Careless Talk Costs Lives
During WW2 the British government introduced a propaganda campaign called “Careless talk costs lives”. The campaign was based around a set of posters aimed at ensuring that military secrets were kept secret, but moreover to prevent rumours from affecting the public psyche, at a time of very natural fear. One of the posters, for example, showed two women on a train having a chat to each other, in a standard morning commuting scene. In the background there is a German General in full military uniform sitting at the back of the carriage in earshot. The poster reads “Careless talk costs lives: You never know who’s listening”. I’m pretty sure it was unlikely that Himmler would have been commuting to the Reichstag on the 7.42 from Basingstoke, but the message in the campaign was pretty clear.
Given the week that the UK banking system has had, there maybe some quarters thinking that a similar campaign may be in order right now. And they might be right. The main problem seems to be that the careless talk isn’t limited to the public – Gordon Brown has been participating freely himself, driving the UK banks closer to the nationalisation he doesn’t want, by slagging them off openly. It might sound inane, but the self-fulfilling positivity that drove us to believe on the way up, is likely to create a considerable overshoot on the downside, and there doesn’t seem to be a will from anyone other than Barack Obama to buck the trend and talk positively about the world. And even with his high global popularity, there are voices of dissent about his overly optimistic take on things.
Amongst the contenders for leading horsemen of the Apocalypse, the global journalist community is winning by a nose from the politicians, with the UK tabloid press one of the best jockeys. I’m not saying that the world isn’t in a bad way, but the doom-mongering will only continue to be self-fulfilling. As an old rugby coach of mine used to say, “…if you think you can, or you think you can’t, you’re probably right.” Perhaps, like at a wake, we need “closure” on this so that we can get on with reconstructing the future. Perhaps the best way to lift the gloom would be to invoke the philosophical thinking of that great theologian, Paris Hilton. “If you feel down and you put on a tiara or a cute sparkly headband, it, like totally, brightens up your day.” Kant and Marx can’t compete with this sort of insight.
Leaping from the ridiculous to the sublime, TS Eliott once wrote that “Humankind cannot bear very much reality”, which is exactly how I felt after reading the various journalistic summaries of the UK banking crisis this week. In particular reading Jim Rogers’ (who founded the Quantum Fund with George Soros) summary of UK plc was particularly uninspiring. According to Rogers, who I usually think has some pretty interesting things to say, “it’s simple – the UK has nothing to sell”. The foundations of the UK economy according to Rogers, were financial services and North Sea oil, neither of which are exactly flying currently. Consequently the precipitous fall of sterling is justified and the likelihood of complete nationalisation of the UK banking system is almost a given.
Rogers’ is a well-listened to commentator on emerging and not so emerging markets. He’s also, in market speak “talking his position” – i.e. he is short UK banks, and short sterling versus various Asian currencies, and has plenty to gain from the markets following his point of view. His very discussion of the topic, will push UK plc closer to insolvency. The market perception is that complete nationalisation of any of the UK banks will lead to all equity and qualifying Tier 1 capital holders being wiped out, so any thought of nationalisation is going to have a negative impact on the price of these. Every bank in the UK has taken write-downs against assets, so in order to restore their ‘capital adequacy’ they need to raise new capital, either through selling assets or raising new capital, or both.
The problem is that is that each time someone talks up nationalisation the cost of raising the required capital to avoid nationalisation, increases. Lloyds, for example raised £700mm worth of new Tier 1 capital this week – they cleared the deal presumably with big institutional UK investors (Prudential, Scottish Widows etc.) with a coupon of 13% and priced at 100. Before the bonds had actually hit the account of the institutional investors the market price was 60% of this sale price; a £300mm mark-to-market loss for the investors, before they actually received what they paid for. Not so much a problem for Lloyds, for now, as they have the money in their books from investors, but if they need to raise more capital in the future because of further falls in their capital adequacy then it would be a problem.
Currently, the likelihood is that they will have to raise more capital in the future, because the general perception is that there will be further falls in the book value of the assets on all banks books. There is a “negative feedback loop” between expectations and future capital requirements, that is being fuelled by media and governmental speculation. If that speculation is based on “fact” then, fine, but too often it overstates and manipulates information to be as gloomy as possible – sometimes in Jim Rogers case, because of an axe to grind, or in other cases because of incompetence.
