Archive for the 'UK' Category

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Chess boxing

Published on 13 October 2009 at 10:26 am in Personal, UK and Umm .. Other stuff. Tags: , , , , , .

Dani and I went to watch the European Heavyweight championship fight for chess boxing last friday.  Yes, chess boxing.  In case you don’t know it, chess boxing combines speed chess with boxing, alternating four minutes of chess with three-minute rounds of boxing.  The winner is determined by checkmate, knockout, the opposition running out of time in the chess (each competitor gets 12 minutes in total) or, in the unlikely event of no result by the end of the sixth and final chess round, by points from the five rounds of boxing.

There were three matches in the evening, but the main event was between these two freakin’ mountains of men (click on the image for the full-sized version.  My apologies for the poor image quality – I forgot the camera and was reduced to using my phone):

Chess boxing at The Dome

As you can see, during the chess rounds the competitors have earphones on (and cotton wool stuffed in their ears) to avoid distraction from the crowd and to allow a commentator to talk about the game.  The old-school board in the background was used because the projector gave up the ghost half-way through the night.

The event got coverage from The Times, The Independent and The Telegraph, although the Times correspondant (or her management?) seems to have been a little caught up with the “glistening muscles.”

We had a great time.  I was amazed at how well the guys were playing in their chess despite being repeatedly pummelled about the head.

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Note to self…

Published on 24 August 2009 at 1:25 pm in Personal, UK and Umm .. Other stuff. Tags: , .

When ordering a latte from a British caff, remember that their unit of measure for barista-applied sugar is much larger than the little packets you get at specialist coffee shops.

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The end of the London evening freesheets? (thank god)

Published on 21 August 2009 at 12:39 pm in Economics and UK. Tags: , , , , , , , , .

The Murdoch Empire ™ has decided to pull the plug on their free newspaper for the going-home-on-the-tube market, The London Paper, after making a pre-tax loss of £12.9 million in the year to June 2008.

That they’re hemorrhaging cash right now is no surprise since advertising expenditure is strongly pro-cyclical — it plummets in a recession and explodes in a boom.  To some extent, they’ve been unfortunate that the credit crisis and it’s associated advertising caution has been around for two of their three years and obviously the competition with Associated Newspapers’ London Lite won’t have helped.  Nevertheless, I’m not sure that it was ever a viable business model and frankly, even if it were, I’m glad that they’ve folded.  Ian Burrell puts it mildly when he says:

For the past three years, the sight of purple-and-mauve jacketed vendors thrusting free newspapers into the hands of office workers as they headed home from work has been a familiar feature in the capital.

“Thrusting” is the correct word to use, but I would prefix it with a few choice adverbs, “obnoxiously” being the most polite.  The vendors are seriously rude.  They make a deliberate point of blocking traffic and getting in your face.  It is genuinely infuriating — I find myself wanting to scream at them — but I know that they’re just doing what they’re told to do.

On their way home from work, nobody cares which of the free papers they read.  Since the papers themselves are desperate to get your eyeballs, the ideal economic situation would therefore be for them to pay you to choose them.  But that’s impossible on a practical level, so instead they end up forcing a non-monetary cost on everybody by slowing everyone down and annoying the hell out of people.

Since Associated Newspapers still have a 24% stake in the Evening Standard, this will probably mean the end of the afternoon freesheet (I imagine that the Metro in the morning will stick around), but even if it doesn’t, it will almost certainly mean the end of the obnoxious vendors forcing themselves on people.  They’ll just stick the London Lite in the same bins that they use for the Metro instead.  Presumably those vendors are being paid (minimum wage, I would guess) and so getting rid of them might make it narrowly profitable if there is just one afternoon freesheet.

Hallelujah.

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Playing cricket in England

Published on 17 August 2009 at 6:22 pm in Humour, Personal and UK. Tags: , , , , .

