Friday, 19 August 2011

Michael Lewis breaks news from 2008

Michael Lewis, of Liar's Poker fame, has emerged as a leading writer of the credit crisis and its aftermath. I wish there were 10 of him. And if only one of them were European. His latest piece, on Germany, is kinda funny and kinda accurate.

He writes that the Germans got way over-exposed to dodgy debt in the credit boom, as long as it was foreign and had a AAA rating. He ties this financial stuff with genuinely funny observations about the Germans he meets, as well as claiming they have a scatological obsession. Lewis is American so it reads a bit National Lampoon's European Vacation for my taste but the financial stuff is solid.

However ... Germans' obsession with AAA-rated credit (and Norwegians' for that matter) is well known in the markets and has been a topic extensively explored since the explosion of CDOs in late 2008/early 2009. That this is still news 2-3 years after the event suggests financial journalists in Europe are simply not doing their job, are unable to explain complex finance or have failed to find ways to explain it in interesting enough ways.

Sunday, 17 July 2011

The sweet ironies of the Murdoch empire brought to heel

The fall from grace of the Murdoch empire contains many rich ironies. Above all, the element that gives me most satisfaction is that the News of the World's disgusting obsession with sensationalist reporting of child murders directly led to the scandal that brought its closure. The tabloid campaigns against alleged paedophiles were absurd, unnecessary, unhelpful and cancerous to good public policy and safety. It should be noted that Rebekah Brooks remained proud to the end that she led one of the worst of these campaigns.

On the wider issue of Murdoch's influence over politicians, there is a bigger irony. It is easy to forget, 50 years on, that when Murdoch first came onto the British media scene in the 1960s that he was the outsider determined to break up the complacent and deferential establishment culture. His belief was that people were being denied news and entertainment that they wanted, instead being patronised by self-serving views of the elite.

Roll forward to the start of the new century and the establishment was no more. The key institutions of the ancien regime – aristocracy, the Church of England, the Conservative Party – were close to collapse, following attacks from both right and left. In their place stood a thin, celebrity-obsessed culture, one that denigrated the institutions and mechanisms by which people achieve long-lasting and meaningful success. A culture that applauds people winning a country's worth of wealth through a state-backed lottery.

Always close to the helm of this empty, random, "late" culture was Murdoch (followed by his less pleasant mini-me, Richard Desmond). The journey from outsider to dominant patriarch was complete. Time had shown that Murdoch's problem with the establishment was that he wasn't running it.

But like in a movie, one journalist knew there was something terribly wrong at the heart of his biggest, brashest newspaper, The News of the World. At each turn in his investigation he found the paper's misdeeds involved more and more members of the new establishment. Meanwhile, peers ignored, sneered or played up the flaws in Nick Davies' work. They had forgotten – if they ever knew – that the best journalists are usually obsessive. In a climate full of lazy journalists spoon-fed by PR firms and the internet, few remembered that proper journalism is awkward and jarring, driven forward by unusual and intense people.

Is it ironic that News International's worst excesses were exposed and brought down by proper journalism? Probably, though more accurately it may be described as sweet justice. Is it a shot in the arm of investigative journalism everywhere? Definitely. Though as long as we remember the right bits of the story.

Is the Murdoch empire finished? Probably not, but it has been put back in its box (there is some kind of lesson there for those that assume big companies always get their own way). Where we go from here is for us to decide.

Tuesday, 12 July 2011

Cracking a nut with a hammer (the return to a regular theme)

One of Ben Goldacre’s best jokes is to suggest that the Daily Mail has embarked on a grand oncological ontology experiment in which it seeks to divide the world’s inanimate objects between those that cause cancer and those that cure it. Other newspapers have different obsessions. The News of the World, for instance, had its own project to peep and pry on behalf of the nation’s prurient busybodies while attempting to redefine ‘the public interest’ as to mean ‘whatever some of the public could be interested in’.

But given my background in debt it is The Guardian’s ongoing campaign to mislead its readers about debt that regularly attracts my attention. As part of this project, most days the newspaper will publish at least one debt-related story but omits a key piece of information or analysis allowing the author of the article to declare the financial markets are singularly corrupt or evil in some way.

Guardian readers, many of whom have been brought up on the watery soup of quasi-Marxism espoused by polemicists such as Michael Moore or Naomi Klein, lap up these safe anti-establishment stories, just as Mail readers relax in the knee-jerk right-wing idiocies of Richard Littlejohn.

But by lazily assuming all finance is somehow wrong, the newspaper prevents itself from producing meaningful analysis of how finance works. Among those that understand finance, the unreliability of The Guardian’s business pages is simply a bad joke.

For instance, when Jill Treanor got on her high horse about Barclays not paying taxes, she did so seemingly without knowledge of basic accountancy rules, rules that her own company had used for similar advantage. And some. Moreover, The Guardian’s great campaign against Tesco’s tax structures quickly ran into the ground when the retailer was able to easily show that many of the newspaper’s allegations were false.

Embarrassing and expensive incidents like these appear not to have dissuaded the newspaper from its overarching project to mislead.

On Sunday, the economics editor of The Observer (owned and operated by The Guardian), Heather Stewart, declared: “Defaulting rescued Argentina. It could work for Athens too.” Then followed an analysis so oddly skewed it might well have been written sideways.

The thesis was outwardly plausible – Argentina had defaulted on its debt a decade ago and recovered, maybe Greece could do the same? But the article didn’t explain that Argentina’s recovery since the default was largely due to the commodity boom (Powerpoint file), not because it had failed to repay its debts (though the devaluation also helped). It was a bit like reading about a lottery winner's work ethic but not mentioning that person's wealth derived from having bought a winning ticket.

