Justastory

This story just had everything: social networking, police, anti-banks, riots, drink, drugs, parties you name it it’s all there. Quite a few papers ran it at the end of the week — – the version I’ve chosen is from the Telegraph

A Facebook-organised party at a squat in a Park Lane town house was broken up by police after hundreds of youths caused havoc in the streets around the £10 million property.
Riot police dispersed crowds in the streets and cleared the building after partygoers pelted them with bottles and bricks from the roof and balcony.

Officers had been summoned to the party, allegedly organised by two teenagers from London, at 11pm after a wave of complaints from terrified neighbours.

Two members of the public were thought to have been injured as the partygoers jumped on cars, threw fire extinguishers and plant pots from windows and drew graffiti before the chaos subsided in the early hours of yesterday morning.

The property was bought for £10m in 2007 by (more…)

I saw this report from Reuters in Rome today. Thanks to a mistake in the online booking system thousands of punters booked a room in this rather nice Venician hotel for one cent a night….

Hundreds of holiday makers struck lucky when they chanced upon a very special offer — a mistake in a hotel booking system which offered a romantic four-star weekend in Italy’s lagoon city of Venice for 1 cent.

The offer, a tiny fraction of the Crowne Plaza Quarto D’Altino’s normal rate of up to 150 euros ($214) a night, was quickly withdrawn when staff realized the mistake, Italian state TV reported.

In just a few hours, some 1,400 nights had been booked under the tariff, costing an estimated 90,000 euros for the hotel, part of the Intercontinental Hotels Group, the world’s largest chain, media reported.

Staff at the hotel, some 25 km (16 miles) outside Venice, declined to comment. A spokeswoman for Intercontinental Hotels Group was not immediately available.

I read this article written by Sam Jones on the Financial Times website this afternoon, ft.com. I have avoided covering too much about the financial ups and downs of GB’s finest as it all tends to be very well covered everywhere else – but a major bank losing a quarter of its value in a single afternoon, that’s a story.

BARC down 24.85 per cent. RBS down 13.03 per cent.

- On an afternoon when the market is up, and the next nearest faller is Lloyds, down 5 per cent.

A flurry of rumours abound. Talk that Barc won’t be included in the putative UK government bad bank scheme; talk of monoline exposure; and talk of the impact from the downgrades on credit card companies to which Barc is exposed.

None of which, as rumours, seem to have the mettle to force Barc to lose a quarter of its value on a Friday afternoon – by our judgment at least.

Mayfair’s finest must certainly be enjoying this. It certainly seems like there’s been a raid on the day the short selling ban on UK financials expired. (Though on the other hand, Barc’s performance has been dismal all week.)
But we would draw readers’ attention to one other set of facts – presumably not the proximate cause of this afternoon’s panic, but certainly worth bearing in mind.

Last week, Sir Nigel Rudd resigned as deputy chairman of Barclays amid rumours of a spat with chairman John Varley over the valuation of certain assets on the bank’s balance sheet (a notion which has been dismissed by friends of both Rudd himself and Barclays).

Barclays is an industry leader in synthetics – corporate CDOs, structured credit products, et cetera. Before Christmas, there were a number of warnings circulating about the potential for disaster in this market – on almost the same scale as that seen in ABS CDOs.

Yesterday, rating agency Moody’s issued this notice (emphasis ours):

New York, January 15, 2009 — Moody’s Investors Service announced today that it has revised and updated certain key assumptions that it uses to rate and monitor corporate synthetic CDOs, a type of collateralized debt obligation backed by a pool of credit default swaps referencing corporate credits.

Moody’s is revising its assumptions to reflect the expected stress of the global recession and tightened credit conditions on corporate default rates, which are likely to be more variable and extreme than those in other recent historical downturns. Specifically, the changes announced today include: (1) a 30% increase in the assumed likelihood of default for all corporate credits in synthetic CDOs, and (2) an increase in the degree to which ratings are adjusted according to other credit indicators such as rating Reviews and Outlooks. Moody’s also announced an increase in the default correlation it applies to corporate portfolios as generated through a combination of higher default rates and an increase in investment grade and financial sector asset correlations.

Based on initial assessment, Moody’s expects to lower the ratings of a large majority of corporate synthetic CDO tranches by three to seven notches on average. The actual magnitude of the downgrades will depend on transaction specific characteristics such as tranche subordination, vintage and portfolio composition.

Those kind of cuts could have disastrous implications for banks’ asset risk weightings under the Basel II regime. Although many banks use their own internal methods to calculate risk weightings, rather than relying on an external rating-based approach, it will be very hard for banks to justify to auditors the use of models that are out of line with the kind of assumptions the rating agencies are now adopting.

Conclusion: any bank with large holdings of synthetic CDOs may be forced to make large writedowns and more seriously, stump up huge extra amounts of regulatory capital.

And which UK banks are big with synthetics? Barc and RBS, by our memory. More info to follow.

This entry was posted by Sam Jones on Friday, January 16th, 2009 at 16:45 and is filed under Capital markets. Tagged with barclays, rbs, Synthetic CDO.

Michael Lewis wrote this story in The New York Times this weekend. It’s a “lunatics taking over the asylum” piece really – there’s more if you want to read the rest of his telling words in the original article.

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating. By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)
At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

We all know this story – how Mr Madoff misplaced 50 billion dollars  and deceived the likes of  Nicola Horlick and other grown up investors the world over. It made me read about Charles Ponzi, the inventor of the eponymous Ponzi scheme. Does anybody out there notice a looky-likey resemblance? The story best encapsulating these links between the two ran in the New York Times yesterday.

 The $50 billion fraud that federal authorities say Bernard L. Madoff perpetuated has already been called the largest Ponzi scheme in history (though Dealbook reports there seem to be other contenders for that distinction).

