It is evident that Governments have been forced to do two things. The first is to finds ways to ensure the capitalist banking and financial system survives and re-establishes world wide confidence. Far from punishing investment bankers and other investment bodies the priority has been to ensure the services remain in London City and Wall Street New York to the present level and are not transferred elsewhere. Secondary has been the need to re-establish a working system in the UK and despite the appearance of measure to reflate the economy the government has set the tone by only offering loans at high rates of interests thus ending the era of cheap money, and oppressing banks to ensure they have a better relationship between their assets and borrowing which means taking as little risk as possible with new loans. Therefore business of all kinds and sizes are finding that they are unable to get working money because this is potentially only more bad debt, with the consequence of going into administration and putting hundreds of thousands out of work and which means less spending power, more drain on savings and more government expenditure on supporting individual families.
The second consequence is that Governments cannot proceed with their planned programmes and policies such as tackling environmental issues, reducing poverty and disease overseas, supporting the arts and experimental research. Everything is geared to maintaining employment and reducing dependency on governmental financial support to individuals and families.
I have only commenced to work through Robert Peston’s Who Runs Britain which begins by pointing out the impact of the creation of private equity firms, groups of perhaps two or three partners with a staff of one or two hundred whose function was identify suitable business for purchase where by a combinations of actions which involved selling off parts and streamlining the remainder they could then resell at sufficient profit, not just 10 or 50 or 100% but several 100%. They would make the partners not just rich but exceptionally rich billionaires with their there staff receiving six figure bonuses on top of six figure salaries. Tax Rules governing Wall Street New York and London City meant that the wealthiest only paid 10% back to the government and therefore they became even wealthier and more influential.
They achieve this by raising capital in two ways. Direct from investors who looked forward to above average returns on their investments and on comparatively cheap money from the lending institutions. The borrowing was not of millions but of billions. Much of the wealth was achieved by increasing the value of businesses through the share capital. The bonus paid to partners and staff was not just a cash dividend with the head of British Home Stores given himself one billion at one point but in shares and share options at prices which meant that with the increase in company profitability the share price rose and more gains could be paid. The providing of shares was the carrot to ensure managers worked even harder to increase the value of their company. Now staff sit around because no existing business is safe so funds have to be parked as safely as possible, and because no business is safe nor is the equity fund itself, so borrowing money for new speculations has also become non existent.
Alongside but interlinked were those funds which used the latest predictive and offsetting formula which attempted to eliminate the uncertainties of the ups and downs of share trading, the currency markets, and commodity futures such as oil and gold. Much of the activity was based on a significant level of gearing so that what the Hedge fund managers were doing was to buy the option to buy or sell for a fraction of the asset market price and they also borrowed several fold the asset value of the investor funds to increase the quantity of the options purchased. It is not just those who own, manage or invest in these funds who gained, but the lawyers and the accountants and money loaned earned interest and volumes of business earned bonuses.
One of the offsets which attempted to ensure that risk element was reduced has been to resell debt, money owed especially debt which was high risk, and this appears to have been the source the collapse of the financial pyramid. In the UK there was the great enthusiasm for buying properties to rent out not for income but for capital appreciation. Buy a home for £60000 and within five years it was beings sold for £180000. Borrow not £60000 but £75000 to make improvements and to cover for the gap between rental income and interest payments, so even if you only managed to pay interest rather than capital there was a tidy profit for minimum work, especially if you did this on a grander scale in terms of property value or number of properties and arrange for a property management company to sort out the lettings and the rent collection. But what if property values start to go down or people stop moving to improve their location and lifestyle. This was doing with homes what sued to be done with office space often unoccupied for year but nevertheless increasing in capital value. In The USA more than in the UK this enthusiasm for loaning money for people to buy proper was extended to those who had no hope of maintaining payments and had no collateral, including a secured job.
