Ordinary Thunderstorms

I met William Boyd at the London Book Fair and had been looking forward to reading this book in spite of some reviews which cast a little doubt over its quality. I think that what he achieves in this book is significant. There is the tension that you would expect from what is I suppose a thriller. It comes very early on and I worried a little that it might lose strength. However, the energy is maintained by the introduction of deep characters and the slow emergence of the 'real' plot. There is revealing description of low life London. It is a book that takes you out of a safe place into one outside normal society.

Middlemarch

Don't be silly; a blog could not possibly do justice to this masterpiece. You'll be blogging Shakespeare next, and any way how come you haven't read it before?
You see it in Felix Holt, but here it is more subtle: the way the plot doesn't work in a linear fashion, but rather is a web of influences and linkages. It would probably be true to say that this book couldn't be written now since editors would stamp hard on the authorial comments. Yet they, with the thoughts of so many of the characters, serve to offer a deep insight into 19th century rural life. I want to tell my lecturer in rural history that this is a first class primary source. It has everything: reaction to the Reform Act, agricultural reform, absent clergy and the absolute domination of money

The deficit

In a much earlier blog I observed that what had happened was that public borrowing, which had previously been used to power the economy through recessions, had been replaced by private borrowing on an unprecedented scale. The dramatic reduction in the availability of credit has through the consequent recession caused a very large number of borrowers to default. The anticipation of this stripped banks' balance sheets of value sending them cap in hand to government who have poured in money like water. Government now wrings its hands at the deficit it is running and its own need for borrowing.
I can't help feeling that an economy which places sensible controls of private borrowing but which is realistic about the need for cyclical public borrowing is likely to end up healthier than the free for all which has got us into this very much larger mess.

Broken Bonds

Broken Bonds is a novel about a man who sought to prove himself and was prepared to give anything in order to do so. He failed and sank. His wife Ally, as principal narrator, now seeks to make sense of what has happened. 

Ed Smith was among the first great rush of bright young men and women who flocked to City jobs with the promise of fat bonuses. Ed, though, viewed it as an opportunity to prove a point: that markets should be free from governmental interference, but that they can be modelled mathematically and beaten. He was a designer of Bonds, which were, in effect, investments in mortgages. The high return these offered was achieved by investing in mortgages which charged very high rates of interest after an introductory period with enticing low rates. These mortgages tended to be granted to people who were at a higher risk of failing to make repayments. In order to make the Bond marketable, these high-risk, high-return ‘sub-primes’ had to be mixed with more secure mortgages. Sophisticated computer models were used to evaluate the risk within the Bonds; however these models failed  to highlight the fundamental risk of a collapse in confidence. A key element in the plot is that Ed discovered that he could crack the model and so deliberately trick it into awarding a top rating to his Bond.  

Ally watched Ed being driven to prove himself, as they listened to his generation of banker being damned by comparison with her great Victorian banker forbear. He was prodded further on this quest for self-worth in a service at the church they attended, when they were also reminded that mankind already had all it needed, provided resources were shared and not wasted. Ed was struck by the contrast between this and the church’s appetite for ever-increasing income to pay for good works, and also his parents-in-law’s need for a retirement fund. 

Ed set out to create a Bond that genuinely provided high returns at minimal risk. However, all this effort ground to a halt with the crash of Northern Rock, an event that prompted his Bank to beef-up its internal regulation. His new boss, Jane, sat provocatively and critically as each new design failed the test of the new regulation. Ed began to wonder whether he could cheat the model mathematically.

Ally and Ed’s son, Paul, was in trouble at school. Ed was too busy, and a surprise invitation from her old college lecturer and lover, Martin, caused Ally to delay meeting his teacher. The Head summoned them both when Paul was excluded for bullying. Ed couldn’t be contacted, so Ally went alone. She knew that it was Paul who was being bullied and not vice-versa, yet her pleas fell on deaf ears. 

Ed came home to find Ally in despair. She was blaming herself for being at lunch with Martin, rather than pre-empting the problem with Paul. Ed decided to confront the victim’s parent. Through this encounter, he witnessed just how the sub-prime mortgages underlying his Bond were exploiting ordinary people. 

Ally found out that her parents had real money problems. She discovered that the charity, she worked for, was increasingly desperate for more income. The charity provided a refuge for girls and Ally discovered that a number had came to London to feed the appetites of bankers. All the time, Ed was becoming increasingly illusive.   

The Bank applied pressure on Jane for her team to produce the Bond that beat the model. She goaded Ed, but he had become reluctant having seen what he had. She preyed upon his pride and arrogance, and Ed created the sought-after Bond that appeared risk-free, but only because it mirrored the assumptions within the regulator’s model; it was in fact completely vulnerable to a market collapse, and Ed knew this. Jane lured him into talking up the positive side. They visited key customers and the Bank’s own head office. Ed was lauded by all. Finally, he gave into the temptation of Jane’s bed.

Ally heard from Ed’s friend and colleague, Tristan, what had happened. She opened her heart to her best-friend, Katie. In the conversation she found that Katie had also bought her house with a sub-prime mortgage. Ally heard more and more about her parents’ and her charity’s anxieties. She was being hounded by Paul’s victim’s mother. With Tristan, she visited a lap-dancing club, the haunt of bankers, to try to understand what Ed had been doing. 

The plan, which, unbeknown to Ed, the Bank always had, was to offload into the Bond all its most risky assets. It succeeded in doing this and Ed became a key member of the marketing team. The Bond secured a top credit rating because of Ed’s artful modelling. The market welcomed it, and individuals and charities piled in with their money. Ed achieved celebrity, but they were all riding far too high. Ed saw the signs of disaster, but his hands were tied; he had sold himself to the Bank.

In September 2008, Lehman Brothers collapsed. To everyone’s shock the Bond crashed too, bringing everything down with it, and Ed was left to sink. He had broken the bond of marriage, the bond of trust on which banking was built and had fallen into the bondage of selling all he believed. Ally was the recipient of the cries that should have been directed at Ed, not even at Ed, but at the bank’s management, perhaps not even at them. She turned to Martin in desperation. He was the rock she needed. He could see what has happened and counselled Ally. She confronted Jane and began to discover the chain of power and pressure that ran through the banking world.

Ed was living in a bed-sit also striving to make sense of what had happened. He had discovered that the market was a beast that demanded intelligent and strong regulation, a task to which he was ideally suited. He rediscovered himself and began to rebuild his life with the values he had discarded. Ally takes him back (or does she?)

Regulation

I am convinced that the single factor most responsible for the banking crisis was loose regulation. Gordon Brown almost admitted it in his interview with the Guardian; his excuse was the the rest of the world was de-regulating and he didn't want London to miss out.

Lord Turner, in his evidence to the Treasury Select Committee, voiced concern that the mood for regulation may be running out of steam. The suggestion of re-introducing the separation of retail banking from its investment counterpart has fallen on deaf ears. Turner is arguing for tougher capital requirements based on size and, presumably risk.

My question is: will regulation based on capital requirements work, when the experience is of massive values evaporating overnight?

Bad old ways?

The Observer (14 June) offered in its leader a stark warning to the city and those concrned with its governance that it must not be allowed to slip back into its bad old ways. I am probably not the only person who would wish to take issue with the word old; the bad ways were new, the bad ways were post big bang, the bad ways emerged because light touch regulation allowed them to. A most telling comment was that the old (I would say new) way of doing things made some people very rich.'

Vested interests are thus very strong and very powerful. In exactly the same way as it was not in the interests of the city to say the emperor had no clothes, neither is it in their interests to question the substance of what might look like the green shoots of recovery. Anything which shows that the city is working is good news.

The tragedy is that just when strong government is need, we are having to live with a lame duck. It is sadder still that when a change in government does come, the forces which demand a strong performance from the city will both be vocal and may well be basking in a recovery of their own making.

So, it was bonuses

I always remember a client years go who paid commission on the orders a salesman took. This was subsequently changed to giving commission on those orders which became actual sales delivered and paid in full.

The argument being made is that bonuses were paid when traders made money but no account was taken of risk. Well, the story would seem to be that when the traders made money, so did the banks and so did their shareholders. Without taking a risk none of it would have happened. So, does that make a risk OK?

Well, we can think of the RBS shareholders who received growing dividends and the value of whose shares rose dramatically for a long time. This was the upside of risk. The downside was when everything collapsed.

I'm not sure I understand what is proposed for the future. No risk, no bonus, dull dividends?