Friday, 27 February 2009

Fred Goodwin

Since everyone else is on about Fred's pension I thought I'd have my say. Now let's think about this for a bit.
Firstly it is important to understand that pensions are deferred pay.
Let's say that Fred started work at aged 22. He's now 50. He joined RBS in 1998. So he has about 28 years pensionable service in various employments in private business. (See his biog on Wikipedia). Of the 28 years, 18 were in employment before RBS. According to his letter published on Guido Fawkes he transferred the accumulated benefits from these previous employments to the RBS scheme. This would have included benefits arising from both personal and employer contributions.
During his employment with RBS he again accrued pension benefits and these probably arose from both employee and employer contributions. These were made from the profits (however illusory) of private business.
So up until he was forced out of RBS the pension benefits he had accrued were entirely legitimate and proper and proportionate to his income.
I would also guess that he was in a defined benefits schemes and I am going to assume a normal retirement age of 60 - common in bank schemes.
We now come to the nub. When he was forced out what actual deal did he do or was he offered?
My guess is as follows.
Having renounced all his contractually payable termination benefits, and with his reputation in tatters, he is probably never ever going to be able to get a fat salary ever again. And as he still has a high degree of self esteem he probably feels that he deserves a fat income. In which case he was probably negotiating hard for an immediate early retirement (age 50) pension, and not actuarially reduced. In other words the full benefits earned to that date, but not necessarily enhanced to age 60.
As a rule of thumb for every 10 years early you draw your pension the cost roughly doubles. In Fred's case the £8m fund he had accumulated would need to be £16m to pay full, not reduced, benefits from age 50. In actual fact it may not have been necessary to actually pay £8m into his scheme, but merely to guarantee to make the pension payments. It is this guarantee that Myers was too witless or too complicit in making that is the problem for the Government.
So, can it be recovered? Well, under current pension law, with difficulty. Firstly it would be necessary to calculate a cash equivalent transfer value (CETV). To be fair it would be necessary to do that for benefits earned pre RBS, they would have the transfer in value figures of course. Having done that it would be necessary to work out what proportion of of the CETV was attributable to his personal contributions and what to RBS' contributions. Then it would be necessary to take a transfer payment and return the funds to RBS, and they would be treated as a trading receipt and taxed. His own funds he is entirely entitled to keep. It is his money, properly earned. Also please note that none of these funds arise from taxpayer subsidy.
Alternatively they could renege on the promise of the full benefits at 50 and actuarilly reduce the pension. This still leaves complications with the pre RBS benefits transferred into the RBS scheme. My guess is that Fred would then sue.
So whatever they do, it's a mess.
This brings in the political dimension. Would a court action suit the government? They may be pleased in that it would work in favour of their diversion tactics and keep the hate for Fred in the public eye. Or they may think that it could end up with Gordon Brown being hauled in as a witness.
What's my view? I reckon he should keep the pension. It has been properly agreed and is a contract. Overturning the contract would set a precedent leaving everyone's pension benefits at the mercy of the whim of the government and its officials. None of us would be safe. Overall the government has cocked up - quelle surprise - and they are going to have to find a way to live with it. As much as I despise Fred for his failures driven by his alleged arrogance and sense of self importance, I wish him the best in his fight.

Wednesday, 25 February 2009

The Housing Bubble USA - There as Here

Below is part of a recent article from the Mises Institute.
The Housing Bubble

Our housing bubble is an excellent of the malinvestment and over consumption caused by credit expansion. Perhaps as much as $2 trillion or more of capital has been lost in the construction and financing of houses for people who, it turned out, could not afford to pay for them. The housing bubble was financed by the creation of
$1.5 trillion of new and additional money in the form of checking deposits created for the benefit of home buyers.

The creation of these deposits rested on the readiness of the Federal Reserve System to create whatever new and additional supporting funds were required in the form of bank reserves. In the three years 2001-2004, the Federal Reserve created enough such funds to drive the interest rate paid on them, i.e., the Federal Funds Rate, below 2 percent. And from July of 2003 to June of 2004, it created enough such funds to hold this rate down to just 1 percent. The end result was a substantial reduction in mortgage interest rates and thus in monthly mortgage payments, which served greatly to increase the demand for houses.

Government also greatly contributed specifically to loans being made to homebuyers who were not credit worthy. It did this through its various loan-guarantee programs, carried out by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development; and by means even of outright extortion, though the Community Reinvestment Act, which required banks to make sufficient such loans as would satisfy local "community groups."