Back in the mid 1990’s I undertook assessments for the National Lottery Charities Board grant aid programmes and the details of individual assessments must remain confidential. For close on two decades as a local authority chief officer I had to struggle to master the financial system, especially the accounting system operated by my employers and its financial officers and which to a great extent was controlled by government economic and financial policy and practice, but it was only as a consequence of my national lottery experience that I learnt that the biggest shysters of all are the creative accountants and their companions in magical formulations- the auditors. One way of assessing the goodness of a charitable organisation is to first examine how much of the money raised is used to pay staff and fund their offices and professional life styles. To be registered as a Charity the national regulating board lays down guidelines about the ratio of administration costs to funds raised and used for charitable purpose. The art is to therefore to present administrative costs within these guidelines. The more expensive the accountant the cleverer the way the financial dealings can be presented to ensure that those running the organisation keep their incomes and offices, their hospitality and a status which attracts celebrities and politicians and media support which maintain public confidence and ensures a continuing income. One of the arts is to divide the organisation into different accounting units and spread the administrative costs between these units and a system of recharges. Then there is what is classified as revenue income and expenditure and what is capital and how debt is described and to some extent masked. What found through this work appears to be the common practice among those who managed funds exponentially. In fact my understanding is that the greater the funds and the image built the greater the scale of fraud. Unfortunately because on both sides of the Atlantic we like politicians who are common and like one us we pick people who are not match for those with greater intellect and in the UK and I assume the USA because of the way we recruit and reward our civil servants they also are not up to the task of identifying the con artists before they have created havoc.
I previously mentioned the last episode of the Ascent of Money in which Professor Niall Fergusson explained part of the reasons for the near collapse of the great financial pyramid created over the past three decades. I had hoped to look at the available earlier programmes on the Channel Four internet site but had difficulties as the programmes froze after the opening advertisements were completed. I managed to gain a viewing on the older laptop which uses Windows XP with the addition of a Plug in to the Microsoft media player. However for the Vista desktop I had to switch from my usual browser to another to use the Digital Management Licensing Diagnostic to copy pages of code which I then included in an email which after a couple of days led to the information that I also needed a plug in and was given the internet reference and where the relevant data information was transferred within second so I was able to watch the important programme which covers the development of the public liability stock company and market and the impact of Scotsman John Law and his Mississippi company which started maverick(criminal) pathway to Enron and John Lay.
In terms of the history and development of human beings it all started comparatively a short while ago with the formation of the Dutch East India Trading Company. According to Wikipedia and the TV programme the “ Dutch East India Company (Vereenigde Oost-Indische Compagnie or VOC in Dutch, literally "United East Indian Company") was a trading company, which was established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia. It was the first multinational corporation in the world and the first company to issue stock.[1] It was also arguably, the world's first megacorporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies.[2]
The Dutch East India Company remained an important trading concern for almost two centuries, paying an 18% annual dividend for almost 200 years. In its declining years in the late 18th century it was referred to as Vergaan Onder Corruptie which translates as 'Perished By Corruption'. The VOC became bankrupt and was formally dissolved in 1800,[3] its possessions and the debt being taken over by the government of the Dutch Batavian Republic. The VOC's territories became the Dutch East Indies and were expanded over the course of the 19th century to include the whole of the Indonesian archipelago, and in the twentieth century would form Indonesia.”
Its original trade was to bring species by quicker route by sea and the programme explained that although one voyage could pay for the construction of the shop, sea travel was hazardous and therefore owners got together to spread the risk and share the profit. One of the founders of the company each putting up 6000 Guilders saw this accumulated to half a million and an individual investor of 1000 guilders, issued with the first stock holding document, saw the value double and double and double again as soon as the company decided that it would not give cash to investors who wanted their capital but required them to sell to others.
This is where Scotsman John Law becomes relevant because according to the programme he was the brains behind the idea that if the public wanted shares in a successful company then why not raise more capital by issuing more shares as long as those in control owned the greater proportion of the overall share capital. Wikipedia says this of him
*John Law (usually pronounced Jean Lass by contemporary French) (bap. 21 April 1671 – 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. At one time he was considered little more than a colorful con man, responsible for the Mississippi Bubble and a chaotic economic collapse in France(which probably led to the French Revolution). Beginning in the 1960s his reputation has improved, to the point he is now considered by some to be one of the most important pre-Adam Smith economic thinkers and a successful economic policymaker whose work was undone by corruption and reactionism of the House of Bourbon. Law was a gambler and a brilliant mental calculator and was known to win card games by mentally calculating the odds. An expert in statistics, he was the originator of economic theories, including two major ideas: 'The Scarcity Theory of Value' and the 'Real bills doctrine'.
