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What were Hoon and Hewitt thinking?

I don’t understand the (failed) attempt by Patricia Hewitt and Geoff Hoon to inspire a leadership challenge in the Labour Party here in the UK.  Any serious contender for the job (i.e. Milliband) would surely recognise that the chance of a Labour victory in this year’s general election is miniscule, no matter who leads the party, and to lose an election three or four months into your leadership would hardly make for a sterling start.

If one takes a Tory victory as given, it would be far better to let Brown take the full hit for the loss.  Keep him on as a figurehead to take all the bile, spit, rage and blame for the state of the country as a whole and the state of the government’s finances and the electoral loss in particular.  Let the voting public gorge themselves in a cathartic spasm of kicking the Blair/Brown pairing and then shuffle Brown off, declare that there will be no return to Old Labour and start observing loudly at every opportunity that now it’s the Tories that are all about spin.

Brown’s job at this point is not so much to put out the fire — that can no longer be done — but to save the furniture.  So why did Hewitt and Hoon do this?  It was never going to work and it only serves to further lessen the probability of Labour retaining some of their seats.

The obvious answer is that they don’t consider a Tory victory to be a foregone conclusion and somehow think that simply getting rid of Brown will help the broader party separate itself from the Blair/Brown brand.  The first part of that sentence may indeed be true (afterall, the Tories need an average swing of 7% to win), but the second is utterly false.  Labour will not escape the Blair/Brown brand until they’ve spent some time in opposition for the simple reason that the public needs to kill it before they will forget about it.

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Well, that didn’t take long (Trafigura)

About an hour ago I wrote about an article in The Guardian about how they had been prevented from writing about parliamentary proceedings via a court injunction.  In particular, they weren’t allowed to write about this question put before parliament:

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Paul Farrelly (Newcastle-under-Lyme): To ask the Secretary of State for Justice, what assessment he has made of the effectiveness of legislation to protect (a) whistleblowers and (b) press freedom following the injunctions obtained in the High Court by (i) Barclays and Freshfields solicitors on 19 March 2009 on the publication of internal Barclays reports documenting alleged tax avoidance schemes and (ii) Trafigura and Carter Ruck solicitors on 11 September 2009 on the publication of the Minton report on the alleged dumping of toxic waste in the Ivory Coast, commissioned by Trafigura.

The story became a Twitter sensation.  Trafigura and Carter-Ruck have been the hottest trending topics on Twitter for the last few hours, the Liberal Democrats sought an urgent debate on press freedom and now, as their journalists write furiously in the background with their editors looking over their shoulders to save time, The Guardian is reporting on their front page:

Breaking news: * LATEST: Guardian can reveal that parliamentary question from Paul Farrelly MP subjected to reporting ban was related to Trafigura toxic waste scandal. More details soon ..

Which is to say that the gag has been lifted in under (?) 24 hours.

This has all been a tremendous example of the Streisand effect, named for Barbara Streisand’s catastrophically backfiring attempt to prevent a picture of her house being made available on the internet.  While attempting to surpress attention, Trafigura and Carter-Ruck have only managed attract a huge amount of attention to themselves.

It’s a PR nightmare for them and a happy day for The Guardian.

Update 1: Here is confirmation from the Guardian.

Update 2: Here is the BBC on the matter.  By way of explaining why they did not cover the story despite not being expressly mentioned in the injunction, they say:

No injunction was served on the BBC, but ever since the Spycatcher case in the 1980s news organisations which knowingly breach an injunction served on others are in contempt of court, so the corporation too felt bound by the Guardian injunction.

Which is the equivalent of “once bitten, (forever) twice shy.”  The Beeb finishes by quoting Steven Fry’s tweet from when he discovered the good news:

Can it be true? Carter-Ruck caves in! Hurrah! Trafigura will deny it had anything to do with Twitter, but we know don’t we? We know! Yay!!!

Update 3: BBC Newsnight will have a special on Trafigura and their chemical disposals tonight.

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The Guardian is excited to tell you that it can’t tell you what it wants to tell you

From yesterday’s (12 Oct 2009) Guardian:

Today’s published Commons order papers contain a question to be answered by a minister later this week. The Guardian is prevented from identifying the MP who has asked the question, what the question is, which minister might answer it, or where the question is to be found.

