Friday, 28 June 2013

Who really caused the recession?

On Twitter and elsewhere there is constant talk of the who is to blame for the mess we are in. The Tories blame Labour and vice versa, everybody blames the bankers and occasionally it turns out to be our fault.

What confuses me is that, whilst greed and avarice were certainly big factors in what happened there is one over riding principle that seems to have left everybodies consciousness.

If I apply for a loan or a mortgage the people I go to turn to credit checking agencies to see if I’m a good bet. They then look at my credit history; have I paid my way, have I got any CCJ’s, etc. in general am I a good risk and they ‘score’ me for the financial house I’ve gone to so they can make an informed decision.

Back in 2008 the banks were doing that with the bonds and stocks they traded. Certainly they were playing some games that were not right, messing with LIBOR and so on, but the main plank of what they did was to buy and sell securities using credit ratings to decide how much risk to take.

Two mighty organisations exist that gave them that information, both American and both making shed loads of money throughout the boom years – those companies are Moody’s, Fitch and Standard & Poor’s (S&P).

From about 2003 these three goliaths had given their AAA rating, normally reserved for a handful of the world’s most solvent governments and best run businesses, to thousands of mortgage backed securities. These ratings are specifically designed to predict default percentages

S&P, for instance, told investors that when they rated a particularly complex type of security known as a collateralized debt obligation (CDO) as AAA there was a 0.12% likelihood – one chance in 850 -  that it would fail to pay over the following 5 years. That made it as safe as a gilt edged corporate bond and safer than S&P now rates US Treasury bonds.

In fact, around 28% of the AAA rated CDO’s defaulted, that’s more than two hundred times higher that they predicted.

This is just about as complete a failure as it is possible to make in a prediction: trillions of dollars in investments that were rated as being almost completely safe instead turned out to be almost completely worthless.

Prediction is all about experience. When you don’t have it you should be cautious. The truth is the ratings agencies had virtually no experience of these securities as they were new and very novel. The ratings didn’t have any historical backing, they were just predictions using a computer model.

So banks around the world, trusting the ratings agencies did what they always do, they traded securities to increase the banks profits and allow us to get cheap credit. Until it went wrong……..

So you would think that everybody would have blamed these three agencies. But at the meeting of the House Oversight Committee on 23 October 2008 that didn’t happen.

The ratings agencies sang with one voice. They blamed the “housing bubble” and irresponsible US lenders, they said they didn’t see it coming. The ‘housing bubble” phrase appears in just 8 news accounts in 2001 but had jumped to 3,447 by 2005; it was discussed about 10 times a day in reputable newspapers and periodicals. Yet the agencies say they missed it.

The ratings agency market is quite an exclusive club. They are regulated by the US government and most pension funds require their rating before they will buy anything. As a result their revenues from giving out ratings exploded. Moody’s revenue from this market increased 800% between 1997 and 2007 and became the majority of their business. Their cozy relationship meant they had little incentive to compete on ratings accuracy nor to put too much effort into it. The agencies were paid by the issuer of the CDO everytime they rated one, even worse S&P gave copies of their ratings software to issuers so that they could manually calculate how many ‘bad’ mortgages they could add to a bundle before it went down from AAA.

By taking risk models and finding a mathematical way to include uncertainty into the model the agencies took highly novel securities and bundled huge amounts of systematic uncertainty into them, claiming the ability to quantify it; this was utter nonsense.

The end result was that the market lost confidence in these securities before the ratings agencies and the collapse that followed was uncontrollable. On the very day of the crash these agencies were still rating CDO’s at AAA.

Yet we saw no high profile resignations, no class actions by the banks and virtually nothing from governments anywhere in the world. It was if the engineers of this crisis got away scott free.

I make no comments about why that was, I’m as confused as the next man, but it just seems odd that’s all…….

Thursday, 27 June 2013

Liverpool Pride

Those of you who follow me on Twitter will know that I post ‘funnies’ some times. I never claim originality (although sometimes they are my own) partly because nothing in this world is original and because, some nights, I do uncredited ‘tributes’ to great comics.

Last night I posted some jokes by the great Jimmy Tarbuck who I was privileged to meet quite a few times during my time playing the club circuit. He was a great man and had the ability to laugh at himself and his home town of Liverpool.

What I discovered last night was that his fellow LIverpudlians lack that grace and style.

As a follower of Old Holborn I’ve witnessed the invective and downright unpleasantness of some LIverpudlians but I didn’t believe they couldn’t have a laugh. Over the past year I’ve posted jokes about Geordies, Scots, Welsh, Londoners and a lot about my own home town of Bradford – never had a reaction other than “lol’”. Why is Liverpool so different?

The joke was:

“What do LIverpudlians use for protection during sex …… a bus shelter”

to be honest when I was thinking of posting it I was going to change the city, partly because I know how touchy they are, but then I thought, as it’s a jimmy joke that would be wrong.

Liverpool people seem to see themselves as victims, they seem to think the whole country is against them. This from a stunning, vibrant city that has brought us great music, great characters and a ‘feel’ that is second to none.

I actually love Liverpool.

But it’s people have this issue with life and seem to lack any confidence; because it’s confidence that lets you take it on the chin.

One of the people who unfollowed me was @MarkMoraghan a man who could hardly be described as unsuccessful or under confident (you don’t make it as an actor if you are) – so this defence mechanism they seem to have is spread across all types.

I have many celebrity friends, none see the need to defend their place of birth in this way. Bradford takes it on the chin every day with jokes about its demise, the people just keep smiling.

So please Liverpool. Know that you are a great place, a great people with an acute sense of humour, and start being a bit more confident when it comes to outsiders poking fun. Stop seeing defence of your city and its people as a cause, stop seeing yourself as victims.

A bit of pride, a little less solidarity and a realisation that we all make fun of different regional stereotypes (Christ, think how obsessed folk from Norfolk would be if they had your sense of inadequacy!) and you’ll be better for it.