The following day the Guardian website published another article on the theme of debt, this time by the blogger David Malone. I have come across Mr. Malone’s theories about finance before on the Liberal Conspiracy website (a peculiar name, because there is rarely anything liberal published on the site which slavishly believes in growing the state, and is allied with parts of the Labour Party). Mr. Malone is an enthusiastic amateur – in that he has no professional experience of journalism or finance – but recently published a book called “The Debt Generation”. Mr. Malone’s style is both tedious and accusatory; he demonstrates that a small amount of knowledge can be a dangerous thing.

As such, he is perfect for today’s Guardian, which published his article that declared that “our wealth is disappearing” due to the needs of a group he specifies as “bondholders”. The article states: “Gradually the story (of the financial crisis) became less about the banks owing us money and more about owing the bond holders.” The piece is like a party of straw men all competing for the honour of who can be most misleading.

But to a non-specialist, Mr. Malone's article may seem plausible and the detail he introduces through the second half of the story would make many readers believe this is a man in charge of his brief. (Several comments underneath the article demand more from Mr. Malone.) However, to someone with knowledge of political economy and finance the article is a shambles, full of mixed-up ideas and ill-judged accusations, as well as basic errors. Mr. Malone’s central charge, that bondholders are being protected while the public have to pay for debt write-offs, is simply untrue in most senses of the words.

In the most advanced case of a eurozone bailout, the Irish government has successfully forced losses of up to 90% on lower-ranking bondholders. Meanwhile, it has been able to protect the state’s holding in the “equity” (or shares / ownership) of the banks, which theoretically should have taken losses before the bonds.

Meanwhile, the situation with regard to Greece is that there is a long argument going on between many different actors, with many different incentives, to work out who will take losses, and how much these should be. The idea that bondholders won’t take losses on Greek debt hasn’t been the case for weeks, if not months.

On the other side of the equation – that the public are being unfairly singled out – this also doesn’t stand up to scrutiny. Mr. Malone’s accusation is: “Public debt … at the insistence of the same banks and bond holders we have bailed out, is being paid down at breakneck speed, no matter what the cost in unemployment and the destruction of social services.”

Like others Mr. Malone here confuses debt and deficit. The UK government’s actual focus is on reducing the deficit – the amount more it spends than its income – rather than its absolute level of debt. Indeed, debt levels in the UK will rise in the next few years, as will state spending. The arguments over the last year have all been about the rate at which this debt level will rise, not about cutting it.

Given this level of ignorance, it almost feels unfair to focus on Mr. Malone’s writing. Clearly he doesn’t know a great deal about the subject that he writes, so why bother so clearly demonstrating it? Surely this is a hammer to crack a nut.

Unfortunately, and as seen with the plagiarist Johann Hari, people that don’t know anything and can’t reliably report facts regularly make it to the top of the British commentariat. Ignorance is no barrier to success, even in apparently technical fields. All it takes is to have views in line with the newspaper’s own prejudices and a talent for self-promotion.

Tuesday, 28 June 2011

Hari and me

A long time ago - around 11 years now - Johann Hari wrote his first article for a big London paper, a front page splash in the New Statesman. It was rubbish and I wrote a response to it but it was rejected, I was told, because the Statesman doesn't publish articles critical of its own work.

Hari's article was a dull prediction that drugs would be legalised in 10 years' time. It was a typical post-student 'radical' article that could have been written at any point in the previous 40 years using the same arguments and ideas. Indeed, given today's Twitter storm about Hari plagarising others' interviews, maybe he did lift those articles.

I have avoided much of Hari's output since because he represented the type of journalist I dislike: a preference for controversial views over facts and a willingness to exaggerate reality to fit an argument. Moreover, he appears to have no background of reporting, only trying to win arguments.

The #interviewsbyhari trend on Twitter today was a belated lesson for this junior-level hack. It was also very funny. And he's now famous in the US! (For all the wrong reasons.)

Today, Independent editor Simon Kelner defended his columnist stating that no-one had ever made a complaint about Hari's writing. That's hardly the point and he knows it - no journalist can state they did something when they actually didn't. Hari's own initial defence reads very weak.

Interestingly, the last time I read an article by Hari I was compelled to respond. That response is here with details of what he got wrong. I was saddened but not surprised that Hari continued to abuse facts in his articles to suit his own arguments. I was particularly saddened that no-one in the London media was willing to point out that Hari was simply a bad journalist.

Hari is set to defend himself in The Independent tomorrow. Let's hope he sticks to the facts. For once.

Updated to add: Hari attempts to defend himself here. It's so bad it's steaming. Lesson one in journalism school is that a story that's a bit wrong is completely wrong. That Hari doesn't know this suggests he needs to start again from scratch, or leave the business. That his editor has again stood by him and claimed the criticisms are 'political' only reflects badly on The Independent; it was a big and wrong call.

Monday, 30 May 2011

When will UK Uncut flash mob The Guardian?

The tone of my last two blog entries provoked some comment, both on- and off-line, along the lines that my arguments might be more effective if they were more evidence-based and less emotionally charged. Maybe so.

However, I'm a sensitive soul and sometimes find it difficult to be relaxed when I read non-factual material dressed up as news. Unlike some others, it’s the output of the broadsheet newspapers that I find most difficult to accept, as I assume – maybe incorrectly – that the impact of tabloid nonsense is well understood (though not appropriately insulated from the policymaking process).

What gets me is not just the broadsheet newspapers’ air of superiority, though this is certainly the case, nor that such a large proportion of their material is untrue, which is also the case, but that the organisations printing this stuff don't believe what they write.

Indeed, there seems to be an inverted rule at play, where the more scandalised a newspaper is over a particular moral outrage, the more likely it is the same newspaper actually commits the same offence.

And again we expect this kind of stuff from the red-tops and other tabloids. For instance, Jonathan Rothermere, chairman of Daily Mail publisher Associated Newspapers is a 'non dom', helping him limit how much tax he pays in the UK, though this does not stop the newspaper from running politically convenient sneers at others benefiting from the same break. Or The Sun mounting a campaign against politicians for being soft on crime while for decades employing a convicted killer as one of its leading reporters.