The incompetence aspect of “careless talking”, was demonstrated clearly to me by an article in the Irish Times this week, by another leading horseman of the Apocalypse, Morgan Kelly. The article was constructively entitled “Piling Anglo (Irish Bank) losses on to national debt risks bankrupting the State”. He argues, perhaps rightly, that Anglo Irish is “poisoning the banking system and is of no systemic importance” and that “it must not be nationalised”. He goes on to say that the proposed nationalisation marks a decisive watershed in Irish democracy. “With it”, he says, “an Irish government has coolly looked its citizens in the eye and said: ‘Sorry, but your priorities are not ours.’” I don’t necessarily have an issue with his point of view, as he has been proved right about prior predications of the coming Irish property bust. What I do have an issue with is the premises he basis this argument on, which not to put too fine a point on it, are made up.
The “central point” of his argument against nationalisation is that it is a direct trade-off between protecting Irish taxpayers, and protecting “international bondholders”. He claims that without nationalising the bank…
“…developers would have gone bust and commercial property would have become more or less worthless, but that is going to happen anyway, with or without Anglo Irish. Depositors of Anglo Irish would have been paid off in full, and the hit would have been taken by the international financial institutions that hold around Euros 22bn of its bonds. These bondholders are professional institutional investors who signed up for higher returns on Anglo debt in the knowledge that they were facing higher risks. They are, moreover, insured against their losses through insurance contracts called Credit Default Swaps. This is the central point about the bailout of Anglo Irish, and one that has not received any attention: the only effect of the a bailout is that the Irish taxpayer will make up the losses of Anglo Irish’s bondholders instead of the insurers who had already been paid to underwrite the risk.”
This is complete drivel. His claims that all international bondholders are insured against losses through “Credit Default Swaps” is just nonsense. Moreover, it’s dangerous nonsense, because most of his readers (Irish taxpayers) will think that he knows what he is talking about, and will feel aggrieved accordingly. I have no major issue with the stance Kelly is talking on the cons of nationalisation of Anglo Irish Bank, but the credibility of his argument is completely lost on me because of the false arguments that he is using. The feedback
loop that may be created is that in rural towns around Ireland, where Morgan Kelly is read, local businessmen may respond to the prophesied doom by bringing forward lay-offs they had been thinking about.
Comment is, of course, free in any democracy. We can yak and yak, and blog to our hearts content. We also wouldn’t want to follow the example of South Korea, where a 30 year-old blogger called Park Dae-Sung is facing trial for being “too pessimistic” in his financial forecasts. Dae-Sung became a household name for his accurate forecasts of sharp falls in Korea’s won currency, declines in the Seoul stock market and Lehman Brothers going belly-up. He faces up to five years in prison if found guilty of violating “communication laws”.
I’m also not trying to deny that this crisis started because of “real issues” – poor credit, subprime loans and unsustainable leverage but panicked, and in many cases unsubstantiated reporting, has exacerbated matters. Markets move with the herd instinct, or with a perception of where the herd instinct is taking us. Rigorous reporting is one thing, but careless talk costs jobs (and lives). Richard Lambert, the former editor of the Financial Times, and now director of the CBI (Confederation of British Industry), gave a speech recently saying he had no problem with accurate reporting, but:
“At a time when careless headlines or injudicious reporting risk becoming self-fulfilling prophecies of a very serious nature, you might have thought that the industry’s self-regulatory body (the Press Complaints Commission) would have had some guidance to offer about the special responsibility of business journalists as they pick their way through the dangerous minefields of the credit crunch. But of course the PCC is nowhere to be seen in this drama” he said.
One of the most striking of the reporting issues, that Lambert goes on to discuss, is in relation to house prices; which naturally enough is pretty key to the great owner occupying British public. Anyone who is willing to put their name to an estimate of the % drop in house prices for the year ahead is latched onto and heralded in an almost Messianic fashion. “House Prices to fall 50%” will be be leading headline, and somewhere within the subtext you will find that this quote is attributed to an “expert”, who’s expertise is at best questionable. When Nationwide releases it monthly house price movements for the country over the previous month, banner headlines will shout “House prices down record 3% on the month”. I’m guessing the average stock market investor is thinking, “I wish my stock portfolio only fell 3% last month”. House prices are a sensitive subject, but in context, house prices have tripled in value in the past 20 years on average across the UK, so a fall of 10, 20, or even 50% will still leave many people ahead of where they were when they bought the house. The media reporting on the subject plays up to the sensitivity, and has certainly added nothing to the confidence of the market on the way down, in the way that it did on the way up.
“I wish people would stop saying that this is a crisis of confidence,” said Steven Eisman, a portfolio manager and banking expert at FrontPoint Partners. “The loss of confidence is just a symptom of bad credit and over-leverage.” I tend to agree with this, up to a point. As the crisis has transitioned into the “real economy”, where it’s affected the less financially educated “man on the street”, the effect of careless talk will have an even greater impact. I think we all need to take a leaf out of Paris Hilton’s book, and put on our sparkly tiaras to cheer ourselves up.