On Saturday night, just before midnight, Daniela and I were roped into playing a game of cricket on Sunday for a team of ex-pats.  Well … “roped” is the wrong word and much too unfair: we signed up with enthusiasm.  No, that’s not quite right, either. Dani gets incredibly excited by this sort of random adventure and she signed up with genuine enthusiasm.  It was inevitable at that point that I sign up as well (with Australia levelling the Ashes up in Leeds, I did have a patriotic duty to join the fray), but my enthusiasm was buoyed somewhat by the wine and had a slightly greasy patina of apprehension.  I hadn’t played a proper game since October 1992 when I was in my high school team and Dani had only played a couple of games of backyard cricket with the dog chasing the ball.  Still, we were assured that experience and ability were by no means necessary, so we agreed con gusto.

We only got to bed at 3am on Sunday (it was a big night – a friend was leaving London), but managed to wake in time to gather with the rest of the team in central London at 11:30am, coffee in hand.  To the casual eye, my whites may have looked a bit like an old pair of khakis supplemented with a borrowed white polo shirt.  Dani, of course, was resplendent in white from top to bottom.  The team we played for represents a charity and, it turns out, there are charities that offer transportation services to other charities, so we all piled into the mini-bus more usually used for carrying disabled children to be driven for an hour and a half to the interminable maze otherwise known as the Oxfordshire countryside.

We must have spent 40 minutes twisting and turning and silently swearing at the perpetually manic directions of the lady in the SatNav (“Recalculating.  After point four miles, turn left, then turn left.”).  I was sitting next to our captain – an Indian chap with an easy grin who was about to submit his Ph.D.  He alternated between trying to figure out where we were, pouring scorn on the English badminton team for pulling out of the world championships in India and declaring confidently that, as an Australian, I must be a fantastic fielder who would happily throw himself horizontal to stop a boundary.  I mumbled something about a bit of practice in the nets before the match and stared anxiously at the six-foot hedges.

redkites

We eventually found the Ipsden Cricket Club [Google Maps].  It’s a beautiful ground that backs onto a (recently harvested) wheat field and has a gigantic ash (?) tree down on the long boundary at the western end.  The pavilion even has a piece of the original floorboards of the Long Room at Lord’s.  The weather was superb, with barely a cloud and a fair breeze coming from the north west.  I guess that the temperature would have been in the mid-twenties (Celsius).  There were some Red Kites in the sky and quite a few gliders were out for the day.

A couple of the guys padded up and we took turns bowling in the nets.  I somehow managed to keep mine in the general direction of the stumps, managed a few yorkers and even clean bowled one of our batsman once.  The captain told me that I would bowl in the match and our friend that had invited us expressed some joy that he wouldn’t have to be bowler number five all on his own.  I started to pick up some confidence.  It was fun.  It was relaxed.  I didn’t suck.

The game was to be 35 overs each; we fielded first.  The Canadian on our team used to play as a catcher in baseball and became the wicket keeper.  Dani alternated between Third man and Long on, while I swapped between Point and Mid-wicket.  We had two good bowlers, two pretty-good bowlers, and me and my mate who’d invited us.  We did pretty well in the first 10 or 11 overs.  We got a couple of wickets and they weren’t scoring too quickly (maybe four per over?).  I didn’t fumble my first couple of touches of the ball and Dani was enjoying herself.

Then I missed a ball badly.  I froze, didn’t get down to it and had to run swearing after the thing only to watch it dribble over the boundary.  Not to worry, it was only one mistake and other people were occasionally missing some too.  After a couple more overs I was called up to bowl.  I was okay in my first over:  clearly nervous and not very good, but not obscenely bad either.  My second over, however, was a shambles that in hindsight I’m almost oddly proud of.  It was chaotic, occasionally dangerous to the batsman and very, very expensive.  I was “rested” after that.

My second over also roughly marked the start of our mini collapse.  Without a fifth bowler, our two decent guys had to bowl 11 or 12 overs each (the Ipsden team very kindly waived the rule requiring no more than seven overs per bowler) and they started to get tired.  I was fading mentally pretty quickly and I missed four or five balls in what turned into a pretty farcical fielding display.  I even managed to have my feet slip out from under me on one occasion.  Drinks came out after 21 overs and our captain took the time to observe that we were fielding atrociously.