But the broadsheets apply exactly the same double standards. And so we must be thankful for Private Eye, that curiously relevant and irreverent fortnightly magazine. For without it, and specifically its Street of Shame pages, newspapers would be able to carry on printing their nonsense without anyone knowing just how large the gap is between their words and deeds.

This week's Street of Shame has a particular focus on The Guardian, and for good reason. The Guardian is undoubtedly the winner in the hypocrisy takes. Private Eye's trio of Guardian stories this week leads with a tale of debt and private equity, revealing that despite The Guardian's apparent outrage at the behaviour of private equity firms and the immorality of investment bankers and excessive debt, Guardian owner GMG has been up to all the same tricks. And some.

The story starts in 2008 when GMG decided to sell just under half its shares in Trader Media (publisher of Auto Trader) to private equity firm Apax Partners. As part of the deal, Trader Media was loaded up with £835 million of debt in what's known as a 'leveraged buyout'. As The Guardian financial editor Nils Pratley pointed out just a couple of weeks ago, in the "wonderful world of the leveraged buyout", companies loaded up with debt can cut the amount of corporation tax they need to pay

You should be able to guess what's coming next. As part of the 2008 deal to sell the Trader Media stake to Apax, the Guardian did some extensive financial engineering. Ownership of Guardian assets was transferred out of the charitable Scott Trust and instead shifted into a new private company, Scott Trust Ltd. This helped the newspaper's owners to avoid paying tax on the profits of the sale of the stake, allowing it to report profits of £306 million but for that year pay absolutely no corporation tax. (Indeed, that year they received a tax payout from the government.)

It gets worse.

In recent months GMG and Apax had looked at selling Trader Media completely, but it appears they could not get the price (two billion pounds) they wanted. So instead they decided to borrow a further £200 million against Trader Media expressly to pay themselves a special dividend.

Mr. Pratley wrote last year: "If the coalition really wanted to reverse the trend towards short-term thinking it would change the rules on the tax-deductibility of interest since the current rules encourage companies to load up with debt to reduce their tax bills … and seek instant gratification and popularity in the form of special dividends."

Guardian Economics Editor Larry Elliott, who has written a whole book about the failures of corporate debt and bankers, chipped in recently with: "The cult of private equity suggested that any business could produce bumper returns if loaded with a ton of upfront debt while management sweated its assets." This is the same Larry Elliott, director of the Scott Trust, which oversaw the Trader Media leveraged buyout deal.

So, on the one hand Guardian owner GMG has loaded up a firm with debt to pay itself a dividend and limit its corporate tax, and on the other Guardian writers queue up to condemn private equity firms for, er, loading up firms with debt to pay themselves a dividend and limit their corporate tax.
In Sunday's Observer-Guardian 'investigation' into the failures of private equity and debt, a TUC spokesperson was quoted as saying: "It sounds a depressing, familiar scenario, where a company is bought by private equity firms and essentially loaded with debt. What too often follows is year after year of value extraction."

Given the recent waves of redundancies at the Guardian, massive executive pay and plans to increase the “partnership” between the newspaper’s corporate and editorial arms, one wonders who these increasingly hysteric stories about private equity, debt and tax avoidance should really be directed at.

Newspaper, heal thyself!

Wednesday, 18 May 2011

Drowning in stupid

One definition of stupid is having very strong views about a subject that you do not understand. Like a mob attacking the house of a paediatrician, or Microsoft launching a social networking site.

In my life, the primary exponent of stupid is the British newspaper. Like that other factory for idiocy, Big Brother, these brightly-coloured comics of made-up-stuff are funny to watch for a bit but after a while become really quite annoying. With politicians you can tell when they are lying by when they move their mouths, with newspapers you can tell they are bullshitting when they print an edition.

Some of the newspapers make it pretty clear that they are talking shit. Like a tree frog in the Amazon, they carry warning colours to alert you of the danger. If you see red at the top, you know not to take seriously anything written inside. But not all are so clear; the real danger comes from those newspapers that give the appearance of not being stupid, while still churning out crap like a sewerage farm on overdrive.

The easiest way to test this is to look at what the newspapers have to say about an area you know about. My area of professional expertise is debt and restructuring; I have plenty of material to wade through.

Take this article from the Telegraph, “Alliance Boots will have to refinance debt in a very different world”. Given that it’s written by City Editor Richard Fletcher we should be able to trust what it says. However, as it turns out I’ve listened to more convincing dogs than the claims in Mr. Fletcher’s article.

The main thrust of the piece is that Boots will struggle to refinance its debts as they come due for repayment in a few years’ time. Mr. Fletcher warns that “unless debt markets improve dramatically” the company is likely to be left 1 billion euros short when it seeks to refinance its debt. However, this is imaginary; no-one in the debt markets would agree with this. Yes, they would recognise that Boots has a lot of debt, but they would start by pointing to the large number of other companies who have been able to refinance debts, particularly in recent months, that have been in a much worse state. Even Gala Coral, which was forced to restructure (ie not repay) much of its debt just last year, just borrowed a load more cash from banks and bondholders.

Over in the Guardian, economics editor Larry Elliott declares that Greece is certain to be the next Lehman Brothers, and this will have the same impact on the wider world, if not more. But it says much about Mr. Elliott that he can’t (won't?) tell the difference between a massive investment bank collapsing overnight at the height of the credit panic and the slow-paced, well-signalled (but bloody difficult) reordering of a country’s debt. Mr. Elliott claims the comparison is valid because of “the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt”. But that’s not good enough. On these terms, pretty much everything in the financial world for all time could be “the next Lehman Brothers”. It’s the equivalent of saying “stuff”.