On the surface, at least, it would seem that Mr. Ponzi and Mr. Madoff could hardly be more different. Mr. Madoff, 70, was a fixture in the high-flying worlds of finance and philanthropy, with a reputation that extended from Manhattan’s moneyed elite to the exclusive golf clubs of Palm Beach, Fla. Mr. Ponzi, who died in 1949, was a fast-talking immigrant and college dropout, whose scheme — according to Mitchell Zuckoff, Mr. Ponzi’s biographer — rested on the eagerness of ordinary working people to benefit from the wealth they saw being generated around them during the last Gilded Age.

“He had his nose pressed against the glass,” Mr. Zuckoff, a professor of journalism at Boston University and a former reporter for The Boston Globe, said in a phone interview on Monday. “He was not linked with Wall Street and New York, though he had dreams of being like Rockefeller.” (more…)

I am posting this story today, lucidly written by Michael J. de la Merced in The New York Times about the forthcoming demise – to my surprise – of what has been a key source of stories for me – the consistently robust (or so I thought) Chicago Tribune. The picture shows “billionaire real estate investor Samuel Zell”. Looks like a nice guy to me.

The Tribune Company filed for bankruptcy protection in a federal court in Delaware on Monday, as the owner of The Los Angeles Times, The Chicago Tribune and the Chicago Cubs baseball team struggled to cope with mountains of debt and falling ad revenue.

Tribune, which was acquired last year by billionaire real estate investor Samuel Zell, had hired bankruptcy advisers like Lazard and the law firm Sidley Austin in recent weeks as it negotiated with creditors over debt covenants. (Read the bankruptcy petition here.)

It is only the latest — and biggest — sign of duress for the newspaper industry yet. Several newspaper companies have struggled to cope with declining revenues and mounting debt woes. Tribune has pared back the newsrooms of many of its papers, and it sold off Newsday to Cablevision’s Dolan family earlier this year. It is unclear what Tribune’s filing means for other newspaper publishers on the brink.

“Over the last year, we have made significant progress internally on transitioning Tribune into an entrepreneurial company that pursues innovation and stronger ways of serving our customers,” Mr. Zell, who holds the titles of Tribune chairman and chief executive, said in a statement. “Unfortunately, at the same time, factors beyond our control have created a perfect storm — a precipitous decline in revenue and a tough economy coupled with a credit crisis that makes it extremely difficult to support our debt.

The Tribune Company owns 23 TV stations and 12 newspapers, including two of the eight largest in the country by circulation. As of Sept. 30, The Los Angeles Times had weekday circulation of 739,000 and the Chicago Tribune had 542,000.

Tribune has been trying to sell the Chicago Cubs baseball team; the team’s stadium, Wrigley Field; and the company’s share in a regional cable sports network. Such a deal, which could bring the company more than $1 billion, has been a crucial part of its strategy since last year.

But the sale — originally expected to take place before the last baseball season — has been delayed by several factors, including the tight credit market.

It is not clear how recent federal allegations of insider trading against Mark Cuban, believed to be the highest bidder, could affect the sale.

In a court filing, Tribune said it had nearly $13 billion in debt, compared to $7.6 billion in assets. Most of that debt was taken on when Mr. Zell acquired the company — a deal he struck using mostly borrowed money. All of the now privately held company’s equity is owned by an employee stock-ownership plan, which is likely to get wiped out. (Because the ESOP is relatively new, its losses are likely to be small. When United Airlines filed for bankruptcy in 2002, its employee plan, created in the mid-1990s, suffered much bigger losses.)

The company had to contend with hefty interest payments over the next year. In its court filing, Tribune listed a $69.6 million bond issue that was to mature on Monday.

Another pressing problem was a maintenance covenant on some of its debt that limits its borrowings to no more than nine times earnings before interest, depreciation and amortization.

Even if the company continues to make interest payments, failure to maintain that level of debt means technical default — which does not always lead to a bankruptcy filing. Other newspaper publishers have halted making interest payments on their debt, but have yet to file.

Tribune said in a statement that it has enough cash to keep operating as usual. Barclays, one of its existing lenders, agreed to amend an existing $300 million financing facility, as well as to provide a $50 million letter of credit. The latter is part of an overall debtor-in-possession financing package, which is usually extended to companies that file for bankruptcy. More details of the DIP financing could not be learned.

The top creditors listed by Tribune in its court filing include big banks like JPMorgan Chase, Merrill Lynch and Deutsche Bank. JPMorgan listed some of the firms it had syndicated its debt to as well; that list comprises private investment firms like Kohlberg Kravis Roberts’s KKR Financial, Highland Capital Management and Davidson Kempner Capital Management.

A CreditSights analyst, Jake Newman, wrote in a research report published last month that Tribune avoided technical default in the third quarter partially through some accounting adjustments. “We think the company will have difficulty meetings its year-end covenant compliance,” Mr. Newman wrote.

Tribune hired Lazard several weeks ago to assess its options, these people said. It also hired Sidley, a longtime outside adviser to Tribune that has a well-respected bankruptcy practice as well.

In its filing Monday, Tribune also said that it has retained Alvarez & Marsal, a restructuring adviser, as a consultant. Alvarez & Marsal is also advising Lehman Brothers, the collapsed investment bank whose filing was the largest corporate bankruptcy in American history.

Tribune’s problems have long been reflected in the price of its bonds. Tribune bonds maturing Aug. 15, 2010 with a 4.88 percent coupon traded at $13.25 on Friday, suggesting severe levels of distress.

–Michael J. de la Merced

It’s about time I ran a serious article about the economy after weeks of crisis – and Melvyn King gave an interesting analysis of what’s been going down in his speech to the Confederation of British Industry this Tuesday, which I am publishing in full here. However when I searched for an image of “King addressing CBI” this one came up, so I thought I would include it anyway. Pound drop, don’t stop….or something.