His believed that money is not an indication of wealth but a means to promote and it was the production of goods and their trading with trading which created real wealth. He is the first known economist to promote the idea of a national bank which excludes private investment and his exile to France and the problems experienced by the monarchy resulted in his being able to put this idea into practice and in 1718 the Royal Bank was created with its notes backed by the King. Law then created the Mississippi company with a prospectus and balance sheet which misrepresented the value of the company interests and where shares were issues again and again to raise more capital as the demand increased and their price rose within one year from 500 livres to 18000. The problem for the French Government and economy is that they bought into the company as a means of clearing the national debt but when the company collapsed so did the bank and the economy. At one point the Mississippi company is said to have “bought” all the government debt of 1.6 billion livres. This has to be compared which British South Seas company which acquired 80% of British Government debt of only 50 million pounds also in the 1720 and which led to what it known as the South Seas bubble.
The Ascent of money Programme then moved into the present time with the Enron Scandal. Wikipedia says this “ Enron Creditors Recovery Corporation (formerly Enron Corporation, former NYSE ticker symbol ENE) was an American energy company based in Houston, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000 (McLean & Elkind, 2003) and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000.[1] Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, sometimes called the "Enron scandal". Enron has since become a popular symbol of wilful corporate fraud and corruption. The scandal was also considered a landmark case in the field of business fraud and brought into question the accounting practices of many corporations throughout the United States. Enron filed for bankruptcy protection in the Southern District of New York in late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. It emerged from bankruptcy in November 2004 after one of the biggest and most complex bankruptcy cases in U.S. history. On September 7, 2006, Enron sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. Following the scandal, lawsuits against Enron's directors were notable because the directors settled the suits by paying very significant sums of money personally. The scandal also caused the dissolution of the Arthur Andersen accounting firm, affecting the wider business world.[2] In early 2007, Enron changed its name to Enron Creditors Recovery Corporation, to reflect its status as a (largely) asset-less shell corporation. Its current goal is to liquidate all remaining assets of the company. For most of 2007, Enron continued to operate under the name Enron Corp. by filing a Doing Business As, or "dba" certificate in Harris County, Texas. “ There are two elements of the Enron story which form a theme to this piece of writing. According to the programme, the top 140 executives were each given bonuses of 5.3 million dollars its collapse and indeed bonus cheques were being issued as its employees were given their redundancies notices. The Enron secret was to disguise the extent of its debts from £13 billion in the balance sheet to $38 billion and this was only possible through its accountants. The disguises of debts off the main balance sheet has been generally adopted by Governments, Local Authorities, Corporations, private investments and hedge funds for years and i deed there is much debate in banking and government circles that Banks should be able to permanently clear their current books of bad debts. What Enron did which enraged so many people was when it shares reached a market value of $90 its executives commenced to sell their personal holdings recommending everyone else to buy on the basis they the shared could expect to rise to £130 to $140.
Robert O’Harrow Jnr and Brady Dennis Washington Post Staff writers have published the first of their three part study of “Wall Street greed and Washington Blindness” and describe aspects of how Howard Sosin and Randy Rackson came together with Barry Goldman to develop their elaborate financial constructions from their experience in using interest rate swaps. It is only possible to understand interest rate swaps if you are a mathematician and know all about the money markets and Wikipedia just compounds one’s ignorance of both. My understanding is that their objective was to reduce or eliminate the risks that could arise from changes in interest rates over a longer term period that the life of existing swaps reported to be two to three years. For close on two decades the articles explains that their undertaking, the American International group provided the machinery to enable the greatest investments institutions such as Goldman Sacks and Merril Lynch, governments, municipalities and corporations “to free up cash, get rid of debt and guard against rising interests rates or currency fluctuations”
When the company was on the verge of collapse last September George Bush argued that e government could not allow the institution to fail and has provided a bail out of 152 billion, I repeat billion dollars, because the company was too entwined with the rest of the world economy, by implication that if it failed so did the world economy. The article states that many of the approaches adopted by AIG have been copied by financial bodies all over the world. Creating vast interlocking deals that no one except the originators fully understood, if they ever did, in terms of potential implications
The article explains that the three broke from their existing firm in 1987 and negotiated a contract deal with Greenberg at AIG in which they kept 38% of the profits with the rest going to AIG. They spent six months at first in a windowless officer with hired furniture creating the first all embracing computer programme which stored every piece of available information and continuously analysed so that they were in a better position than anyone else to see opportunities and of taking on risks which others did not see, but because they possessed information they were more able to protect themselves. In terms of their trading activities they concentrated on the futures market and on a risk management approach, hedging which involved in effect betting on whether the prices went up or down. The profit is possible if the gain from an individual trade is greater than the combined expenditure of both trades and allows of administrative overheads.