And given that the headline, sub-headline and opening two paras are so catastrophically loose, it’s hard to take the rest of Mr. Elliott’s article particularly seriously. And maybe it is not a coincidence that the only journalist at the Guardian who understood debt and restructuring left the newspaper a few months ago and has not been replaced.

Sometimes I wonder if this is some kind of project to see how much stupid can be injected into the body politic. Certainly it is insidious, this creeping nonsense. And influential. Who do you think attention-seeking politicians listen to? Newspapers with readerships of millions, or experts with less sensationalist views? (This may explain why when they arrive in government, politicians change their tune so much.)

So, what to do? How do you avoid stupid? How do you find where the jewels are in amongst the crap? Or do we have to accept that the British newspapers are generally rubbish and turn to other sources for information? I don't know the answers to these questions but as someone who works in information I can share some of the solutions that I have come up with. First up: assume newspapers are written by idiots who are repeating verbatim the last thing they heard.

Thursday, 5 May 2011

The Shit Sandwich

The most successful Prime Ministers of recent times, Margaret Thatcher and Tony Blair, were often able to convince voters of the necessity of making difficult choices. For Mrs. Thatcher, TINA – there is no alternative – was her ally, while Tony Blair preferred instead an open recognition of how it was sometimes important to take unpopular decisions.

Since taking power a year ago, Britain’s coalition government has tried to take a similar position. The country’s structural deficit, rising debt and recent financial crisis meant the Conservative-led government came to power full of doom-mongering about the UK’s solvency. Building up the drama, the government staged an ‘emergency budget’ shortly after taking office, and allowed talk of an ‘austerity budget’ to enter the media debate. The junior partners in the coalition, the Liberal Democrats, publicly allowed themselves to be convinced of the need for drastic cuts, rowing back on positions they had campaigned on just weeks before.

In the fourth series of The Wire, Baltimore’s Mayor Carcetti, faces a similar situation. An unexpected shortfall in his education budget forces him to reverse his reformist spending pledges. Reflecting the language of Baltimore, the mayor finds he has a shit sandwich to deal with.

There are two distinctive features of the shit sandwich. The first is that it must be eaten. Like a hospital pass in rugby, the shit sandwich is a terrible thing to receive, but impossible to pass on. Someone’s going to have to take a bite. The second feature is that no matter how much bread there is, it’s still a shit sandwich.

Faced with such an unappetising menu on coming to power, and hardly over-endowed with intelligence (this is a team that regarded a former News of the World editor as an intellectual powerhouse), it is hardly surprising the new government allowed itself to overstate the unpleasantness of its situation. Moreover, not put off by their own exceedingly comfortable backgrounds and circumstances, they thinly claimed that they were “doing this for us”. Thanks guys! Unsurprising was the lack of gratitude from the populace, though many of them were more used to being stuffed by the big fat state lying back on a sea of easy money.

Given how gullible many people are financially (have you ever spoken with a retail bank’s personal advisor? It’s like being patronised by Jedward.), it is hardly surprising that a significant proportion of the public rejected out of hand the concept it was necessary to cut state spending when there was less money.

Predictably, those with most to lose and the best organisation, the trade unions who are concentrated in the public sector, led the campaign. They were followed by their political allies in the Labour Party, seeking a popular cause after being thrown out of office and relegated to third place in the May poll.

Disappointingly, these groups decided that the best course of action was simply to deny the existence of the shit sandwich. Or, if they led the Labour Party, claim they know it exists but declare that those who believe it doesn’t exist are heroes. No, it made no sense to anyone else. 

Moreover, if you write for the Guardian, or are the shadow chancellor, you now must believe that if such a dish were to exist it can be magicked away via the means of Keynes, where increased state spending will clear away any unpleasantness through faster economic growth and higher government revenue. That such increased state spending would be entirely dependent on borrowing yet more from bondholders, who have – via their proxies in the rating agencies – made it clear there is a puke point after which they will not lend, is so inconvenient as to be portrayed as irrelevant.

But while one side of the debate is in denial, the other side is in crisis. Unlike 1997, when Labour came into power with a rigid professionalism, this new government crash-landed into power and have looked ill at ease ever since. Though accused of ruthlessly executing an extremist ideology by their leftist critics, it has always seemed more likely that incompetence and incoherence would be more likely to trip them up. A sign of their uselessness came at the start of the year, when they failed to sell off a few commercial pine forests after having no answer to a press release circulated by a weeks-old leftwing campaign group. The AV referendum, meanwhile, has been a thorough disaster for the current crop of Liberal Democrats, who risk being remembered by history as simply a stupid bunch of fuckwits, outmanoeuvred by a babyfaced PR man with a small brain and a large wallet.

But what of the shit sandwich? Though the government may be less trustworthy than Paul Gascoigne conducting brain surgery with a can of Stella just beyond reach, and as likely to do the right thing as Lee from Blue judging a fraud trial for a bit of a laugh, it does not follow that there is no looming solvency issue for the British state. As the latins would say, that’s something of a non sequitur. Looking ahead, it remains to be seen if the incompetents in government will stick to their task, and keep munching, or fall apart as their rank incompetence defeats them all. If so, would an election then propel the deniers-in-chief back to power? Whatever – I seem to have lost my appetite.

Wednesday, 13 April 2011

Sailing on the pool of liquidity

During the credit boom, financiers regularly talked of ‘special purpose vehicles’ for their operations and so I started to wonder what kind of vehicles these would be. In my imagination, they quickly became ships sailing on the seas of liquidity, transporting wares over time and space.

So attractive was this idea that it quickly grew details. Suddenly, the ships had a crew – the company directors – and there became ports where these ships would sail to and from. Obviously the biggest port was the City of London, which, just as in times of Imperial Britain, was the hub of international trade. Every day vast numbers of ships from all across Europe, the Middle East and further afield would dock and unload their financial goods, ready to then be repackaged and put on ships sailing elsewhere.