My first memories of Leeds are from a wet summer in 1958. I was ten years old, we lived on the moors above Hebden Bridge, and my father took me to my first Test Match – England against New Zealand at Headingley. It rained all day on both Thursday and Friday, and, when play started in mid-afternoon on Saturday, on a drying wicket New Zealand were bowled out by Laker and Lock for 67. So I became a slow bowler. I was taught to bowl – slow left arm – at Old Town primary school by the headmaster, Alfred Stephenson. During the morning break he would mark the wickets in chalk in the playground, and draw a small circle exactly on a length. If we could pitch the ball within that circle he would give us a farthing. As we improved, and the payout of farthings increased, the morning break became shorter and shorter – my first lesson in economic incentives, or what is known in the trade as “moral hazard”.
So let me move forward 50 years to the events of 2008, and describe the nature of the financial crisis, the steps that governments and central banks have taken to deal with it, and, most important, the implications of recent events for the UK and world economies. Since August 2007, the industrialised world has been engulfed by financial turmoil. And, following the failure of Lehman Brothers on 15 September, an extraordinary, almost unimaginable, sequence of events began which culminated a week or so ago in the announcements around the world of a recapitalisation of the banking system. It is difficult to exaggerate the severity and importance of those events. Not since the beginning of the First World War has our banking system been so close to collapse. In the second half of September, companies and non-bank financial institutions accelerated their withdrawal from even short-term funding of banks, and banks increasingly lost confidence in the safety of lending to each other. Funding costs rose sharply and for many institutions it was possible to borrow only overnight. Credit to the real economy almost stopped flowing. In financial markets, confidence in others fell to a point where investors sought refuge in government instruments such as US Treasury Bills, which at one point yielded a negative return. Central banks around the world were providing enormous amounts of liquidity to some institutions while at the same time taking large deposits from others. Eventually, on 6 and 7 October even overnight funding started to dry up. Radical action was necessary to ensure the survival of the banking system. And on the morning of 8 October that action was taken when the Prime Minister and Chancellor unveiled a UK plan for recapitalising the banking system on which the Bank, FSA and Treasury had been working for a while. Why was radical action necessary? When the financial turmoil began in August 2007, markets for a number of financial instruments, including mortgage-backed securities, dried up. Most observers expected this closure to be short-lived, and the predominant view was that the crisis was one of (a lack of) liquidity. But, as time passed and markets did not re-open, it became clear that the problem was deeper seated, and concerned the solvency of the banking system and the sustainability of its funding model. Attempts to deal with the problem by injections of liquidity from central banks led to temporary alleviations of the symptoms, but, after an initial improvement, conditions would deteriorate again. The scale of central bank liquidity support during the crisis has been unprecedented, and all central banks have increased the scale of their lending in broadly similar ways. The UK taxpayer now has a larger claim on the assets of banks (in the form of collateral held by the Bank of England) than the total equity value of UK banks. Massive injections of central bank liquidity have played a vital role in staving off an imminent collapse of the banking system. Such lending can tide a bank over while it is taking steps to remove the cause of the concerns that generated a run or lack of confidence. But it can also serve to conceal the severity of the underlying problems, and put off the inevitable day of reckoning. I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks. Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment. Just as a fever is itself only a symptom of an underlying condition, so the freezing of interbank and money markets was the symptom of deeper structural problems in the banking sector. So let me explain why a major recapitalisation of the banking system was necessary, was the centrepiece of the UK plan (alongside a temporary guarantee of some wholesale funding instruments and provision of central bank liquidity), and was in turn followed by other European countries and the United States. Securitised mortgages – that is collections of mortgages bundled together and sold as securities, including the now infamous US sub-prime mortgages – had been marketed during a period of rising house prices and low interest rates which had masked the riskiness of the underlying loans. By securitising mortgages on such a scale, banks transformed the liquidity of their lending book. They also financed it by short-term wholesale borrowing. But in the light of rising defaults and falling house prices – first in the United States and then elsewhere – investors reassessed the risks inherent in these securities. Perceived as riskier, their values fell and demand for securitisations dwindled. For the same reason, the value of banks’ mortgage books declined. Banks saw the value of their assets fall while their liabilities remained unchanged. The effect was magnified by the very high levels of borrowing relative to capital (or leverage) with which many banks were operating, and the fact that banks had purchased significant quantities of securitised and more complex financial instruments from each other. Not only were these assets difficult to value, but the distribution of losses across the financial system was uncertain. Banks’ share prices fell. Capital was squeezed. Markets were sending a clear message to banks around the world: they did not have enough capital. At the Annual Meetings of the IMF and World Bank in Washington ten days ago, the message was reinforced by our colleagues from Japan, Sweden and Finland, who, with eloquence and not a little passion, reminded those present of their experience in dealing with a systemic banking failure in the 1990s. Recapitalise and do it now was the lesson. Recapitalisation requires a fiscal response, and that can be done only by governments. Confidence in the banking system had eroded as the weakness of the capital position became more widely appreciated. But it took a crisis caused by the failure of Lehman Brothers to trigger the coordinated government plan to recapitalise the system. It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted. The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else. So where does this leave us? The recapitalisation plan is having a major impact on the restoration of market confidence in banks. Perhaps the single most important diagnostic statistic is the credit default swap premium – an indicator of market concerns about solvency of banks. These premia