Don't tell the banks

Tweet It often seems that, as fast as I get my various spam filters set up to avoid the stuff, so the spammers find some way of getting around the controls, and their missives get through. I've never really understood why they think someone is more likely to buy replica watches or Viagra just because the title indicates that the e-mail content will be something completely different.

Anyway, one of the successful ones to get through today offers me a way of beating the credit crunch and getting a 215% return on my investment. It's obviously too good to be true, of course. But I do hope that they haven't succeeded in getting through the spam filters at any of the banks – based on recent performance, they might just fall for it.

Who's really being decisive?

Tweet Whilst Gordon Brown endlessly reiterates the mantra that he is acting decisively, the Irish government has actually taken action, rather than just talking about it. And Brown's response is to raise doubts about what they've done - when he should be following suit.

The Irish have, effectively, guaranteed the whole of the deposits made in their banks, whilst the UK government proposes only to raise the level of guarantee from £35,000 to £50,000. It's a meaningless distinction. In reality, as one Labour peer has already pointed out, the UK government, whatever it says about imposing a limit, is for all practical purposes committed to a full guarantee - so why not just be honest about it?

A few days ago, I raised the question of how 'global' the crisis really is, drawing attention to places like Spain which have been relatively unaffected. The Economist carried an interesting article about how Spain managed to avoid the crisis so well. This could have been us – but for the obsession with allowing the 'markets' to do whatever they wish.

And, if any more confirmation was needed that the time has come to clamp down on the speculators and gamblers who have already done so much damage, the headline in yesterday's Daily Express certainly provided it. Not content with forcing a bank onto the rocks, it seems that the speculators were actually trying to wreck the rescue deal for HBOS. Not because it was a bad deal, not because the deal isn't necessary, but purely because they could make a bit more money by doing so. It neatly sums up the (lack of) values which drive them.

He who pays the piper

Tweet Peter Black draws attention to a story in the Observer yesterday, "How short-selling profited the Tories". The Observer is not always the biggest friend of the Tory Party, of course. However, the Sunday Times, which is much more well-disposed towards them, also carried much the same story, under the heading "Short-sellers bankroll Conservatives". They both list a number of managers of hedge funds who have donated handsomely to the Conservatives, although they both appear to have missed our friends Christofferson, Robb from the list, despite their kind contribution of £181,000.

I suspect that that is because the stories were based on the information about the membership of the "Leader's Group", which is for personal rather than corporate donors. Most of the other hedge fund donors appear to have donated from their own personal share of the profits from their 'work', rather than that of their companies, it seems. The Observer claims that the information about membership of the Leader's Group has been placed on the Conservative Party's website, "in an attempt to quell a mounting row over the party's finances". I have to say that if it has, then I can't find it.

On Saturday, Tomos Livingstone in the Western Mail said that Cameron faced a difficult choice in his address to his party's conference about how far he should go in responding to what Gordon Brown said last week. Amongst his comments, he suggested that Cameron might want to try and distance himself from the 'share-dealing bogeyman'. He reports today that Cameron has duly obliged by stating clearly that bankers and financiers had "no influence over my policy at all".

So, that's alright then? Not exactly, no.

While his party is being bankrolled by these people, stating that their financial support has no effect on his policies is about as convincing as Labour's first reaction some years ago when they received £1million from the boss of Formula 1, and claimed that it had had no effect on their decisions. It didn't wash – and they eventually had to give the money back.

The precedent is a clear one; if the Tories want us to believe that they are not in hock to the bankers and hedge funds who have come so close to bringing down the entire financial markets, there is an obvious step that they can take - count up all the donations from those concerned, and return them, with a polite note. I won't hold my breath waiting.

It's interesting that it's a Spanish bank which is buying some of the assets of B&B, following the collapse of B&B. Spain seems to have been largely unaffected by the effects of the 'global' crisis in the markets. So too does France, and Canada, and a number of other countries. That raises an interesting question. If this is a 'global' crisis, outside the control of any particular government, how come it only affects part of the 'globe' so badly?

The answer is in the regulatory regimes applying to banks in different countries. In Spain (and other countries) much of the activity which has caused the financial crisis would be illegal, so that they are largely insulated from the worst effects. So why are UK banks so exposed? Because the Tories (who claim not to be in any way influenced by the donors who benefitted from their decision) de-regulated the financial markets, and Labour have done little or nothing to re-regulate them.

Another day, another bank

Tweet The collapse and subsequent takeover of HBOS seems to have been made inevitable by a run on the shares, which forced the price into a downward spiral. It looks as if the speculators and hedge funds who drive share prices down in order to make money for themselves and their clients have selected a victim and concentrated their fire upon it. According to the financial pundits, there is more to come. Other banks are likely to be targeted next.