And there were treacherous seas. Ever-changing, the seas of liquidity would in places be broad and deep while at others deceptive and shallow. Ship-ripping rocks were an ever-present menace, appearing to cluster around certain places and times. If a heavily-loaded ship were to sail through a patch of limited liquidity, then its end could be sudden and disastrous. Only a few sailors had the knowledge and experience to know where and when was best to sail, but not all shipowners were wise, or wanted to hear the message of experience.

In port, the loading and unloading of the ships was watched by the regulators. Few of the regulators had ever been to sea, and the sailors did not think much of their ability. However, often the regulators and the ship owners would end up drinking in the same pubs in the ports, and while there, telling tales, the regulators could often be persuaded to see the others' point of view.


So what would these ships carry? Over the years, trends came and went, different ports handled different goods. Over the years, the Chinese ports sent out increasing amounts of goods, especially manufactures. In London and New York, the amount and complexity of financial goods grew and grew. Each load was ever more valuable. Incentives increased to load up each ship with more and more.

A rising tide lifts all boats, they say, and in credit world the same rule applies. So when the central banks began pouring in liquidity to the seas after 9/11 all the boats began to rise. Liquidity came from lower interest rates, pushing down the cost of debt and so lowering the price of risk. This was bolstered by banks and investment funds, seemingly free from restrictions to generate new debt-based products, with each iteration leading to greater liquidity.

By 2005, this was sufficient for the shipowners to declare they were almost drowning in liquidity. For the ships, this meant the risks of overloading grew smaller and smaller. Default (sinking) rates fell and the risks taken by ship owners increased. As each overloaded ship returned safely to port, this encouraged the next ship to be loaded up yet further. And the regulators? They had been persuaded that what was good for the shipowners was good for the port. The shipowners had invested in a range of complex measures to assess their risks, and paid rating agencies for their opinion of them. The regulators believed that the shipowners’ actions had helped stop ships from sinking. However, they rarely looked out to sea, but if they had they would have seen levels higher than ever before.


All good things must come to an end. But before it ends, there must be a final orgy of activity. This took place in the second quarter of 2007. Liquidity became so deep that shipowners started to believe they could do anything. The most elaborate structures set sail on the sea with no consequences. But then the consequences began. This started innocuously, a couple of small boats overturned loaded with goods few people knew about. However, by August the rumours grew. Throughout the month, the shipowners' newspaper had trumpeted “crisis” on the front page every day.

People grew worried. They looked out to sea and noticed the levels, though high, were dropping. And each time they looked, the lower the sea became. Suddenly, all those ships at sea were at risk. The atmosphere in the ports grew ever more fearful. By the turn of the year, the situation looked grave. Liquidity continued to slide away. Everyone had become sucked in to the chase of landing just one more load; one shipowner noted that 'if the music is playing, you've got to keep dancing'. But the music was ending, liquidity was ebbing away. Ships overloaded with complexity and risk were left to battle their way back to port. By the middle of 2008, like a pool of rainwater left long in the African desert, there was no liquidity at all.

Monday, 11 April 2011


Last week I wrote a short piece about the two different styles of political economy writers. I noted that they can take a cautious approach, or be more bombastic and forthright. On reading this, a friend noted this was a quite a difficult distinction to draw, and it was “a bit subtle”.

As this person has an interest in science, I got to thinking that a better word for someone taking the latter approach is often “crank”. In the world of science and medicine, cranks routinely emerge but are usually (sometimes after a period of time) pushed out of normal discourse. If cranks do get taken seriously, and cause harm, then there are a number of institutional mechanisms to eradicate their influence and there is an effort to correct mistakes.

The recent case of Andrew Wakefield and the MMR scare is a good example of this. Mr. Wakefield’s views were, for media-related reasons, taken seriously for a while until eventually he was exposed as a crank. In 2010 he was struck off by the General Medical Council.

Another was the example of Simon Winchester, a science writer. Mr. Winchester wrote an article for Newsweek on 13 March claiming that “The Scariest Earthquake is Yet to Come”. It didn’t take long for geologists to reject Mr. Winchester’s claims, and though his “bogus claim” was picked up by many news sources in the US, punch in “Simon Winchester” and “bogus” to Google and you can see the world of science fighting back.

Politics and finance does not have the same process.  Indeed, often the most sensationalist ideas get picked up while the accurate ones are ignored. The list of cranks writing about political economy, particularly after the financial crash, is long, and many get a lot of attention. However, there is no mechanism or culture of correcting mistakes. People with silly views of the world usually remain uncorrected.

One of the most forthright of these is Johann Hari, the Independent columnist. Here’s an example of what he does. He wrote a story for the Huffington Post in December declaring: “The Banks Have Not Been Reregulated by Our Corrupt Politicians. So Get Ready for the Next Crash”. There was little in the story that was accurate, neither in his general assertions or the details provided.

As an example, to justify the claim that “the banks have not been reregulated”, he said that: “Most economists believe the banks need to hold capital reserves of 30 percent to protect against another crash. The new rules say they have to hold 3 percent, by 2019, if you wouldn't mind awfully.”

Neither of these claims are any way near true. “Most economists” wouldn’t claim a 30% capital ratio to be desirable, and even the article he links as a source doesn’t say this (“equity requirements need to be very much higher, perhaps as high as 20 or 30 per cent”) and he’s the only writer I’ve seen suggesting such a high number. His second point about the “new rules” refers to Basel III, which states that banks have to hold 7% by 2019 not 3%. (As an FYI, today’s ICB report on UK banking says the figure for retail banks should be 10%.)

I wrote to Mr. Hari asking him if he could point me towards his sources for these claims. I didn’t get a response. The article was widely republished and remains on his website, uncorrected (September 2011 update: the article has been removed from his website between July and September 2011). General readers will never realise that the article was misleading and its key facts were wrong.

Friday, 8 April 2011

The Puke Point

What, my wife asked, knowing that sometimes I need an outlet to talk debt, is going on in Portugal? What is this mess they’ve got into?