have fallen markedly since the announcement of the UK plan. From the close of business on 7 October to now the premia on the UK’s five largest banks have more than halved. We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner. As concerns about the viability of our banks recede, banks should regain the confidence of the market as recipients of funding. There are already some signs of greater activity. But the age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return. In itself that does not affect the ability of banks to fund lending, but confidence has been badly shaken after the traumatic events of the past few weeks. New sources of funding will develop only slowly, although the temporary government guarantees of new lending to banks will help. So it will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy. And we cannot assume that there will not be problems in other parts of the financial system and in some emerging market economies to be overcome before the crisis can truly be described as over. With the plan for recapitalisation in place, the focus of attention has moved to the outlook for the UK and world economies. Over the past month, the economic news has probably been the worst in such a short period for a very considerable time. The most recent activity indicators for the second of half of the year have fallen sharply. In the UK, unemployment continues to rise and, over the past three months, has risen at the fastest rate for seventeen years, albeit from a relatively low level. House prices declined by about 5% in the third quarter and are 13% lower than a year ago. The recent weakness of the housing market is likely to continue. And if the news on the domestic front were not sufficiently discouraging, the rest of the world economy also appears to be slowing rapidly. Why has the outlook deteriorated so quickly? The banking crisis dealt a severe blow to the availability of credit. Growth in secured lending to households fell to an annualised rate of 1.9% in the three months to August, its lowest level in more than a decade. The Bank of England’s survey of credit conditions suggests that the terms on which banks provide credit to companies have tightened even further. And, on some estimates, the supply of finance to the UK corporate sector has ground to a halt. This credit shock has come on top of a fall in real disposable incomes resulting from the rise in energy and food prices earlier in the year. So, taken together, the combination of a squeeze on real takehome pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession. At the same time, consumer price inflation, our target measure, has risen from around the 2% target at the beginning of the year to a worryingly high rate of 5.2% in September. Oil and other commodity and food prices have all been rising very rapidly. In those circumstances, it was sensible to allow those price changes to be absorbed by movements in consumer prices. The alternative would have been an even sharper slowdown in the economy. Central banks in other countries also find themselves in a similar position. Over the past year or so, CPI inflation rose from 2.0% to 5.6% in the United States and from 1.7% to 4.0% in the euro-area. It is surely probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally. But two pieces of good news should temper the gloom. First, the banking system will be recapitalised and, in due course, the banking system will resume more normal lending, although by normal I do not mean the conditions that prevailed prior to August 2007. Second, oil prices have now fallen from a peak of $147 a barrel only three months ago to around $70 today. And wholesale gas prices have now also started to follow oil prices down. That will help to support the growth of real incomes as well as bringing down inflation. So, what should the Monetary Policy Committee do now? It must continue to set Bank Rate in order to meet the 2% inflation target, not next month or the month after, but further ahead when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy. This is the time not to abandon but to reinforce our commitment to stability. The slowdown in demand, and the recent falls in energy prices, will bring inflation back towards the target. The Committee must balance the risk that a prolonged slowdown in domestic demand pulls inflation materially below the target against the risk that today’s high inflation rate becomes embedded in inflation expectations. During the past month, the balance of risks to inflation in the medium term shifted decisively to the downside. And the MPC – in an action co-ordinated with six other major central banks – cut Bank Rate by half a percentage point to 4.5%. Looking ahead, the outlook is obviously very uncertain – both for the world as well as our own economy. The MPC cannot simply extrapolate the past into the future. The prospects for oil and other commodity prices are difficult to assess. So too are the period over which bank lending will return to normal and the extent of the damage to business and consumer confidence. Moreover, the credit crunch affects not just demand but also the supply potential of the economy, complicating the assessment of the inflationary impact of changes in the level of demand. The associated shift of resources away from those parts of the economy that have flourished in recent years towards other areas of economic activity will moderate the increase in potential output while that adjustment is taking place. The MPC must monitor carefully all the available evidence about fastchanging patterns of spending, supply and prices. It will act promptly to ensure that inflation remains on track to meet our target.
The downturn in the economy will affect not just monetary policy but fiscal policy too. That subject is for another occasion, but there is one point I do want to make tonight. The cost of supporting the banking system will inevitably raise the level of national debt. Managed properly, however, such a rise in national debt need not prove inflationary. Indeed, within a reasonable period it should be possible for the Government to reduce its stake in the banking system, for example by selling units in a Bank Reconstruction Fund, and repay the additional debt that had been issued. That is one difference between past increases in national debt in times of war and the increase now to pay for recapitalisation of the banking system which involves the acquisition of an asset. Let me take you back again to 1958. In the very first television interview given by a Governor of the Bank of England, Cameron Cobbold explained national debt to Robin Day on “Tell the People”, the highlight of ITN’s Sunday evening schedule fifty years ago. Here is the exchange:
Cobbold: The National Debt represents the sums of money which the Government have over the years borrowed from the public, mainly in this country and, to some extent, abroad. That is really the amount of expenditure which they have failed over the period to cover by revenue.
Day: Have we paid for World War II?
Cobbold: No.
Day: Have we paid for World War I?
Cobbold: No.
Day: Have we paid for the Battle of Waterloo?
Cobbold: I don’t think you can exactly say that.

