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Michael Baxter

Bull and bear: Let banks fail says British Bankers Associations: give new banks a helping hand, says FSA

Written by: Michael Baxter on February 28th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Let banks fail says British Bankers Associations: give new banks a helping hand, says FSA. Dow hits five year high. Tesco warns meat prices may rise. Recession or not a recession. Companies in the news: Petrofec, Bwin.party and 888 Holdings.

Let banks fail says British Bankers Associations: give new banks a helping hand, says FSA

Infant industries. Even out and out fans of free trade admit infant industries may be the exception. A child needs protecting, supporting, until that child can look after him or herself. A new business joining the race to success may look down a track of impossibly high hurdles.

Of course, as the story of Facebook and Google shows, such impediments do not always stop success; sometimes they can be an advantage. But in some industries, start-ups are crowded out. In some industries the major players are like dinosaurs.

After the meteoric struck, the dinosaurs became extinct. A gap in the market was created, and little shrew-like creatures who had struggled to survive for millions of years filled that gap, and eventually came to dominate the earth, evolving into tigers, elephants, whales and us.

It is a little odd, however, that so often governments try to protect the dinosaurs. European agriculture is older than civilization itself, yet the Common Agriculture Policy, which is little different from the 19th century corn laws, gains popular support – not to mention the lion’s share of the EU budget.  And another species of dinosaur, what one might call it the bankosaurus, was the recipient of billions of pounds of bail-out money in 2008/09.

Here is a radical idea. Why not let the bankosaurus fail? Maybe in the niche that is created by this failure we will see new banks come into view, like a dolphin jumping the waves.

Maybe this is not such a radical idea because the British Bankers Association boss Anthony Browne has made pretty much that point. He was talking at the Institute of Directors yesterday and, according to the ‘Telegraph’, said the most important thing: “Is ensuring that financial services never again get a subsidy off the taxpayer – whether explicit, or implicit…In other words, we have to solve the problem of banks being ‘too big to fail’.” He added: “There is a danger that in the heat of a crisis, this will be abused and governments will feel compelled to bail out banks rather than let them fold. This risks inadvertently reinforcing the implicit subsidy.”

Here is another radical idea: why not give new banks – that’s banks with bold ideas and the potential to change the finance industry – a helping hand. Is that a radical idea? Well maybe it is, but the FSA is not known for its radicalism, yet it’s an idea the organisation seems to sign-up to.

FSA chairman Lord Adair Turner, who recently talked about replacing QE with overt monetary financing or OMF, has now called for new banks to be given a helping hand.

In particular he wants to see new banks being required to maintain much lower capital requirements than their more established elders. He has proposed that new entrants will only have to hold 4.5 per cent of their capital in reserve, versus 9.5 per cent for established banks. At the moment it’s pretty much the other way round; new, inexperienced banks are required to maintain higher capital ratios.

Lord Turner wants to change the way the banking industry operates too. He wants to remove barriers to both entrance and exit. He has suggested that banks should be allowed to fail, and new banks should be encouraged.

It’s a funny thing, isn’t it? The FSA is set to go the way of the dodo, or (is that the Pterodactyl?), but in its dying moments it starts coming up with radical ideas.

Dow hits five year high

The FTSE 100 peaked on January 2 30 1999. If you sign-up to the theory that stock prices tell us what is going on in the real world, then maybe the story of the FTSE 100 of the last 13 years or so tells us the true story of the economy.

Here is another way of looking at it. We should have had recession in the early 2000s. We didn’t because markets fled from equity to debt. Leverage delayed the inevitable. And the longer the delay, the worse the final outcome.

And since the FTSE 100 is now moving close to the December 1999 level, perhaps we can say that if stock markets really do tell us what is really going in the economy, all of the troubles of recent years are drawing to a close.

The Dow closed at 14075 last night. The last time it was so high was in 2007. Its all-time high is 14164. Just another 89 points and we are into new territory.

Maybe that suggests the economic woes of the last half decade are truly coming to a close.

There is one snag with those arguments. The FTSE 100 may have peaked in 1999, but the Dow peaked on October 9 2007, slightly less than a year before Lehman Brothers went bust. Maybe stocks markets are not such a good guide after all.