Earlier that day Portugal’s caretaker Prime Minister had given into the inevitable and started talks with the European Union on a bail-out financing. Reports suggest the country needs financial support of 70 – 90 billion euros.

It’s a tough situation for a country that’s seen several years of hard times. There’s been years of deficits, recession, a failed austerity budget and then, pushing it over the edge, the parliament refused to pass a second austerity budget, triggering Prime Minister Socrates to stand down and call new elections, due 5 June.

The Prime Minister continued to resist help, but the final straw was the threat by Portugal’s biggest banks to stop buying government bonds. They had reached the puke point, where bond buyers lose their appetite to buy debt. On Monday, Portugal held its (semi-regular) auction to sell government bonds and had to pay 5.1% on six-month debt and 5.9% on 12-month debt – far higher than the country can afford over the long-term, and would have to rise further if the Portuguese banks made good on their threat.

And governments cannot choose to ignore the debt markets. Auctions of debt are routine for all large economies, and the results are made public. And in between these auctions there are a variety of ways (primarily secondary trading and CDS) that indicate market appetite pretty much in real time.

For Greece, bond auctions in the first months of 2010 indicated that lenders had grown queasy of buying Greek government debt; the puke point was not far away. By March, Greece had agreed a rescue package from the international authorities.

Last September, the Irish government decided to cancel all planned bond auctions, seeking to shy away from bondholders’ unpleasant message. However, CDS levels rose through October and ended up indicating Ireland would have to pay in excess of 7% to borrow. By November, Ireland had begun bailout talks.

There are differences between Ireland, Portugal and Greece. In Ireland, the government made a rash decision in 2008 to offer a blanket guarantee to the country’s banks. (In hindsight, this was one of the most expensive decisions ever taken by a small country.) By contrast, banks in Greece and Portugal are not in need of a bailout, and in many circumstances are held back by the weakness of the sovereign state’s credit rating.

In Greece and Portugal, but not in Ireland, the banks have traditionally bought a high proportion of the government’s debt. By doing so, governments were given an easy source of funding, but these banks tended to be owned by the state and acting in the interests of the state, so have been stuffed with low-priced – uneconomic – bonds. They had no puke point; the taxpayer would ultimately pay for their largesse through regular banking collapses and financial crises.

Since joining the euro, these countries have been able to reduce their dependence on their domestic banks, finding instead foreign bond investors more than willing to lend. These investors believed that Europe’s periphery offered a ‘convergence play’ – ie that the poorer countries of Europe were on a journey that would see them end up with similar credit profiles to that of the richest, but in the meantime they would pay higher interest rates than countries such as Germany and the UK. Investors’ largesse combined with poor governance, and Greece saw its sovereign debt balloon to more than 290 billion euros, most of it held by foreigners.

So that’s Portugal, Greece and Ireland dealt with, is there anything here that’s relevant to the UK? Only today The Guardian splashed its front page with attacks on Chancellor George Osborne ("desperate ... scaremongering" according to Shadow Chancellor Ed Balls). Critics of austerity at the leftist blog Liberal Conspiracy took Osborne to task. Here is one of the better-informed critics today:

“Tough austerity is a self-defeating strategy.

Several commentators have been quick to point out that Portugal, Ireland and Greece had ‘no choice’ but to adopt these policies. Now whilst there is always a choice, I fully accept that in each of those cases membership of the Euro, the maturity profile of outstanding debt that needed to be refinanced and loss of confidence from the bond markets forced the government’s hand.

But this doesn’t change the fact that austerity isn’t work and is unlikely to work.”

According to this commentator, who at least seems to know the difference between debt and deficits,

“The key difference between Britain and the Euro-Periphery is that Britain certainly does have a clear choice – we have the longest debt maturity in the developed world, the markets are prepared to lend to us at near record lows (and have been for over two years – not just since the emergency budget), our debt/GDP ratio is comparatively low. Whatever the scare-mongers say, Britain was nowhere near the brink of bankruptcy.”

This is a  curious and elusive use of phrasing, concepts and numbers. It is true that Britain was not near bankruptcy, as David Cameron once (in 2009) unwisely claimed. It was untrue then and it’s untrue now. And, yes, the UK has stretched its debt maturity (as have other developed world countries) for the last couple of years, taking advantage of continued investor appetite for UK debt.

So, nothing to worry about then?

Well, not really. What’s noticeable about Mr. Weldon’s peon to the UK’s creditworthiness is that he doesn’t mention the main group of people concerned about the UK’s debt: the credit rating agencies. And these have issued frequent warnings about the UK’s debt position. As noted below, one of these, Moody’s, said last month that the UK’s Aaa rating remained at risk, and explicitly praised Osborne’s plans to cut the deficit.

Until now, the UK has seen its debt climb at a dizzying pace but has maintained investor confidence. The puke point appears some way away. However, and as the Moody’s report makes clear, this confidence is substantially connected to the government’s determination to reduce the deficit. Investors have seen the UK as a safe haven, but there is no law that says this will always remain the case.

If there is one thing we should have learnt from the financial crisis is that high debt levels mean investor confidence can be lost almost overnight. The puke point is never far away. The complacency of the anti-austerity critics, and this includes the Labour opposition, seems breathtaking in this regard. The difference between Portugal and the UK is that investors in Portugal reached their puke point; given the UK’s high level of debt there is no reason to suggest the same could not happen to the UK.

Addendum: the only way that the UK could be sure of continuing to borrow without a care for investor confidence would be turn the clock back and stuff state-linked banks (such as RBS) with government debt. Though such cronyism has long since been banned by Europe, it is one logical extension of the arguments made by the anti-austerity brigade.

Wednesday, 6 April 2011

Number Crunching

£10 million: Amount of tax UK Uncut accuses Associated British Foods, which partly shares ownership with Fortnum & Mason, of avoiding and used as justification for the store's occupation on 26 March.