In physical terms, the result of credit expansion was the passage of literally millions of houses that represented capital to the firms that built them, and to the banks and others that financed them, into the hands of consumers who not only had not contributed anything remotely comparable to the wealth and capital of the economic system but also had no realistic prospect of ever being able to do so. The further result has been that many of the builders of these houses are now ruined as are many of the banks and other investors that financed the construction and sale of those houses. And because so many lenders have lost so much, the business firms that depend on them for loans can no longer obtain those loans, and so they must close their doors and fire their workers.

The growing problem of unemployment that we are experiencing and the accompanying reduction in consumer spending on the part both of the unemployed and of those who fear becoming unemployed is the result of this loss of capital, not of any sudden, capricious refusal of consumers to spend or of banks to lend. Indeed, the kind of consumer spending that so many people want to revive and encourage, by means of "stimulus packages," played a major role in the loss of capital that has taken place and now results in unemployment and impoverishment.

During the housing boom, millions of owners of existing houses thought that they were growing rich as the result of the rise in the prices of their homes and that they could actually live to a substantial degree off the accompanying increase in the equity in their homes. They borrowed against the increased equity and spent the proceeds. This consumption was at the expense of capital investment in the economic system, which was rendered correspondingly poorer by it. And when housing prices collapsed, and fell below the enlarged mortgage debts that had been taken on, the effect was to add to the losses suffered by lenders. This was the case to the extent such equity-consuming homeowners then walked away from their homes, leaving their creditors to lose by the decline in the price of their homes.
Says it much better than I can. The full article is here.

Tuesday, 24 February 2009

Moral Hazard

I had been thinking about 'moral hazard' and how it applies just as much to Gordon Brown as to the banks he falsely blames for the current crisis of money. Serendipitously I came across this article from the Mises institute.
Bailing out the banks is morally hazardous, and the future will show us that it has been a major policy error. But, what else could Gordon do? His 'success' - in fact the success of all western governments with a monopoly of money - is bound up with the banks. They are simply a highly regulated and complicit cartel supplier of a monopoly product.
But, there is also the moral hazard to tempt governments who have the monopoly of money. And boy, do they get tempted to use it. If you give politicians the monopoly of money they will exploit it to increase their power and reduce our freedom. In fact they have done so in spades. We are enslaved in a new feudalism where we get a job, get a mortgage and have to stay in the job to pay the mortgage which means that we can be taxed by the government.
As the article says:
We need to consider what government wants — more power and revenue — and the means available to attain it.
This process also destroys the family, I quote again:
By fueling the exponential growth of the welfare state, fiat inflation fosters the decline of the family. Families become degraded into "small production units that share utility bills, cars, refrigerators, and especially the tax bill." The welfare state drives the family and private charities out of the "welfare market."
All of this exposes both the ignorance and deceit of Gordon Brown and socialism.
The sooner that both are consigned to history the better.
The article says it all much better than I can. Read it well and remember it. And someone, please tell Gordon Brown and New Labour.

Monday, 23 February 2009

Who Pays for 'Mis-selling' and FS Regulation?

Another priceless gem from the financial services regulatory 'system' here.
So, With Profit fund surpluses are being used to settle mis-selling claims against insurers. In other words successful compo claimants are being paid out the reserved profits from their own fund to settle their claims for not running the funds properly. (I know. I know. Compo is for 'mis-selling' - as in advising wrongly. But no client I have ever dealt with has ever contemplated a claim for anything else other than apparently poor investment performance).
Let's break this down.
One. There is no such thing as 'mis-selling'. You either allowed yourself to be pursuaded to buy an unsuitable product or you were subject to professional negligence. In the first case caveat emptor, buyer beware, applies. It's tough. You made a mistake. Live with it. In second professional negligence case you can claim from the advisers PI policy as he failed as an expert in giving you the correct advice.
Two. All financial services compo costs are ultimately paid by the compo claimants or their companion policyholders. The industry does not pay. These costs are either added to the investment / insurance company operating costs and incorporated in the policy charges or they are taken out of capital within the client funds and hence destroy the returns for both current and future populations of policyholders. In theory you can charge the shareholders but all that does is to drive down the share price which, as these shares are held by the managers as investments, drives down the returns for policyholders.
Three. All fees and expenses and FSA 'fines' paid by FS companies find their way to the costs charged to the client. Our FSA fees are paid by our clients. Competitive pressure keeps us honest and our prices in line with our competitors. All our competitors pay FSA fees. Therefore we all add the fees to the costbase against which we assess our overheads and hence our pricing.
Four. Money released from the sales of capital assets is transferred to successful compo claimants who in about 90% of the cases (based on our own experience) just spend the cash. This increases the broad money supply and drives inflation (inflation being defined as the increase in quantity and reduction in quality of money). It must be understood that the capital assets - shares, bonds, property - sold are only priced in money. They are sold, that is converted into cash, and this cash is then released back into the economy. A lot of the cash used to buy these assets is borrowed.
The solution is easy.
One. Add a simple fee to all products sold. Like VAT (yukk). Make it compulsory to set it out as a specific charge. This would be the 'Investor Protection Levy'. Make it possible to opt out. Investors could then see the price they are paying for FSA/FOS/FSCS and compensation and make a choice as to its value to them. It would make them think.
Two. Scrap 90% of the FSA/FSCS/FOS which would reduce the costs to the FS industry, or rather their clients.
Note. In 15 years we have had about 5 actual complaints to us of which two were endowment related. Both were opportunistic and failed. We have seen about 15 or so complaints through our business of which about 12 were successful and only one that I can recall actually used the money to pay down the mortgage. Most of the rest bought cars or had holidays on the windfall. We have had one complaint through our office that I considered showed serious failings on the part of the previous adviser - from Hambro Countrywide - and the FOS could not be of any help as they held that the claim was stale. Although they will happily adjudicate on endowment policies more than 15 years old. Justice or 'fairness' it ain't.