On this occasion, we should have little difficulty in evaluating when we have paid for the recapitalisation. There are, though, questions about the source of the funding and the level of borrowing by the country as a whole from overseas. For several years, the UK banking sector has been relying extensively on external capital flows, principally shortterm wholesale funding, to finance its lending activities. Those external inflows have 9 fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s. Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run. With the bank recapitalisation plan in place, we now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions. The past few weeks have been somewhat too exciting. The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks. I hope banks will come to appreciate, just as the New Zealanders at Headingley in 1958, the Yorkshire virtues of patience and sound defence when batting on a sticky wicket. I have said many times that successful monetary policy would appear rather boring. So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing. The long march back to boredom and stability starts tonight in Leeds. ENDS

I found this on the internet today and it provided me with a refreshing antidote to the stories of Royal Bank of Scotland plunging over 40 percent in value, America in dissarray, Wall Street bankers hurtling to their doom down the sides of skyscrapers….. purporting to be a 419 scam (you know, those emails from scammers claiming to be the president of Nigeria) for me it captures the mood of a moment.

Dear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of US$800 billion. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours faithfully,
Minister of Treasury
Paulson

I actually loved this idea. My son still insists that “art is for people with a lot of time on their hands.” An interesting perspective. As you would expect, I have accused him of being a Nazi book burner. My son, not President Bush of course. I have given my son the Hans Johst quote – “when I hear the word culture, I reach for my gun. ” Some people mistakenly attribute this quote to Himmler or Goring. But let’s not beat around the bush (arrrrgh) Johst was a died in the wool Nazi too. Anyway…….Jean Luc Godard later restyled this in the film “le Mepris”….”when I hear the word culture, I reach for my cheque book.” More like it in this day and age. I have featured a story from der Spiegel…no irony intended. I just love their dry tone of voice here.Please note, as der Spiegel says,  that offensive portions of this picture have not been pixellated.

Artist Jonathen Yeo has created a collage portrait of US President George W. Bush by cutting up porn magazines. The Bush portrait, currently on display in London, has attracted the wrath of Republicans.

British artist Jonathan Yeo had every reason to be offended. The Bush Library in Texas had yet again rescinded a commission it had given him to paint a portrait of United States President George W. Bush. In the end, though, the artist decided to go ahead with his artistic portrayal of the 43rd president, even if he wasn’t getting paid for it — and created a portrait of Bush using a collage of pornographic images.

The tribute has not gone over well with Bush’s supporters. A spokesman for Republicans Abroad International described the portrait as a “cheap stunt” in an interview with the British tabloid The Sun. Meanwhile, a spokesman for the Republican Party in Bush’s home state of Texas didn’t find much humor in the portrait either. “This picture is very distasteful,” he told the paper, adding angrily, “Why would anyone want to make a picture of our president from pornographic material?”

For his part, artist Yeo has reacted calmly to the furore over the smutty visage. “I did it for fun, not to offend,” he told the paper, adding that he was “pleased with it.”

Nor has Yeo always been so cruel to politicians. He recently completed a portrait of former British Prime Minister Tony Blair — without the help of nudity, sexual acts or graphic displays of genitalia.

The artwork, titled “Bush 2007,” is currently being shown as part of an exhibition at London’s Lazarides Gallery and is available in a limited edition run of 150 prints, each measuring 86 by 56 centimeters.

Spread betting is an interesting game. We were talking about it in our office at the end of last week –for many people it allows entry into a world of speculative gambling which would otherwise be denied them. There are no warm feelings for Mike Ashley in the Newcastle United supporters enclosure – I wonder how this news was greeted by them. This story ran in the daily mirror  on Saturday and was written by Adrian Butler. 

Football tycoon Mike Ashley has lost £300million this week in a BET on crisis-hit bank HBOS.

The Newcastle United owner watched helplessly as HBOS shares plunged in value on Tuesday and Wednesday under sustained attack from speculators.

Ashley made his mammoth  bet in March on HBOS’s share price when the price was just under £6.

He gambled that the shares would go up and put down £50million – a 10 per cent deposit of the total HALF A BILLION pounds he was gambling.

The terms of the bet meant that for every penny HBOS’s share price went up Ashley made £800,000, and for every penny it went down, he lost the same amount.

Betting on the performance of shares – financial spread betting – is a way of playing the markets while avoiding capital gains tax. High-rolling gamblers predict what will happen to a firm’s share price and can make millions if they get it right.

But if they get it wrong and the shares move in the opposite direction, they end up having to pay fortunes to the financial bookmakers who take the bets.

On Wednesday, as the world reeled from the collapse of US bank Lehman Brothers and insurer AIG, HBOS shares went into freefall amid fears about dodgy debts.

Ashley lost £100million in just one hour as the shares plummeted to an all-time low of 88p.

When trading closed for the day after the price rallied slightly, Ashley had lost £50million in a day, with the world economy in meltdown. He would have been required to wire cash to betting firm IG Index to cover the loss.

The £50million hit took Ashley’s loss on his HBOS punt to the mind-boggling total of £380million.

Amid the Lloyds Bank rescue of HBOS, the share price recovered steadily on Thursday and Friday to £2.22, but that still left Ashley £300million down.

And as he was losing millions, Newcastle’s owner – whose wealth has been estimated at £1.4billion – was also struggling to sell the club for his asking price, potentially putting him out of pocket by another £100million.

Ashley decided to quit Newcastle after he was blamed by angry fans for manager Kevin Keegan’s exit earlier this month. He has been in Dubai trying to sell the club for £400million – but offers so far have valued it at only £200million.

Ashley said of his gambling loss at the time: “It is what it is. Unfortunately every morning I get up, I don’t always back the winner.”

A source close to the businessman said: “Mike has had the week from hell. He was complaining he would be left disastrously out of pocket from Newcastle. Then he is being stalked by this bet, which is killing him financially.”

Spread-betting expert Malcolm Pryor said: “I’ve never heard of a loss as big as this.  Anyone could have seen the way the financial market was going this week – what made Ashley think HBOS would be the exception? Ashley looks like he’s made the classic poker error – he knows he has a bad hand but he won’t get out of the pot.”

His losses began with £129million in March, then grew to £200million by July. But his real problems hit last week, when he told pals: “I’ve lost £300million this week.”

Ashley has admitted he loves gambling, spending many nights in the exclusive Fifty casino on St James Street, Central London.

“Many of the most successful people I know are gamblers,” he said. “When you get up on Monday morning you are in the risk business. But there is a fine line between an entrepreneurial investor and a gambler.

“People say: how do you play poker? My answer is ‘all in’ – I’ve always been the same.”

James Purnell (Work and Pensions Secretary of State) spoke today in Parliament about Labour’s new ideas with regard to the unemployed and how they get benefit. As the Independent points out, (all the papers covered this but I have included Ben Russell’s take on it) it would mean a far from sympathetic deal for those unfortunate enough to be drug addicts. Incapacity benefit is to be scrapped altogether. Steer clear of drugs. (240,000 addicts on benefit). And don’t fall ill.