£60 million: Amount of tax The Guardian's owner, Guardian Media Group, has been accused of avoiding as part of its 2008 deal to sell a stake in Trader Media.

GMG paid no corporation tax in the 2008/2009 financial year, for which it reported profits in excess of £300 million. “The Board (of GMG) ... believes that it has a commercial responsibility to manage the Group’s affairs in a tax efficient manner within those rules as well as to manage the Group’s exposure to tax.” The Guardian has described its tax affairs, which included the establishment of a Cayman Islands subsidiary, as “not abnormal”.

Since 2007, the Guardian has run an investigation to expose how “large corporations are creating elaborate structures to move profits through subsidiaries to offshore centres such as the Cayman Islands, Bermuda and the British Virgin Islands, to avoid handing money over to tax collectors in the countries where their goods are produced”.

Sunday, 3 April 2011

Seek and ye shall find

There are two ways to write political economy. One is to be the intrepid explorer, seeking out the truth and constantly revising opinions along the way. Each new mountain of understanding reveals a fresh vista from which to understand the world. Such a writer must know much about what he does not know; changing conclusions becomes a habit, modesty and an aversion to certainty become key characteristics.

The other approach is the seeker of a distinct truth that lies buried at a known point in the jungle. The style of such a writer is to march in a straight line from here to there, scorching the earth, proving all the way why that journey is correct, and leading inexorably to the predetermined destination. Habits of such writers include certainty from the opening page, declarations of others' weaknesses and failings, as well as claims that their work reveals some secret but vital truth about the world.

In our opinion-soaked age, telling the difference between the two is of vital importance.

Friday, 1 April 2011

Where's the fool?

To mark April Fool’s day, the UK media have a charming habit of publishing plausible yet false stories to entertain their readers. The Guardian, splendidly, once published a guide to the island of Sans Serriffe. However, to my critical eye it’s not just April 1st when it seems difficult to distinguish between fact and fiction. And it’s not just the silly stuff.

Take The Guardian’s recent story on whether the UK can pay its debts - “UK risks losing top AAA credit rating if growth is lower than predicted”. The maintenance of the country’s AAA credit rating is a key economic objective of the present government, and so the story is of significance.

The newspaper’s headline is reflected in the opening of the story, and there is a quote high up the story from Moody’s in support of the opening section of the story (the ‘lede’).

However, the headline of the report was actually: “UK Budget: Continued Commitment to Fiscal Consolidation Critical to Aaa Rating”. ‘Fiscal consolidation’ broadly means cutting deficits - where the government spends more than it receives in tax.

Here’s some meat from the Moody’s report: “The two key drivers of the future evolution of the United Kingdom's credit risk profile are likely to be economic growth and fiscal consolidation. Although the government faces challenges in both areas, the budget announcement on 23 March 2011 indicates that the UK has the willingness to meet these challenges. This conclusion is based on the government's plans to achieve a cyclically adjusted current balance by the 2015-2016 fiscal year, or even earlier, despite the recent deterioration in the near-term economic growth outlook.” (Emphasis added.)

However, this doesn’t fit the centre-left / Guardian narrative about the economy, which is that government’s cutting plans are excessive and will mean the UK economy will stop growing. So, the story effectively hides the fact that Moody’s explicitly praised Osborne’s budget, and specifically his plan to cut the deficit in full by 2015-16, by burying it in paragraph eight (of 10). To get to the truth, readers must first wade through references to Osborne’s over-optimistic growth forecasts, the threat this causes to the Aaa rating and the (spurious) assertion that the Moody’s report directly led to a (tiny) drop in the value of the pound.

Ultimately, the story is misleading, because even the most determined and well-informed reader would have struggled to realise that Moody’s believes it “critical” that the government focuses on cutting the deficit, while the issue of growth is important but of secondary significance.

Wednesday, 30 March 2011

Two risks, two gambles

Looking ahead, there are no easy options for the UK economy. The present government is accused by the TUC and the opposition Labour Party of taking a gamble with the economy by making excessively deep cuts. They have a point. Substantial amounts of money are being withdrawn from the economy at a time when there is little growth and fragile confidence.

However, the plan espoused by these critics is a gamble also. Their gamble is that the government will be able to borrow more from bondholders and that this extra debt will be effective in kick-starting the economy, or at least protect it from recession. The government’s plans will still see debt rising, just not by as much as under the “Plan B” espoused by the opposition.

The government says borrowing more risks the UK’s credit rating, and at worst its solvency. They have a point: ahead of last year’s election all the bond credit rating agencies flagged up the risk of the amount of debt carried by the UK. It was clear that the UK’s prized AAA rating was under threat. And in a rather under-reported story, following the budget rating agency Moody’s said the UK’s AAA rating remained at risk.

So there are two gambles on the table for the UK, one based on the state taking on more debt, the other based on not taking on more debt. In the wake of the biggest debt crisis of anyone’s lifetime, and continuing solvency issues in many European governments, it is not so surprising the government has opted not to tap its credit card any further.

Monday, 19 July 2010

Financial journalists should take responsibility too

In our information-soaked age, it is shocking to see how little our newspapers know of money. Though newspapers are hardly advertisements for financial acumen, as they lose both money and readers at a quite astonishing rate, but one would have thought that finance was one area of our newspapers immune from the distractions of celebrity culture and sensationalist reporting. Surely, money would be too important to trivialise and people wouldn’t make mistakes over simple numbers.

A general reader glancing through The Financial Times - the high point of London’s financial journalism - would be forgiven for thinking that readers of the finance pages are treated with a certain respect. It might be not be very entertaining, but it looks pretty solid, what with lots of numbers and graphs, and clever-looking men staring out from columns full of weighty-sounding economics talk.