By that point the batsmen had settled in nicely, though and our fielding was rarely the problem.  Boundaries, boundaries, everywhere became the order of the day.  Poor Dani had to scramble down the embankment past the boundary to hunt for the ball in the bracken on more than one occasion.  I was out at Deep cover point and Deep forward leg by then and under instruction to stay on the boundary (not walk in with the bowler).  I may not have had the reflexes for the infield, but dammit, I could run around like a mad hare as sweeper.  For the last five overs or so, I switched over to the northern side of the field and played Square leg and Deep cover.  I managed to stop the three or four balls that came to me, saving a couple of singles and a boundary, so my fielding ended, if not a high note, then at least having recovered a smidgen of self-confidence.  Ipsden managed 3 for 236 after 35 overs, with one chap on 101 not out.  It had taken three and a half hours.

Our hosts put on quite a spread for the break.  Half a dozen types of sandwiches, some chips (“crisps” to the English) and a bunch of delicious sweet tarts and teacakes filled us up mightily with endless cups of tea.  The black labrador of the club president happily wandered between us, soaking up the attention.  I reminded Dani how to hold the bat (it’s not a natural position for someone new to the game) and we both earnestly hoped that we wouldn’t need to pad up.

Dani’s and my friend opened the batting along with the captain and it shortly became clear that the race was on.  I was surprised.  Apparantly last year the Ipsden team had gotten our lot all out for only 60.  Dani and I ended up sitting and watching a fine batting display as our batters clipped along to seal the win with two balls and six wickets to spare.  One of our lads managed a fantastic century and another 74.  The sun had started to set by the end and the wind, still fresh, began to chill a little.  Jumpers, cups of tea and the dog to the rescue, we were toasty warm through to the end.

It was the last game for our captain, who on top of the win to remember was presented with a bottle of champagne and a first-edition copy of C.L.R. James’s classic, “Beyond a boundary“, by the regular members of the team.  We got back to London about 9:30pm and were home by 10.  It was an absolutely cracking day.  We really enjoyed ourselves and the team was a great bunch of guys.  It was, in many ways, the very best sort of day in England.

Now if only I weren’t so stiff the day after that I can barely walk …

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The MP expenses scandal in Britain

Published on 22 May 2009 at 12:51 pm in Media, Politics and UK. Tags: , , .

It’s both spectacular and petty.  The fraction of MPs that truly scammed the system is tiny and the scale of the claims for the most part only seems offensive in a recession.  It was started by Cameron as a political stunt, but when Torys were implicated he had to take it nuclear or look terrible.  The Speaker was culpable, yes, but he was thrown under the bus by Brown all the same.  That The Telegraph got the complete list in a leak is more of a story, to my mind.

What style of Speaker will emerge is an interesting question.  If it’s another Labour party member, it will be easy to imagine the role moving somewhat  in the direction of the Speakers of the lower houses in Australia (where the role is quite partisan) and the USA (where it is extremely partisan).  In a parliamentary democracy (Australia, UK) , that will serve to grant the executive more power over the legislature, which is a Bad Thing ™ in my books, as it reduces the ability of the opposition to contribute to the legislative process in any meaningful way.

I’ve occasionally thought that in the event of Australia becoming a republic, the president’s primary constitutional role might simply be to ensure the fair operation of the judicio-political system.  So, for example, the president – or their appointee – might be the official Speaker of the House but would not have a vote (even in the event of a tie) and could not introduce legislation.

Of course, having the monarch appoint an independent Speaker of the Commons in the UK would get MPs’ knickers in a collective knot over the sovereignty of parliament.  Another reason to be a republic.

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How to value toxic assets (part 6)

Published on 23 February 2009 at 11:04 pm in Economics, Epistemology, Finance, UK and USA. Tags: , , , , , .

Via Tyler Cowen, I am reminded (again) that I should really be reading Steve Waldman more often.  Like, all the time.  After reading John Hempton’s piece that I highlighted last time, Waldman writes, as an afterthought:

There’s another way to generate price transparency and liquidity for all the alphabet soup assets buried on bank balance sheets that would require no government lending or taxpayer risk-taking at all. Take all the ABS and CDOs and whatchamahaveyous, divvy all tranches into $100 par value claims, put all extant information about the securities on a website, give ‘em a ticker symbol, and put ‘em on an exchange. I know it’s out of fashion in a world ruined by hedge funds and 401-Ks and the unbearable orthodoxy of index investing. But I have a great deal of respect for that much maligned and nearly extinct species, the individual investor actively managing her own account. Individual investors screw up, but they are never too big to fail. When things go wrong, they take their lumps and move along. And despite everything the professionals tell you, a lot of smart and interested amateurs could build portfolios that match or beat the managers upon whose conflicted hands they have been persuaded to rely. Nothing generates a market price like a sea of independent minds making thousands of small trades, back and forth and back and forth.