Heroin or crack cocaine addicts will be forced to seek treatment or lose their benefits and the long-term unemployed will be forced to work for their dole under the most radical reform of the welfare state in more than 60 years.

Incapacity benefit and income support will also be abolished in a package that stresses there can be “no right to a life on benefits” for anyone capable of working.

A leaked draft of the Government’s welfare Green Paper, due to be published on Monday, sets out tough conditions for claimants, making it clear that they must match the right to help with the responsibility to find a job.

The plans billed in the document as a “social revolution”, are likely to provoke an angry reaction from some Labour MPs.

Under the proposals, the estimated 240,000 heroin or crack addicts on benefits will be required to seek treatment in return for their money. The document warns: “Many people who are dependent on benefit are also dependent on drugs so we cannot hope to tackle one without addressing the other.”

Pilot schemes will increase pressure on the long-term unemployed to seek work. People on jobseekers’ allowance for more than a year will be forced to do at least four weeks’ full-time work in return for benefits and will be put on back-to-work programmes run by private or voluntary groups paid by results. Those out of work for two years could face tougher tests such as daily signing-on. Incapacity benefit will be replaced with an employment and support allowance. People unable to work will get a higher rate of long-term benefits.

Income support will also be abolished, with claimants transferred on to jobseekers’ allowance. Single mothers will have to seek work once their children turn seven. At present they can remain on benefits until their children reach 16.

In a letter accompanying the leaked draft, James Purnell, the Secretary of State for Work and Pensions, said he wanted to maintain “a clear balance between rights and responsibilities”.

Yesterday’s leak of a full copy of the Green Paper just days before its official publication caused dismay among officials.

But the Conservatives leapt to claim credit for the proposals, many of which they said were lifted from their policy paper on welfare reform earlier this year. Government sources dismissed that suggestion.

Chris Grayling, the shadow Work and Pensions Secretary, said: “Many of these proposals first appeared in our Welfare Green Paper six months ago, and it would be great news for Britain if the Government is planning to introduce the radical change that we have been arguing for.”

Jenny Willott, the Liberal Democrats’ work and pensions spokesman, said: “This Green Paper ignores the fact that over half of the adults living in poverty are in work, largely thanks to the poverty trap Labour has created with means-tested benefits.”

The issue of the rising cost of food in comparison to other items has to be salient for anyone who shops regularly in Britain. Ordinary commodities like apples, eggs and milk seem to have soared in price in the last three months. When I read this piece by John Henley in The Guardian, he actually puts some real figures down showing the amounts which these items have risen by. Scary. Particularly if you’re living on a tight budget. Me, I’ve been shopping in Lidl for years now.

There comes a point when you can no longer afford to ignore it. You may, if you are lucky, have found it hard to get worked up about the fact that the average loaf of sliced bread now costs £1.15, compared with less than £1 last year. You may have shrugged on learning that a pint of semi-skimmed milk will currently set you back approximately 20% more than it did in May 2007. But you would have to be really very relaxed – or very flush – indeed not to be moved by the realisation that when a dozen medium free-range eggs are also up 47%, salted butter 62%, Basmati rice 60%, cheddar 25%, pork 7% and beef nearly 5%, you are paying an awful lot more for your groceries than you were a year ago.

According to the Office of National Statistics, food prices have climbed 6.6% over the past 12 months (and April’s hike equalled the fastest increase recorded since the consumer price index was invented 11 years ago). The big supermarkets, which constantly juggle prices across the whole of their range, dispute this figure. But a survey of 24 staple products this week by the myconsumer.co.uk website, which compares prices at Tesco, Asda, Sainsbury’s and online supermarket Ocado, found that the average family is now spending around 20% more on its weekly food shopping than it was 12 months ago – equivalent, based on a trolley filled with £100 of groceries, to rather more than £1,000 a year.

As a result, it seems, we are beginning to change the way we shop. The evidence? Cheaper retailers such as frozen-food chain Iceland and German-owned Aldi have seen their sales soar as shoppers who would usually grace the aisles of upmarket alternatives such as Waitrose or Marks & Spencer poke their noses round the doors of the long-disdained, deep discounters. Canny consumers who have been loyal to particular brands for longer than they can remember have suddenly started switching, in search of better bargains. And sales of organic products, which only a short time ago were seen as the bright new future of food retailing, have slowed dramatically.

“I’m seeing a real change,” says Paul Foley, managing director of Aldi UK. “I’m seeing people in my stores who I would never have seen a few years ago. To be fair, it has been a growing trend over the past three years or so, but it’s true that over the past few months it has accelerated. I think rising utilities bills, fuel bills, mortgages and now food bills have jolted people into considering trying somewhere new. And that’s a big deal, you know: most people can’t remember how long they’ve been going to the same supermarket, often on the same day and at the same time. They’re almost on autopilot.”

Aldi says its shopper numbers have increased by 25% over the past three months compared with a year ago, while the number of ABC1 customers passing through its doors is up a startling 17%. Fully half the discounter’s shoppers now belong to those higher socio-economic groups, Foley says. “Part of that shift is down to the fact that we’ve changed, too,” he says. “Compared with five years ago, we offer many more upmarket ranges; we’ve won national awards for food quality; our fresh-food section has been hugely expanded. I think the people coming to Aldi now are discovering that shopping at a discounter these days isn’t quite the desperate, eastern European experience they thought it was. I think it’s quite shocked some of them.”