I do not know but I think it works like this. It began with the future market where produces, of oil crops, beef steak and such like enter into a futures contract to supply x quantity and x price. They have some certainty over future income, assuming they are able to deliver the quantity and quality stipulated and the purchaser is also able to plan ahead. The provider gains if the actual market price at the time of the agreed is less but loses if the market price has been higher. Although oil reached over $100 dollars a barrel recently is likely that vast quantity were sold contract for significantly, where as those who bought new contracts when the market was over $100 will be stunned that the current market price is half this.
What then happened si that he money manipulators and their investors decided they wanted to reduce the risk and make more money by two developments.
I go to commodities market through an approved dealer and but not an actual contract to say buy or sell 1 million barrels of oil at $75 dollars a barrel say six months, one year or longer away and because of the time gap the option price of both options is low say $10. If I have a contract to buy and the price drops markedly I do not exercise my right to buy and therefore only lose $10. It is jumps to sat £110 dollars then I will but and make profit of £35 dollars a barrel, and likewise if the contract is to sell However in reality the changes over a period of time are less dramatic and the margins of gains and loss smaller and I have to take account of the administrative costs of buy and selling or exercising the option. However as an investor, individual, bank, insurance firm, local government body I am not interested in just buy a few barrels of oil but talk in terms hundreds of thousands and millions of barrels.
The Hedge is to enter into contracts to buy and sell the same quantity over the same time period and to sell both options before their expiry. Say I but the option to buy and sell 1million barrels and the option to do this cost 2 x $10 million dollars. Say the price of one the options falls $9 dollars a barrel so I sell this as quickly as the trend is identified, limiting my loss on this trade to $1million plus the dealing charges. However because I have bought both sets of options my other trade is now selling for $12 dollars make $2 million dollars less charges and £1 million profit overall less charges. The margins are usually smaller than this, but with trades being made all day and every day, the profits accumulate over the losses. But there is risk involved
What Sosin and his colleagues worked out was a complex trading programme which incorporated all the available information and which identified the best points at which to sell and buy
The objective was to make money but reduce risks so every action they took was looked at in depth every day with attention paid to overall losses and as much as the overall gains. The kind of people involved were as much interested in producing the foolproof systems as it was in the making of money. This is not necessarily a good thing because of the tendency to become so involved in mastering, being ahead and winning the game, that the consequences of the game on everyone else is overlooked.
It was only a short while after the operation went into business that Sosin is reported to have contacted AIG Vice Chairman to say they were entering into a contract with the Italian government for a $1 billion dollar interest swap about ten times the size of what was being done in general and the deal would produce a profit of around $3 million greater than the two other operations of AIG expected to achieve in a year. It is important to remember that the core function of AIG was insurance not speculative trading, the new trading arm under Sosin and his colleagues made $ 60 million profit n the first six months. They changed offices to Maddison Avenue. They also moved into currency, stocks and municipal bonds. They opened offices in London and Tokyo and set up a small bank in Paris.