I don’t really expect anybody to believe me, but I’ve been thinking something similar.

CDOs, CDOs-squared and all the rest are derrivatives that are traded over the counter; that is, they are traded entirely privately.  If bank B sells some to hedge fund Y, nobody else finds out any details of the trade or even that the trade took place.  The closest we come is that when bank B announces their quarterly accounts, we might realise that they off-loaded some assets.

On the more popularly known stock and bond markets, buyers publicly post their “bid” prices and sellers post their “ask” prices. When the prices meet, a trade occurs.[*1] Most details of the trade are then made public – the price(s), the volume, the particular details of the asset (ordinary shares in XXX, 2-year senior notes from XXX with an expiry of xx/xx/xxxx, etc) – everything except the identity of the buyer and seller. Those details then provide some information to everybody watching on how the buyer and seller value the asset. Other market players can then combine that with their own private valuations and update their own bid or ask prices accordingly. In short, the market aggregates information. [*2]

When assets are traded over the counter (OTC), each participant can only operate on their private valuation. There is no way for the market to aggregate information in that situation. Individual banks might still partially aggregate information by making a lot of trades with a lot of other institutions, since each time they trade they discover a bound on the valuation of the other party (an upper bound when you’re buying and the other party is selling, a lower bound when you’re selling and they’re buying).

To me, this is a huge failure of regulation. A market where information is not publicly and freely available is an inefficient market, and worse, one that expressly creates an incentive for market participants to confuse, conflate, bamboozle and then exploit the ignorant. Information is a true public good.

On that basis, here is my idea:

Introduce new regulation that every financial institution that wants to get support from the government must anonymously publish all details of every trade that they’re party to. The asset type, the quantity, the price, any time options on the deal, everything except the identity of the parties involved. Furthermore, the regulation would be retroactive for X months (say, two years, so that we get data that predates the crisis).  On top of that, the regulation would require that every future trade from everyone (whether they were receiving government assistance or not) would be subject to the same requirementes.  Then everything acts pretty much like the stock and bond markets.

The latest edition of The Economist has an article effectively questioning whether this is such a good idea.

[T]ransparency and liquidity are close relatives. One enemy of liquidity is “asymmetric information”. To illustrate this, look at a variation of the “Market for Lemons” identified by George Akerlof, a Nobel-prize-winning economist, in 1970. Suppose that a wine connoisseur and Joe Sixpack are haggling over the price of the 1998 Château Pétrus, which Joe recently inherited from his rich uncle. If Joe and the connoisseur only know that it is a red wine, they may strike a deal. They are equally uninformed. If vintage, region and grape are disclosed, Joe, fearing he will be taken for a ride, may refuse to sell. In financial markets, similarly, there are sophisticated and unsophisticated investors, and unless they have symmetrical information, liquidity can dry up. Unfortunately transparency may reduce liquidity. Symmetry, not the amount of information, matters.

I’m completely okay with this. Symmetric access to information and symmetric understanding of that information is the ideal. From the first paragraph and then the last paragraph :

… Not long ago the cheerleaders of opacity were the loudest. Without privacy, they argued, financial entrepreneurs would be unable to capture the full value of their trading strategies and other ingenious intellectual property. Forcing them to disclose information would impair their incentive to uncover and correct market inefficiencies, to the detriment of all …

Still, for all its difficulties, transparency is usually better than the alternative. The opaque innovations of the recent past, rather than eliminating market inefficiencies, unintentionally created systemic risks. The important point is that financial markets are not created equal: they may require different levels of disclosure. Liquidity in the stockmarket, for example, thrives on differences of opinion about the value of a firm; information fuels the debate. The money markets rely more on trust than transparency because transactions are so quick that there is little time to assess information. The problem with hedge funds is that a lack of information hinders outsiders’ ability to measure their contribution to systemic risk. A possible solution would be to impose delayed disclosure, which would allow the funds to profit from their strategies, provide data for experts to sift through, and allay fears about the legality of their activities. Transparency, like sunlight, needs to be looked at carefully.