I referred to the way in which this happens in a previous post. Speculators sell shares they don't own to drive down the price, then buy them back again at a lower price and pocket the difference. It's called 'short selling'. Most of them do this in a way which is, incredibly, entirely legal – they 'borrow' the shares from the real owners for the purpose. Some, however, sell shares they don't own without even bothering to borrow some. That's called 'naked short selling'. It's illegal in most jurisdictions, but that doesn't seem to prevent it happening.

It's another world for most of us, but it impinges directly on the real world in which we live when such speculation and gambling creates profit for the few, and economic woe for the many.

We need to look again at the way the financial markets are (or, more to the point, are not) regulated. It cannot be right that the banks and funds on which we all depend can be threatened by gamblers and speculators; and it cannot be right that the financial stability which most of us need and depend upon can be thrown into complete turmoil for the benefit of a few.

And it is utterly hypocritical and shameful for the Conservative Party to use the credit crunch as part of their campaigning whilst their local campaign is being almost entirely funded by the sort of activity which caused the crunch in the first place.

PS – This man seems to be criticising Labour for not having done more to undo the policies of his own party. I suppose that we should be at least a little grateful that he understands how damaging some Tory policies were. His criticism is a fair one – but coming from this source, it is just more hypocrisy. I do wonder whether he has told the Tory party in this area that he favours regulation which would stop the activities which fund their campaign.

They win - we lose

Tweet I still don't know why a New York based company would be so interested in what happens in Carmarthen West and South Pembrokeshire that they would want to bung £40,000 into the local Tory coffers; but I do know a little more about the company. Christofferson, Robb and Co are what is known as a hedge fund.

Hedge funds are not well understood outside their own sphere – and there are plenty of people who believe that they're not terribly well understood within it either. They are usually secretive, and much of what they do is completely unregulated. Different funds behave in slightly different ways, and because they are so secretive about their precise business, it is hard to know what any individual company is up to. But there are some generalities which are known.

Hedge funds often borrow many times the value of their underlying assets to buy things that they don't want and can't afford, and they sell things that they don't own. They then buy back the things that they sold but never owned in order to return them to the rightful owner from whom they were borrowed in the first place, and they sell the things that they bought but didn't want before they have to pay for them. They turn future profits which haven't been made into bits of paper which they can buy and sell before they even exist.

These funds are, in effect, gambling; and they are doing so with huge sums of money which aren't theirs and don't really exist. Betting on the future price of currencies, betting on the future price of shares, betting on the future price of commodities. Some of them even bet on the future value of the bets that they and others have already placed. They add an enormous degree of instability to the market place, and their whole ability to make money depends on market volatility. Their profits, made by making risky and usually short term investments, come at the expense of those investors who have to be more careful and long term with their money – investors such as our pension schemes and insurance companies.

So, whilst the overwhelming majority of us have a vested interest in financial stability and security, these funds – acting on behalf of already wealthy investors – have a vested interest in instability and volatility. They deliberately create volatility in order to benefit from it. They are a siginficant part of what has led to the recent instability in the markets – something from which we all suffer.

Some hedge funds trade in what are rather euphemistically referred to as "Mortgage Backed Securities" or MBS. These securities – the name is a complete misnomer, since there's nothing remotely secure about them – are the means by which the sub-prime crisis in America started and by which it was subsequently exported around the world. By separating lenders from the consequences of their foolish actions, MBS led to the collapse of Northern Rock in the UK and Freddie Mac and Fannie Mae in the US. In short, they are responsible for much of the financial crisis which has engulfed the world in recent weeks and months.

Let me be quite clear about this – the financial crisis is not simply an unfortunate accident. It is a consequence of virtually unregulated ('light-touch' regulation is the euphemism used by government) markets (the UK markets were deregulated by the last Tory government, of course, and Labour have done little or nothing to bring them back under control), corporate and individual greed, and foolish lending, aided and abetted by the creation of MBS to divorce banks from the risks of their lending.

What sort of hedge fund is the one which has been donating so handsomely to the Tories locally? It's hard to be certain. They certainly have been trading in MBS, and there has been talk that, after the collapse of the US market in this area, they would be investing in the same sort of business in Mexico. And they were one of the companies which was 'selling short' the shares in financial institutions such as Freddie Mac and Fannie Mae; that is to say selling borrowed shares in order to buy them back at a lower price before returning them to the owner.

The Tories cry crocodile tears over the problems faced by ordinary families as a result of the credit crunch; but they were responsible for creating the conditions in which the crunch could occur by de-regulating the markets, and they are clearly happy to be generously funded by companies which have been making their money trading in the sort of securities which caused the crunch.