Sunday, 22 February 2009

Oh God no!

Just read this in the Telegraph on line.
Can you really believe this bunch of witless idiots. Look, try something once and it doesn't work, try something different. Trying the same thing again is just bonkers. Trying the same failed things three times is just stupid.
Listen you bunch of mindless jerks - CUT TAXES AND GOVERNMENT SPENDING NOW.
Then there's the stuff about 100% mortgages. Just what has it got to do with Brown how much a bank lends to a customer? The real laugh is that I did a radio spot a few months ago where my opinion was sought on how first time buyers could be exepected to 'get on the housing ladder' now that '100% mortgages were no longer available'. It was on the local BBC channel as well.
Update. Someone more significant than I has finally got to the hysterical stage with these fools.

Working Tax Debit

On many occassions a useful way of testing the sense of something is to try and phrase the obverse. F'rinstance, 'common sense' could become 'common nonsense' or 'uncommon sense' or if you really wanted to be pedantic - 'uncommon nonsense' - but that sort of cancels itself out.
How about 'working tax credit'? This would become 'working tax debit'.
This is very enlightening. It exposes income tax for what it is. A tax on work, not on income. Income tax is therefore a tax on your time. Or a payroll tax for employers; a cost of employing you.
Of all the taxes that we are forced to pay, I consider income tax - which I shall now call 'working tax debit' - the most despicable, especially so since no State or local government employee pays any income tax at all. The notional deduction for PAYE shown on their payslips is, in reality, just a rebate to the rest of us.

Thursday, 19 February 2009

A Treat from the Mises Institute

I found this which is one of the best of its kind.
I should declare an interest. I am a Jaguar owner (well, strictly it's Mrs Lola's car) and fan.

FSA - Light Touch Regulation?

The FSA rule book, if printed out, stands 8 feet / 2.440 metres high.
If nothing else that nails the lie of light touch regulation.
Regarding my response to MW comment you can find how the FSA/FOS/FCSC admitted it can 'create law' here
“We do not have to pretend to ‘find’ what the law is. We unashamedly make new ‘law’”, boasted Walter Merricks in a June 2001 speech to the Financial Regulation Industry Group
How can a Quango be allowed to make new law? How can it be allowed to be applied without Parliament approving it? Is it at all compatible with freedom for the Government to empower Quangos like this?

Monday, 16 February 2009

FSA - Again

The FSA is admitting that it made mistakes in regulation that may have made a difference to the severity of the banking failures. Yeah, right.
The only way that the FSA 'regulation' could have had a chance of preventing the banking crisis was to regulate upwards, to the Bank of England the Treasury and The Chancellor of the Exchequer.
Once a government with a monopoly of money starts on the unsound money route the country is doomed. The FSA would have had to stop Gordon Brown from printing money, it would have had to make the Bank of England ignore the spurious CPI price index measure and make it take more heed of broad money supply and it would have had to stop the Treasury sanctioning profligate government spending and off balance sheet borrowing.
Financial services 'regulation' does not work from the top down. It has to work from the bottom up. We, the people, have to make sure that the governments we elect know the principles of sound money and macro economic management and how to spend our money wisely and miserly.
We failed with New Labour.