This strikes me as being around the wrong way.  Money markets don’t rely on trust because their transactions are so fast; their transactions are so fast because they’re built on trust.  The scale of the crisis can be blamed, in no small measure, because of the breakdown in that trust.

I also do not buy the idea of opacity begetting market efficiency.  It makes no sense.  The only way that information disclosure can remove the incentive to “uncover and correct” inefficiencies in the market is if by making the information public you reduce the inefficiency.  I’m not suggesting that we force market participants to reveal what they discover before they get the chance to act on it.  I’m only suggesting that the details of their action should be public.

[*1] Okay, it’s not exactly like that, but it’s close enough.

[*2] Note that information aggregation does not necessarily imply that the Efficient Market Hypothesis (EMH), but the EMH requires information aggregation to work.

Other posts in this series:  1, 2, 3, 4, 5, [6].

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How to value toxic assets (part 5)

Published on 17 February 2009 at 3:19 pm in Economics, Epistemology, Finance, UK and USA. Tags: , , , , , .

John Hempton has an excellent post on valuing the assets on banks’ balance sheets and whether banks are solvent.  He starts with a simple summary of where we are:

We have a lot of pools of bank assets (pools of loans) which have the following properties:
  • The assets sit on the bank’s balance sheet with a value of 90 – meaning they have either being marked down to 90 (say mark to mythical market or model) or they have 10 in provisions for losses against them.
  • The same assets when they run off might actually make 75 – meaning if you run them to maturity or default the bank will – discounted at a low rate – recover 75 cents in the dollar on value.

The banks are thus under-reserved on an “held to maturity” basis. Heavily under-reserved.

He then gives another explanation (on top of the putting-Humpty-Dumpty-back-together-again idea I mentioned previously) of why the market price is so far below the value that comes out of standard asset pricing:

Before you go any further you might wonder why it is possible that loans that will recover 75 trade at 50? Well its sort of obvious – in that I said that they recover 75 if the recoveries are discounted at a low rate. If I am going to buy such a loan I probably want 15% per annum return on equity.

The loan initially yielded say 5%. If I buy it at 50 I get a running yield of 10% – but say 15% of the loans are not actually paying that yield – so my running yield is 8.5%. I will get 75-80c on them in the end – and so there is another 25cents to be made – but that will be booked with an average duration of 5 years – so another 5% per year. At 50 cents in the dollar the yield to maturity on those bad assets is about 15% even though the assets are “bought cheap”. That is not enough for a hedge fund to be really interested – though if they could borrow to buy those assets they might be fun. The only problem is that the funding to buy the assets is either unavailable or if available with nasty covenants and a high price. Essentially the 75/50 difference is an artefact of the crisis and the unavailability of funding.

The difference between the yield to maturity value of a loan and its market value is extremely wide. The difference arises because you can’t eaily borrow to fund the loans – and my yield to maturity value is measured using traditional (low) costs of funds and market values loans based on their actual cost of funds (very high because of the crisis).

The rest of Hempton’s piece speaks about various definitions of solvency, whether (US) banks meet each of those definitions and points out the vagaries of the plan recently put forward by Geithner.  It’s all well worth reading.

One of the other important bits:

Few banks would meet capital adequacy standards. Given the penalty for even appearing as if there was a chance that you would not meet capital adequacy standards is death (see WaMu and Wachovia) and this is a self-assessed exam, banks can be expected not to tell the truth.

(It was Warren Buffett who first – at least to my hearing – described financial accounts as a self-assessed exam for which the penalty for failure is death. I think he was talking about insurance companies – but the idea is the same. Truth is not expected.)

Other posts in this series:  1, 2, 3, 4, [5], 6.

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How to value toxic assets (part 4)

Published on 29 January 2009 at 1:14 am in Economics, Epistemology, Finance, UK and USA. Tags: , , , , , , , , .