However the honeymoon is reported not to have lasted long when first Sosin and his colleagues insisted on being paid bonuses up front on one deal even if took the AIG decades to achieve the profit which the bonuses reflected and the unease grew when on one deal $100 million was lost. It was more of a clash of cultures and temperament, so Sosin left with his crew taking a copy of the system with him while the former company under a new management negotiated a new deal with more of the profit to AIG and only half the bonuses on new long term deals taken up front with the rest paid over the time. I have once been to a casino once and where I watched rather than gambled and this was in 1965. I watched someone win and lose several thousands pounds within a short period of time. When he won say £100 he gave £10 chips (the currency was in fact francs) to the croupier and to his female companion, so on his way winning £4000 he gave the girl £400 and the croupier a similar sum. The girls friend and the croupier kept their share when he lost the rest. I have every sympathy with Greenberg the head of AIG when he decided to pay less up front and concentrate more long term and sustained profits.
who took the view that if girlfriend had been responsible for selecting the numbers . The croupier kept his bonus although the man lost all that he had won and kept for himself. He also had his income and reminds me of the position of deal traders, the lawyers and the accountants who job is to process and present the deal within the rules to ensure their legality and to minimise the taxation to governments. The girl friend picked the number so it could be argued she was entitled to some of the rewards and I do not know what was the amount of his original stake and whether this was more or less than what the girlfriend took away. My observation that evening was that the man was more interested in thrilling and pleasing his companion than in making or losing money and her grateful response, unless it was actually her money he was playing with may will have compensated him for any financial loss. I did note that the majority of the men were older, and fatter than one expected to see and that there appeared to be a higher proportion of outstanding looking, dressed, made up and younger women on the arms of many an older men who did live up to the Hollywood image.
According to the article the re-jigged arm of AIG found that others in the market were duplicating the approach so profit margins began to shrink and pressure was on to devise new and more complicated deals in new areas. The hedging and minimising of risk continued and overall profits increased from £140 million 1995 to $323 1998. However what the writer call the beautiful machine was about to crack.
I decided to end the writing at this point to finish my wheeling and dealing for the day. I use the Travel Lodge Motels and City centre Hotels because they are ideal for me. I love a double bed and quick access to the bathrooms as I wake during the night. The tea and coffee is adequate which I supplement by buying from the nearest store. There are Lodge Hotels close to Kings cross station and also at Croydon near the station so that I can travel by train to Kings Cross or coach to Victoria Station and cut out the hassle and cost of travelling by car, but equally the car provides greater flexibility and I can fill with the kitchen sink. There is usually standard TV but I can supplement this with wireless internet for £20 for a week’s use. However the best reason for using Travel Lodge is the price. Three times this year special internet offers have been made for as low as £9 a night or room where a last minute stop can cost as much as £120. I had previously obtained one trop to London with six nights for £54 5 x 9 and one at 19 and to-day by rising at 5.30 and being prepared with dates and options to fit around home games of County Champions Durham, the Whitley Bay Jazz festival and other personal commitments and interests I was able to arrange five new trips making a total of 31 nights at an average expenditure of £12 a night compared with the just before average price of just under £80 a gearing of 6 to 7 times less. I have not engaged in so many trips over such a short trip covering late spring and summer since 2004 when I visited former homes and places of work, went to Gibraltar and undertook family history searches in London and Wiltshire. However one only becomes 70 once, and in some respects I am amazed to be within a couple of months of this, although being sixty was bad enough and seventy is horrifying.
I turned my attention to another of the Ascent of Money programmes and to a Taggart as well as some food with the rest of the chicken into a Thai style stir fry all from packets with the fresh Thai vegetables vacuum packed, a Thai Style sauce and noodles at midday. There was Anchovies on Crackers with also Poachers Pickle and olives also stuffed with Anchovy as a tea time early evening snack and then a portion of meat balls and pasta in a tomato sauce. There was some ice cream and a banana and custard, but no alcohol. Tomorrow I shall spend New Years Eve on more study of the near collapse of modern capitalism, I shall cook the large joint of ham intended for Christmas as well as a small turkey crown planned for Christmas day. The fridge is nearly empty so I will go out fro some fresh fruit and fresh vegetables to make the intentions for the year. The freezer will continue to be used up as it needs a defrost and again I will review what is bought and what is not. Also need a table lamp for this room as the lighting is behind on to one side and a direct light on the keyboard would be helpful.