The bottom line for deep discounters such as Aldi, though, will always be the price of the goods in their shoppers’ trolleys: its current Super Six promotion – “Is this the best-priced fruit and veg in Britain?” – offers, for a barely credible 59p each, six oranges, six kiwis, 250g of baby plum tomatoes, or three gem lettuces. According to Foley, a full weekly shop that would cost an average family £100 at Sainsbury’s costs around £70 at Aldi. “If you only shop for the absolute basics, say a £10 basket, the difference will be smaller,” he says. “You need to shop across the full range to get maximum benefit – the price differential on milk, for example, will only be about 4% or 5%. On cosmetics, it can easily reach 50%.”

Research published this week by market information group TNS Worldpanel showed discounters such as Aldi and Iceland, and relatively cheap alternatives such as Morrisons, have fared substantially better than their more upmarket competitors over the past three months, booking sales growth of 17%, 12% and 9% respectively. “Obviously, everyone has a measure that will allow them to say, ‘We’re cheaper than someone else,’” observes Iceland’s marketing director, Nick Canning. “We’ve actually been outperforming the market for the past five or six years, but it’s certainly true that right now, the great British public have a lot less money in their pockets. They’re being a great deal more careful.”

Even the very big boys, it seems, are noticing the squeeze. Tesco this week introduced almost 1,000 new promotions and special offers “in a bid to help hard-up consumers make ends meet”. As household costs continue to increase, the company said in a statement, “Britain’s favourite supermarket will have more products on promotion than it has ever had at any one time. From bread to bathroom cleaner and with savings including half price, extra free and buy one, get one free, there will be an offer to help every customer.” Chief executive Sir Terry Leahy boasted in the supermarket’s annual review that Tesco currently has “more than 9,000 products on promotion – the highest number of offers at any one time in our history”.

Stretched budgets are not tempting everyone to ditching their regular retailer, however. “The automatic assumption is that as soon as prices go up, people switch supermarket,” says Johnny Stern, managing director of the mysupermarket.co.uk price comparison site. “That is happening to some extent, certainly. But in fact most people are actually quite loyal to their supermarket, especially to its own brands, and what they are doing more often is not swapping their whole basket, but swapping products within that basket. The cost of their basics – eggs, milk, pasta, tea, orange juice, fruit, meat and so on – may have leapt by 19% over the past year, but the cost of their basket has gone up by quite a bit less. They’re doing some quite clever product switching.”

According to Stern, smart consumers are not just alternating between, say, Heineken, Carlsberg and Becks beer, Haagen-Dazs and Ben & Jerry’s ice cream, or Evian and Volvic mineral water, but between different packaging options offered by the same brand. “They may switch to a different product if it’s really markedly cheaper,” he says. “The simple option, obviously, is to move to an own-brand. But often, they’ll save by buying their usual brand differently – a 12-pack rather than a six-pack, larger bottles, what have you. Consumers are suddenly much less product- and packaging-loyal than they have been.”

As if to confirm the picture of a nation of altogether more cost-conscious consumers, last year’s 30% growth in the sales of more expensive organic foodstuffs has slumped to just 10%. And while we now seem to be buying rather more products than we once did from the supermarkets’ premium quality ranges such as Tesco’s Finest, Sainsbury’s Taste the Difference and Morrison’s The Best, this is absolutely not because we’re feeling flush enough to pay the mark-up – but because we’re not feeling flush enough to eat out in restaurants. Truly, times are hard.

This story has been in all the TV news reports over the weekend – but the fact I wanted to draw attention to was that Bear Stearns was valued at $169 per share just about a year ago – and today’s price was $2. And this could easily have been regarded as a “safe haven” kind of investment. My forward-looking sunglasses are far from rose-tinted. The news breaks this morning that the bank has been bought by JP Morgan for a fraction of its original value. The cartoon is by Pat Bagley of the Salt Lake Tribune. This article was written by Tony Bonsignore in Citywire

Just when it seemed the news couldn’t get any worse, it duly did, and on a Sunday evening too. Last night’s shock announcement that troubled US investment bank Bear Stearns had been forced into an emergency sale sent shockwaves through Asian and European markets this morning, as panicked investors tried to figure out where the madness might end. Not anytime soon, was the general conclusion.

The scale of the collapse is terrifying. As America’s fifth largest investment bank Bear Stearns was at the forefront of the US housing-led economic boom of the past decade, and currently employs some 14,000 staff. At its peak in January 2006 – interestingly around the same time as the US housing market peaked – the company’s shares were valued at a mind-boggling $169.

Last night’s deal agreement with JP Morgan Chase valued the company at a measly $2 per share, an ignominious way to end 85 years of independence. But perhaps even more disturbing is the speed and nature of Bear Stearns’ fall from grace. That a deal happened at all was only thanks to the US Federal Reserve, which agreed to fund up to $30 billion of the deal. And all this barely a week after the Fed injected more than $400 billion into the financial markets in a desperate attempt to shore up liquidity – a move that some cynics said at the time was indicative of a looming solvency crisis at a major US bank. It is now clear that these worries were well founded, though investors will take no solace in being proved right.

Most commentators this morning agree that the credit crunch has entered a frightening new phase, and that worse may be yet to come. In the very short term investors will be nervously looking to this week’s results from Wall Street giants Goldman Sachs, Lehman Brothers and Morgan Stanley, looking to assess how far they have been hit (or escaped) the worst of the sub-prime fallout. Even then, however, suspicions are likely to remain that banks are yet to come clean about the real extent of their losses. Punch-drunk investors are understandably reticent to believe anything the banks tell them right now.

There are also growing fears that Bear Stearns is not the only major US bank facing solvency issues. If Bear Stearns does turn out to be an isolated incident then we may look back on this as the moment the crisis peaked. However, if another bank hits the skids it is difficult to see how the Fed can contain the damage in the same way; another JP Morgan-style deal will certainly be considerably more difficult to arrange. In that nightmare scenario the US may yet see a full-blown banking crisis on a scale not seen since the 30s, something almost too dreadful to contemplate. Unfortunately in these dark times investors and central bankers cannot help but do just that.