Okay.  First, a correction:  There is (of course) a market for CDOs and other such derivatives at the moment.  You can sell them if you want.  It’s just that the prices that buyers are willing to pay is below what the holders of CDOs are willing to accept.

So, here are a few thoughts on estimating the underlying, or “fair,” value of a CDO:

Method 1. Standard asset pricing considers an asset’s value to be the sum of the present discounted value of all future income that it generates.  We discount future income because:

  • Inflation will mean that the money will be worth less in the future, so in terms of purchasing power, we should discount it when thinking of it in today’s terms.
  • Even if there were no inflation, if we got the money today we could invest it elsewhere, so we need to discount future income to allow for the (lost) opportunity cost if current investment options generate a higher return than what the asset is giving us.
  • Even if there were no inflation and no opportunity cost, there is a risk that we won’t receive the future money.  This is the big one when it comes to valuing CDOs and the like.
  • Even if there’s no inflation, no opportunity cost and no risk of not being paid, a positive pure rate of time preference means that we’d still prefer to get our money today.

The discounting due to the risk of non-payment is difficult to quantify because of the opacity of CDOs.  The holders of CDOs don’t know exactly which mortgages are at the base of their particular derivative structure and even if they did, they don’t know the household income of each of those borrowers.  Originally, they simply trusted the ratings agencies, believing that something labeled “AAA” would miss payment with probability p%, something “AA” with probability q% and so on.  Now that the ratings handed out have been shown to be so wildly inappropriate, investors in CDOs are being forced to come up with new numbers.  This is where Knightian Uncertainty is coming into effect:  Since even the risk is uncertain, we are in the Rumsfeldian realm of unknown unknowns.

Of course we do know some things about the risk of non-payment.  It obviously rises as the amount of equity a homeowner has falls and rises especially quickly when they are underwater (a.k.a. have negative equity (a.k.a. they owe more than the property is worth)).  It also obviously rises if there have been a lot of people laid off from their jobs recently (remember that the owner of a CDO can’t see exactly who lies at the base of the structure, so they need to think about the probability that whoever it is just lost their job).

The first of those is the point behind this idea from Chris Carroll out of NYU:  perhaps the US Fed should simply offer insurance against falls in US house prices.

The second of those will be partially addressed in the future by this policy change announced recently by the Federal Housing Finance Agency:

[E]ffective with mortgage applications taken on or after Jan. 1, 2010, Freddie Mac and Fannie Mae are required to obtain loan-level identifiers for the loan originator, loan origination company, field appraiser and supervisory appraiser … With enactment of the S.A.F.E. Mortgage Licensing Act, identifiers will now be available for each individual loan originator.

“This represents a major industry change. Requiring identifiers allows the Enterprises to identify loan originators and appraisers at the loan-level, and to monitor performance and trends of their loans,” said Lockhart [, director of the FHFA].

It’s only for things bought by Fannie and Freddie and it’s only for future loans, but hopefully this will help eventually.

Method 2. The value of different assets will often necessarily covary.  As a absurdly simple example, the values of the AAA-rated and A-rated tranches of a CDO offering must provide upper and lower bounds on the value of the corresponding AA-rated tranche.  Statistical estimation techniques might therefore be used to infer an asset’s value.  This is the work of quantitative analysts, or ”quants.”

Of course, this sort of analysis will suffer as the quality of the inputs falls, so if some CDOs have been valued by looking at other CDOs and none of them are currently trading (or the prices of those trades are different to the true values), then the value of this analysis correspondingly falls.

Method 3. Borrowing from Michael Pomerleano’s comment in rely to Christopher Carroll’s piece, one extreme method of valuing CDOs is to ask at what price a distressed debt (a.k.a. vulture) fund would be willing to buy them at with the intention of merging all the CDOs and other MBSs for a given mortgage pool so that they could then renegotiate the debt with the underlying borrowers (the people who took out the mortgages in the first place).  This is, in essense, a job of putting Humpty Dumpty back together again.  Gathering all the CDOs and other MBSs for a given pool of mortgage assets will take time.  Identifying precisely those mortgage assets will also take time.  There will be sizable legal costs.  Some holders of the lower-rated CDOs may also refuse to sell if they realise what’s happening, hoping to draw out some rent extraction from the fund.  The price that the vulture fund would offer on even the “highly” rated CDOs would therefore be very low in order to ensure that they made a profit.

