Monday, 14 April 2008

Ministry of Stupidity

If it wasn’t tragic, I would think it was comic. Mr. Rodriguez (a.k.a. “Zapatero”) has decided that Spaniards require further ministerial indoctrination. We have recently been blessed with a brand new Ministry for Equality.Its role is not very clear but that is beyond the point...the fact is that we now have another chauffeur-driven, budget-wielding, incompetent politician with no significant track record of any sort beyond many years of carefree expenditure of taxpayers’ euros. The fortunate recipient of this taxpayers’ largesse is a young woman by the name of Bibiana Aído. She is only 31 years old but has already profited from many years of public larceny. Before her designation she was the “Director for the Andalucian Agency for the Development of Flamenco of the Council for Culture of the Andalusian Regional Government”, where she spent almost three meaningful and productive years. She was recently acknowledged in the press for singing the praises of Mr. Rodríguez during the recent election campaign: “Oh, Jose Luis, smile! You have a clean smile that favours you so much”. Anyway, enough said about this aspiring looter: maybe I do bear some grudge for not having achieved chauffeur-driven status after many years of work.

Let’s move on to the mission that Ms. Aído has been charged with. Ministry of Equality...hmmm. I suppose “Equality” is a concept that no-one can object to, at least on initial reflection. I suspect, however, that Mr. Rodriguez and I disagree as to what we mean by equality. As a good socialist, Mr Rodriguez and his young henchwoman Ms Aído defend equality as an enforced concept. We must all be equal: but equal to what or to whom? No doubt that Mr Rodriguez and his fan club already have a view as to their ideal “equal”. It is probably not dissimilar to the “equal” that Stalin and Hitler portrayed in their propaganda. The new socialist “super-person” of the 21st Century that we must all aspire to be. Therefore they are sure to legislate that we are must all be or act “equal”...the choice to be different, to be independent, to have free will, has to be eliminated. This socialist concept is based on the false premise that either we are all equal or that we aspire to be equal. In fact, I have news for you...we are not and we do not (at least I don’t). People have different abilities and aspirations based on genetic and environmental factors: some of us are better suited at some things than others and we have to match our aspirations to these- I would love to run 100m in less than 10secs or get a Pritzker Price in archictecture but neither speed nor technical drawing are my fortes. To legislate specifically for equality is the same as to legislate for the sun’s disappearance- idiotic and doomed to failure.

The definition of equality that I relate to is associated with the availability of opportunities/choice for all via the creation of an enviroment which encourages the elimination of entrenched privilege of all types; ie. the establishment of a society where each person can pursue their individual aspirations according to their desires and abilities, based on a minimum framework of laws. I don’t think we need a Ministry for Equality for that; in fact I don’t think we need any more ministries, thank you.

Wednesday, 2 April 2008

The "originate to default model" and its unsavoury characters

I’ve spent enough time in banks and a brief but intense stint during Enron’s twilight to understand the huge unravelling of the farce cum accident-waiting–to-happen of the current banking crisis. Commercial banking has always been regarded as the backwater of financial services until some bright investment bankers decided that they were going to turn a traditional and sleepy banking model into a money-making machine.

Historically, commercial bankers had a deep and ingrained sense of credit risk derived from the knowledge that they were investing other people’s money; usually deposits. As a result, loans were carefully monitored and handed out cautiously. Leverage was treated as a dangerous and addictive treatment and, as such, was to be administered sparingly. Assets were booked on the balance sheet and kept to maturity. If a loan went bad, the banker was undoubtedly affected. That is, until the “i- bankers” arrived and decided that through the use of debt capital markets, financial institutions could offload this exposure to unsuspecting investors. Thus the “originate to distribute” model was born...

The new operating model consisted in hiring aggressive, young and naïve bankers (akin to sales reps) whose sole role was to push money out of the door. This role was supported by a clique of product specialist whose letimotif was to distribute the rubbish that was originated to unsuspecting investors. These product specialists came in different flavours: one was the syndication specialist who usually onsold the rubbish to less sophisticated banking institutions and the other was the debt capital markets specialist who created securities backed by rubbish as collateral. Both systems created moral hazard by decoupling the credit risk from its associated rewards. Banks found they could engage in almost risk-free lending.

The process described above created a “virtuous” circle in which extremes soon started to flourish. Originators became more naïve, loan documentation became weaker, credit spreads fell lower and the borrower held all the negotiating power. The approach across banks was: “Who cares? We’re not keeping this crap anyway...” Meanwhile, borrowers had a field day, low income households went on a spending spree supported by debt secured on credit-bubble inflated assets, private equity firms added “value” through leverage, the financial services sector had a field day... and in ten years the “originate to distribute” model mutated into the “originate to default” model. Now that the loans have been originated the time has arrived for them to default. Who’s first in line? (i) Countries: Spain, USA, UK, Ireland and China as the big beneficiary of spending but also a major creditor; (ii) Sectors: Real Estate, Automobile, Infrastructure, Financial Services and any sector depending on high leverage or cheap financing.

Who are the industry characters that have flourished in this environment? I could name a few but I am sure it is not necessary. If you are in the business you will recognise them. Ego-driven, mediocre, social psychopaths, good communicators, with an unrelentless focus on short-term earnings and a lack of ethical or moral standards to constrain them; fuelled by compensation mechanisms which reward today’s income but do not penalise for disaster tomorrow. The new “masters of the universe” seem in hindsight to have been “the masters of disaster”.. Few people, including myself I’m afraid, had the courage to stand up to these bullies while the going was good. It’s high time they were let go...

For an interesting read try: