Friday, May 22, 2009
An hour's read, but a very worthwhile one
London Book Review: John Lanchester: The Banks - Its Finished
IMO, this is an excellent summation of the state of our banks. Like we've been saying for some time, this is a solvency crisis rather than a liquidity crisis - only no-one wants to admit that. Lanchester also pinpoints four reasons why the UK government is so reluctant to nationalise our banks (mostly pride and political embarrasement). He clarifies the difference between 'toxic assets' and 'toxic prices', and how the former is being used to disguise the fact that the assets are simply hugely overpriced. Finally, he also explains the principal reason the ratings agencies are taking a dim view of the UK's finances right now - the UK has effectively become the world's biggest credit default swaps trader for UK banks' bad assets.
Posted by paul @ 10:03 AM (829 views) Add Comment
6 Comments
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1. stillthinking said...
Great post.
2. bellwether said...
Thanks Paul and well found, will read over the weekend - with some alcohol close to hand, looks as if I will need it!
3. icarus said...
Good, clear stuff. Will they ever strip Sir F*** Goodwin of his knighthood? The form is unclear - they took away Lester Piggott's gong for tax evasion but not Conrad Black's for misuse of investors' money. Maybe Sir F*** doesn't care either way as long as he keep getting his £15,000 a week.
4. Flatbread said...
Wow! Excellent article.
5. paul said...
A reasonable analogy I suppose is the locked box for sale.
If I tell you that the contents of the box were worth £1k two years ago, what would a fair price be now?
Given that both buyers and sellers know that the market for these boxes is in a state of turmoil, the buyer might say that £150 or maybe £200 is a reasonable price. But of course, the seller wants £800 for it. Even worse, if he gets less than £700 for it, he is effectively bankrupt because he paid £1k for it.
So the real problem is that the box won't sell at the price sellers need to stay afloat, so with the tacit nod of the government, the contents of the box are labelled 'toxic', and put aside until Things Get Back To Normal. Additionally, the seller says that he has liquidity problems rather than solvency problems.
The trouble is, this is the new normal and that box will never again be worth its 2007 pricetag.
Sound familiar? Sounds awfully like the standoff in the housing market right now.
6. icarus said...
....and the bank which loaned lots of £700s to buy the boxes doesn't want to seize them and flood the market with them because that would reveal that the mark-to-mkt value is indeed £200, thus breaking the bank. Better to keep the standoff position and support the accounting fantasies that this makes possible.