Tesco warns meat prices may rise

Give Philip Clarke credit where it is due. The Tesco CEO was pretty open earlier this week when talking about the horsemeat saga.

He talked about the complexity of the meat business, and how the supply chain is open to rogue elements. Now Tesco is going to be more scrupulous with its produce. “I am in no doubt that we will find things we don’t like,” said Tesco’s boss.

So Tesco plans to buy more of its produce locally. Mr Clarke said: “I hope that it doesn’t mean price increases, but I can’t stand here today and tell you that it won’t.”

The buy food locally lobby has won a major victory. Across the land you can imagine the “told you so” comments.

The argument against buy food locally has always come down to cost. Don’t buy food from local suppliers, say the free market advocates, buy it from the best/cheapest.

A part of the problem may have related to confusion between best and cheapest. Maybe local is best, distant is cheapest.

But now we are going to see the arguments tested. Will prices rise as a result of the move towards local, food? And if so, how will consumers react?

Before the matter of what’s in our meat is finished with, have you heard about the practice in China of using dog meat? There has been a spate of articles on the subject and a most disturbing video on Youtube. The cruelty inflicted on dogs is truly shocking, perhaps even too cruel to describe in a polite column such as this. There are two ways of looking at this. One way is to suggest that the British are way too sensitive when it comes to cruelty to animals, and we are not even rational when it comes to cruelty to dogs. The alternative is to say that if China treats man’s best friend like that, one assumes its attitudes to mankind are not much better.

Recession or not a recession

Well, it was stated here in black and white: “My suspicion, however, is that when the ONS has finally finished revising its data, we will find the UK did not fall into recession during this period at all…Frankly, the media is to blame, because the media is news hungry. Little things like accuracy must never be allowed to get in the way of good headlines.” See: Lies, damned lies, and figures on the UK’s GDP 

The UK may or may not be in recession at the moment, but even if it is, it may well not have suffered a triple dip. Many economists doubt the accuracy of stats that suggested the UK suffered recession in late 2011 and during the first half of 2012.

The latest data was out yesterday, and although the ONS data still suggests the UK suffered recession last year, it was only just, and in any case, if you were to squint and look at the data in a funny way you could even say recession did not occur, even based on yesterday’s data.

So this is what the revised data said. The UK economy contracted by 0.1 per cent in Q1 2012, by 0.4 per cent in Q3, expanded by 1 per cent in Q3 and contracted by 0.3 per cent in Q4. And since the UK contracted in Q4 2011 too, that means the data still says there was a recession between Q4 2011 and Q2 last year. It is just that when the ONS first estimated GDP in Q1 2012 it had the economy contracting by 0.2 per cent. It is not hard to imagine the revised 0.1 per cent contraction being revised to zero, in which case recession was avoided by the technical definition.

Indeed yesterday’s data showed that the ONS now has the UK expanding by 0.3 per cent in 2012, whereas previously it had zero growth.

But some go further. For example, as Simon Ward, chief economist at Henderson Global Investors, pointed out; when you strip out one off factors affecting North Sea oil and gas production, last year’s recession was avoided. The ‘Telegraph’ quoted Mr Ward as saying the factors that lay behind the North Sea’s contribution to GDP figures have no “relevance to the wider economy.”  Or to put it another way, the onshore economy did not fall into recession at all.

Companies in the news

Bull: Petrofec operates in the oil industry. Many of its customers are national oil companies, and, or so suggests Tempus in the ‘Times’, and bureaucracy is getting worse. Questor at the ‘Telegraph’ reckons the 2013 guidance is too vague. Tempus said: “It’s getting harder all the time.” Questor said that yesterday’s share price fall was overdone and said “buy.”

Bull: The two gambling online companies Bwin.party and 888 Holdings came under Tempus’s microscope. It reckons change in US state laws to gambling are in the offing and in this notoriously unpredictable market the two companies are in pole position to benefit

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: 888 Holdings, accuracy of data, Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Let banks fail says British Bankers Associations: give new banks a helping hand, Bwin.Party, capital requirements small banks, Dow five year high, Infant industries, Let banks fail, says FSA. Dow hits five year high. Tesco warns meat prices may rise. Recession or not a recession. Companies in the news: Petrofec, Tesco price of meat, too b

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