Closer to home, the long term impact of our own banking collapse may become a little clearer later today with news expected of a massive job cull at Northern Rock. The government-owned lender is set to shed at least 2,000 jobs and halve its loan book over the next few years, in a revised business strategy aimed at meeting European competition rules. Meanwhile the Centre for Economic Business Research suggests that some 10,000 City jobs are set to be lost over the next year as a result of the ongoing market turmoil – an increase of more than 50% on its previous estimate, made just three months ago.

I include this story with some reluctance – it’s sort of got to be the one today really as I feel it is the beginning of the end for Darling as Chancellor, and even for Brown as PM. He is ex Chancellor of course –and the way they have both handled this looks hamfisted in comparison to the leadership style of the ruthless but effective Blair. I chose the story from the Guardian, Fiona Walsh and Jill Treanor had got to some of the meaty bits but had held back from saying what I’m saying out of a sense of misplaced loyalty I suppose- though it won’t be long.

Shares in stricken mortgage lender Northern Rock were suspended from stock market dealings this morning following the government’s controversial decision on Sunday to nationalise the bank.

Its shares closed on Friday at 90p, valuing the Newcastle-based company at around £380m. A year ago it was worth more than £5bn.

The government’s move – the first nationalisation of a British company since the 1970s – has been greeted with fury by Northern Rock shareholders.

Although chancellor Alistair Darling said yesterday the government would appoint an independent valuer to decide the level of compensation, shareholders are expected to receive little, if anything, for their shares.

They are now considering a legal challenge against the government. Jon Wood, head of the Monaco-based hedge fund, SRM, said it was it was “a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre”.

SRM is Northern Rock’s largest shareholder, with a stake of over 10%. Shares in another hedge fund, RAB, which has just over 8% in the bank, plunged in early trading this morning, tumbling 9% to 63p.

Prime minister Gordon Brown is scheduled to hold a briefing on Northern Rock at 11 o’clock this morning. This afternoon Darling will put forward the emergency legislation in parliament, with a Commons statement due at around 3.30pm.

The chancellor, who has his own mortgage with Northern Rock, said this morning that the government is still open to offers for the bank. “If people have proposals, of course we will listen to them,” he told the BBC, although he cautioned that the current state of the financial markets meant it was “not an ideal time” for a deal.

He again stressed that the nationalisation was a temporary move – “the government can’t run a bank; governments don’t do that” – but said that the timing of a return to private ownership would depend on market conditions.

Unions are expected to meet today with Northern Rock’s new executive chairman, Ron Sandler, to discuss potential job losses among the 6,000 or so staff. He will also give a press conference at 1pm today.

Sandler, who is being paid £90,000 a month to head the nationalised bank, was first approached by the government last November, as part of its contingency planning for nationalisation.

He has a good track record as a “company doctor” and won respect in the City for his role in revitalising the troubled Lloyd’s of London insurance market in the 1990s.

One of Societe Generale’s traders had a position, or placed a “bet” worth about 50bn euros that was actually worth more than the entire value of the bank he worked for – about 35bn euros. Incidentally, 50 bn euros is about the size of France’s annual budget deficit. That’s what’s at the root of the story it seems. The Telegraph tells us the latest in this in a story by Henry Samuel and Nick Allen

The French “rogue trader” accused of the biggest banking fraud in history has claimed that he was being made a scapegoat by his employers who had “tolerated” his risky deals as long as they made money.

Jérôme Kerviel, 31, has been placed under official investigation but allowed to walk free on condition he remained in the country. He faces multiple charges of forgery, computer hacking and breach of trust, but the charge of attempted fraud was not pressed.

Kerviel says he wants to co-operate fully with the authorities.

Prosecutors said that he had behaved “like a financial drug addict” as he bet wildly on stock markets. They said they would appeal against his release.

But in a series of counter accusations against Société Générale, France’s second biggest bank, Mr Kerviel said he and other traders had regularly exceeded trading limits set for them by the bank.

Prosecutor Jean-Claude Marin said that the £75,000-a-year junior trader had not stolen money from the bank but had hoped to secure a higher salary and large bonus and to boost his reputation as an “exceptional” trader.

Mr Kerviel admitted concealing deals but told investigators he was a loyal employee who only wanted to raise the bank’s profits.

Mr Kerviel claimed his strategy had been hugely successful, that he was almost £1 billion in profit in December and that he had been rewarded by the bank with a guarantee of a £200,000 bonus for 2007.

He claimed to have begun his activities in late 2005, whereas the bank has said they only stretched back a year.

SocGen faced further embarrassment after it was disclosed that the bank had been warned about Mr Kerviel’s massive trading volumes in November by a derivatives exchange. He produced a fake document which threw his bosses off the scent, Mr Marin said.
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Several shareholders also filed a complaint with the French financial markets watchdog yesterday after it transpired that a member of SocGen’s board sold shares worth €86 million on Jan 9 – shortly before the scandal broke.

Mr Kerviel claims SocGen then brought the disastrous situation on itself by hastily selling his positions last week when they discovered the scale of his trades. At that time he held positions worth about £37 billion, more than the market value of the bank.

Mr Kerviel’s version of events is very different from that given by SocGen head Daniel Bouton, who has compared the young trader to a lone “terrorist” in the bank’s midst and a “great pretender”.

A hunt for possible accomplices began with police focusing on calls and text messages Mr Kerviel sent and received on his mobile phone.

But Elisabeth Meyer, one of Mr Kerviel’s lawyers, said: “It’s a lynching. He has been thrown to the lions before being able to explain himself.”

The scandal has added to the deep distrust the French have of free market capitalism, at a time when President Nicolas Sarkozy is trying to push through relatively liberal economic reforms and encourage the French to embrace financial success.