But it was out of these pages that emerged the single biggest crisis the world has seen, certainly in the last decade, maybe even the last half-century. Somewhere in those boring pages lay the causes of the biggest economic crisis since the Second World War, a crisis that came close to tipping the western world into depression and collapse, that loaded taxpayers with hundreds of billions of pounds of debt, and longer-term ramifications that are only just starting to be felt.

As a financial journalist reporting on the world of credit throughout the build-up to the crisis, I had a remarkable vantage point to understand the credit boom, and also to get a sense of what would happen if the house of cards came tumbling down. During this time I started - but never finished - a book about debt.

It is damning criticism of my business, financial journalism, that we failed to look hard at the credit boom and call it for what it was, and what it would mean. Instead, what happened, was we stood up the day after it happened and pointed to all the reasons why we knew it would have happened, and highlighted the small number of examples were we mentioned it in passing. Then a few months passed, and we forgot everything we might have learnt from the biggest disaster our industry has known in recent times, and reverted to populism.

Blame the banker was an easier game to play than the intellectually difficult, and quite worrying, truth: that ignorance was central to the crisis, that a profound and systematic intellectual failure undermined almost every one of the world’s financial and government institutions. And while it was not journalism’s fault that credit boomed, and assets bubbled, and banks tweaked structures, and governments’ took advantage, it was journalism’s responsibility to tell the world what was going on.

Saturday, 3 July 2010

What they are not telling you

There is so much going on in the world, and the well-trained journalist knows that within each event lies a thousand stories, and within those a million different articles. No-one is able to tell all those tales. As such, journalism is a flawed occupation; destined always to fail. But the mistakes are interesting, and only by understanding them can understand their impact.

Financial journalism is certainly one flawed part of this error-strewn business. Indeed, because of the importance of finance and money in our world, the failures of financial journalists have a particularly large impact, not just on their readers - misled about how to manage their finances and hence much of their lives - but also upon opinion-formers and policymakers, who introduce bad laws based on poor information.

Moreover, even professionals in the world of finance, who really should know better, can find themselves herded into decisions by journalists and newspapers who in the search for the big story often generate a climate of crisis out of nothing, or sometimes just blunder on through mistakes and misunderstandings.

This is why I instinctively reject conspiracies. Nothing in the world that I have seen has ever been as perfect, as neat, as the stories told by conspiracy theorists. The things they are not telling you are usually secret not because there is some massive conspiracy generated by an all-powerful elite. No, what they are not telling you are the things they don’t know, or don’t think you need to know, or they can’t be bothered to tell you about.

Thursday, 11 March 2010

CDS fail

People don't understand CDS. I guess that fact should be obvious - it's a relatively complex tool used by financiers to make money, sometimes in situations where others are losing out. Like short-selling, it appears to have given politicians in Europe something (anything!) to rail against and as with the short-selling ban it is unclear what the evidence there is to support the vituperative attacks. (Indeed, as time as gone by there appears to be less and less evidence that short-sellers were to blame for problems with banks.)

Here is a brief explanation of what was going on with Greece: it seems as though hedge funds sold CDS to banks to protect the banks against a possible default by Greece. More here and here and a lengthy and wide-ranging one here. The CDS became more desirable - and the price rose - as Greece found an enormous black hole in its finances, a media and political storm became whipped up, and some banks panicked. None of this stopped Greece eventually selling its bonds (to those evil foreign investors that it relies on), but neither did it stop European politicians capitalising on all this froth to try to ban an element of finance capitalism they seemed not to understand.

It is an interesting question to ask whether it matters if policy has to come from evidence. Many people seem to believe that politicians should act just because a group in society is angry, often at wide variance to the facts. This is a form of populism, and it has a long history. Unfortunately most of this long history is of making people, particularly those in identifiable minorities, sad, poorer and/or dead.

Thursday, 25 February 2010

Friday, 21 August 2009

Fooled by Randomness: David Cameron

Tory leader David Cameron does not have a big reputation for intellectual gravitas. Indeed, intellectually he's probably on a par with Blair, and that's not a great thing.

So curious it was to see Cameron share a platform with Nassem Nicolas Taleb, provocative intellectual and author of Fooled by Randomness and The Black Swan.

I hear many anecdotal stories indicating there is some truth in critics' claims that Cameron lacks solidity in his policymaking, and is prone to cherrypick inconsistently.

So it was hardly surprising that Labour -- moving back to a anti-intellectual position -- seized the opportunity of Cameron's Taleb meeting to smear one with the other.

A Guardian front page story highlighted Taleb's thought crimes ("Cameron's guru"), including his apparent denial of man-made climate change and his strong position on the need for banks to face the reality of insolvency. Larry Elliott then weighed in with his own clearly unbiased view ("economics editor" indeed!).

Here's a reasonable overview of the issue.

Columnists: creating an imaginary world

A fine piece this, about the dynamic between news and comment in tabloid newspapers.

"What the tabloid columnist usually does is act as Greek Chorus for the paper they appear in. The tabloids set the scene with their constantly repeated stories, with exagerrated figures, distorted coverage of reports that aim to invert their meaning and opinion dressed as fact - that happen to fit the targeted narratives they've created.

But these will often be flawed by the balance that must be inserted (and mostly is) with a quote toward the end, or the inclusion of actual figures that readers might spot aren't quite as scary as the paper wants them to believe they are. So here the columnist pipes up and shows the reader what their ideal reaction should be.

Want to imply that most crime is carried out by foreigners, but are hampered by the fact that they're not? A columnist doesn't worry about facts, so with a throwaway line, Richard Littlejohn can help by saying, in a complete fabrication, "Most of the robberies in this country have been carried out by Eastern European gangs."

Want to exaggerate how much immigrants get in benefits but find it difficult to get away with it in news stories because they don't get very much? Someone like Carol Malone can make the fatuous claim that they get free cars. Yes, free cars. Columnists take the false claims made in news stories that extra step to help create a version of Britain for their readers that rely even more on imagination.