Tuesday, 10 February 2009

A = B x C

A = B x C
A = economic meltdown
B = Bankers
C = Chancellor of the Exchequer.
It's simple sum and it works like this:-
I listened to an edited version of the parliamentary committee interviewing the Bankers today.
I am sorry but I have seriously lost my sense of proportion when it comes to Bankers. They've always been too big for their boots. They adopt the same assumptive superioty of languange and attitude beloved by that other alledgedly useful commercial class, estate agents.
Let's get this straight, banking is a very simple business. It has two bits of work to do. One, it operates as your fiduciary by offering an account management service. A clerking job. Two, it takes the money you deposit and acting as your intermediary it lends it out to someone. The difference in price between what they pay you and what they charge someone else is their commission. Right, having set that out I will concede that this simple model can get more complicated in action, but the essential model is as simple as I have set out.
Now then, in the past about twenty years, there has been a consolidation of banking businesses such that there are now about 6 actual banks. They all offer the same service at the same price. There is zero differentiation. They are a cartel. A cartel supplier of a monopoly product.
What is the monopoly product. Money. In the UK that's Sterling.
So who makes this product? Yep, the UK government, currently under the control of the well know one eyed Scots idiot.
So, suppose you are supplying this monopoly product and the manufacturer massively increases the amount he supplies and slashes the price? What are you going to do? How are you going to make money storing this excess product? You can't. You have to sell it on. And sell it on in vast quantities.
In short then, however nice it is to hear the multi eyed not necessarily Scots (althgough one of the banks was) idiots apologising, when are we going to get the real grovelling mea culpa from the other key player in this disaster?
You tell me.

Inflation. The Evidence?

This is a graph based on data from the World Gold Council. Now, I am not saying that there are not other factors at work here (do we know whether we have discovered all the gold fields yet?). But it seems to me that there is a correlation between the exit from the Gold Standard and inflation. I am assuming that the Misian definition that inflation is the growth in money supply plus its reduction in quality, applies here. In other words the temptation is for Governments running monopoly fiat money to inflate away their self induced problems at our expense.

Just a thought. Happy to be argued with.

Monday, 9 February 2009

Why Bailouts - Neither Here nor Over There - Won't Work

The following snippet was copied and pasted from Dimensional Fund Advisors website. (My business is a committed and, for our size, a big user of DFA passive funds).
Jan 28, 2009Essays
Bailouts and Stimulus Plans - Addendum 1/28/09
In his NY Times blog
Paul Krugman attacks my piece on the stimulus plan.
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
[Eugene F Fama is a financial economist and renowned for his work on efficient investment]

They Still Don't Get it

Guido Fawkes pointed me to a book review here.
Liberal Fascism: The Secret History of the Left From Mussolini to the Politics of Meaning Jonah Goldberg Penguin £9.99, pp496 Nick Cohen finds much to admire in a blistering attack on liberalism.
It's a book I shall buy.
The reviewer for the Guardian a Mr. Nick Cohen cannot bear to let the right have the win and his last paragraph is:
Liberal Fascism is a bracing and stylish examination of political history. That it is being published at a time when Goldberg's free market has failed and big government and charismatic presidents are on their way back in no way invalidates his work. Hard times test intellectuals and, for all its occasional false notes, Goldberg's case survives.
Classic. Look, sunshine, we've had big government for yonks. And we've had charismatic (and useless) leaders in recent times. It's them that have failed. The present difficulties are free markets succeeding and passing judgment on just the sort of Statist fascist tendencies the book you've reviewed has warned us of.

Wednesday, 4 February 2009

Thought for the Day

I copied the following from an email from a colleague of mine. It deserves to be shared:

(Galt Capital a Virgin Isles based Investment Advisor).

"Happiness is not to be achieved at the command of emotional whims. Happiness is not the satisfaction of whatever irrational wishes you might blindly attempt to indulge. Happiness is a state of non-contradictory joy—a joy without penalty or guilt, a joy that does not clash with any of your values and does not work for your own destruction, not the joy of escaping from your mind, but of using your mind's fullest power, not the joy of faking reality, but of achieving values that are real, not the joy of a drunkard, but of a producer. Happiness is possible only to a rational man, the man who desires nothing but rational goals, seeks nothing but rational values and finds his joy in nothing but rational actions.
Just as I support my life, neither by robbery nor alms, but by my own effort, so I do not seek to derive my happiness from the injury of the favor of others, but earn it by my own achievement. Just as I do not consider the pleasure of others as the goal of my life, so I do not consider my pleasure as the goal of the lives of others. Just as there are no contradictions in my values and no conflicts among my desires—so there are no victims and no conflicts of interest among rational men, men who do not desire the unearned and do not view one another with a cannibal's lust, men who neither make sacrifices nor accept them.
The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread—a man of justice.

John Galt
Atlas Shrugged