It would appear that banks and other holders of CDOs and the like are using some combination of methods one and two to value their assets, while the bid-prices being offered by buyers are being set by the logic of something like method three.  Presumably then, if we knew the banks’ private valuations, we might regard the difference between them and the market prices as the value of the uncertainty.

Other posts in this series:  1, 2, 3, [4], 5, 6.

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One of the challenges in negotiation for Israel/Palestine

Published on 21 January 2009 at 4:04 pm in Justice/Law, Politics, UK and USA. Tags: , , , , , .

There’s a perennial idea of proposing Northern Ireland as a model of how progress might be achieved in the fighting between Israelis and Palestinians.  After reading this recent posting by Megan McArdle, one of the difficulties in such an idea becomes plain.

In Northern Ireland, both sides had moral, if not logistical, support from larger powers that were themselves allies.  So while the nationalists found it difficult to trust the British government, they would generally trust the US government, who in turn trusted the British government, while the same chain applied in reverse for the loyalists.

By contrast, while Israel receives moral and logistical support from the USA, none of America’s close allies really comes close to giving the Palestinian cause at large, let alone Hamas in particular, the sort of tacit support that America gave the Irish nationalists.

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How to value toxic assets

Published on 17 January 2009 at 12:28 pm in Economics, Finance and UK. Tags: , , , , , .

There should really be a question mark at the end of that title.  As far as I can tell, no-one really knows.

I mentioned yesterday that the US government has just given a guarantee to Bank of America against losses in a collection of CDOs and other derrivatives that BofA and the US government agreed were currently worth US$81 billion (the headline guarantee is for $118 billion, but $37 billion of that is cash assets that are unlikely to lose value).

Last November the US government did the same thing for Citigroup, but the numbers there were much larger:  US$306 billion.

The deal with Bank of America is a better one because the $81 billion of toxic assets had to be bundled with $37 billion of cash that will almost certainly create a (small) profit to partially offset any losses.

Nevertheless there is a general question of how they arrived at those numbers given that the market for those assets has dried up:  nobody is buying or selling them, so there aren’t any market prices to use.

The problem is hardly unique to America.  From today’s FT:

[M]inisters and regulators are examining loans already on banks’ balance sheets, which are becoming more impaired as the economy deteriorates. Concern about the eventual size of losses on them is one reason British banks have recently reined in lending.

Final decisions are not expected imminently from the Treasury. But Mr Brown has spoken recently of the problem of “toxic assets” on balance sheets, raising speculation that a “bad bank” solution will be adopted.

The prime minister has also said Britain is looking at different models. These include schemes whereby the government buys up bad assets in return for cash or government bonds; and schemes where banks keep the assets on their balance sheets but the government insures them against loss. The latter method was adopted by the US government this week to shore up Bank of America.

The Bank of England is moving towards the idea of a so-called bad bank, since private sales of bank assets are proving difficult or impossible. But it raises difficult questions: how should assets be valued; should gilts be issued for the purchases; or should money be created.

Mr Darling also notes that a US toxic asset relief scheme proved difficult to launch because of banks’ refusal to sell assets at a price ­acceptable to the government. Offering insurance against future losses on bad assets could prove more attractive.

“The other problem is that the banks haven’t asked us to do this yet,” said one government official. “We would be asking the banks to give us a load of crap and they’d say to us: ‘What are you going to pay us then?’”

The credit crisis will not end until we know which banks are solvent and which are not, and we won’t know that until we know the value of those CDOs.  Despite the fact that they can’t sell them, banks are loath to write them off completely.  Also from the FT today:

With speculation growing that the government will be forced to stage another bank rescue, the prime minister told the Financial Times he had been urging the banks for almost a year to write down their bad assets. “One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off,” he said.

Speaking amid mounting market concerns that banks face further heavy losses, Mr Brown said: “We have got to be clear that where we have got clearly bad assets, I expect them to be dealt with.”

Is it just me, or do you get impression that we’re watching a very expensive game of chicken here?

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