The Guardian is also forbidden from telling its readers why the paper is prevented – for the first time in memory – from reporting parliament. Legal obstacles, which cannot be identified, involve proceedings, which cannot be mentioned, on behalf of a client who must remain secret.

It sounds tremendously exciting, doesn’t it?

Anyway, the House of Commons Question Book is publically available.  There are thousands of them (questions, that is).  There were 2,344 outstanding questions as of Monday 12 October 2009 (see here).

But the question in question, as it were, is apparantly this one, which as I type has been shifted forward to Wednesday 14 October 2009 (I have no idea, but suspect that unanswered questions get shuffled forward as necessary, so it’s best to start at the root Question Book if you’re searching for something):

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Paul Farrelly (Newcastle-under-Lyme): To ask the Secretary of State for Justice, what assessment he has made of the effectiveness of legislation to protect (a) whistleblowers and (b) press freedom following the injunctions obtained in the High Court by (i) Barclays and Freshfields solicitors on 19 March 2009 on the publication of internal Barclays reports documenting alleged tax avoidance schemes and (ii) Trafigura and Carter Ruck solicitors on 11 September 2009 on the publication of the Minton report on the alleged dumping of toxic waste in the Ivory Coast, commissioned by Trafigura.

I didn’t figure the question out myself.  I got it from Alex Massie at The Spectator.  Alex also helpfully points us to the Guardian’s reports from Wed 16 September 2009 on Trafigura and their exploits in the Ivory Coast [Main article, supporting article, 8MB pdf of the emails] and highlights the fact that Trafigura is now a trending topic on Twitter.

While I join the general expressions of anger at the gagging of the press over parliamentary proceedings, I also note that this will ultimately serve to help The Guardian’s reputation enormously.

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Chess boxing

Dani and I went to watch the European Heavyweight championship fight for chess boxing last friday.  Yes, chess boxing.  In case you don’t know it, chess boxing combines speed chess with boxing, alternating four minutes of chess with three-minute rounds of boxing.  The winner is determined by checkmate, knockout, the opposition running out of time in the chess (each competitor gets 12 minutes in total) or, in the unlikely event of no result by the end of the sixth and final chess round, by points from the five rounds of boxing.

There were three matches in the evening, but the main event was between these two freakin’ mountains of men (click on the image for the full-sized version.  My apologies for the poor image quality – I forgot the camera and was reduced to using my phone):

Chess boxing at The Dome

As you can see, during the chess rounds the competitors have earphones on (and cotton wool stuffed in their ears) to avoid distraction from the crowd and to allow a commentator to talk about the game.  The old-school board in the background was used because the projector gave up the ghost half-way through the night.

The event got coverage from The Times, The Independent and The Telegraph, although the Times correspondant (or her management?) seems to have been a little caught up with the “glistening muscles.”

We had a great time.  I was amazed at how well the guys were playing in their chess despite being repeatedly pummelled about the head.

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The end of the London evening freesheets? (thank god)

The Murdoch Empire ™ has decided to pull the plug on their free newspaper for the going-home-on-the-tube market, The London Paper, after making a pre-tax loss of £12.9 million in the year to June 2008.

That they’re hemorrhaging cash right now is no surprise since advertising expenditure is strongly pro-cyclical — it plummets in a recession and explodes in a boom.  To some extent, they’ve been unfortunate that the credit crisis and it’s associated advertising caution has been around for two of their three years and obviously the competition with Associated Newspapers’ London Lite won’t have helped.  Nevertheless, I’m not sure that it was ever a viable business model and frankly, even if it were, I’m glad that they’ve folded.  Ian Burrell puts it mildly when he says:

For the past three years, the sight of purple-and-mauve jacketed vendors thrusting free newspapers into the hands of office workers as they headed home from work has been a familiar feature in the capital.

“Thrusting” is the correct word to use, but I would prefix it with a few choice adverbs, “obnoxiously” being the most polite.  The vendors are seriously rude.  They make a deliberate point of blocking traffic and getting in your face.  It is genuinely infuriating — I find myself wanting to scream at them — but I know that they’re just doing what they’re told to do.

On their way home from work, nobody cares which of the free papers they read.  Since the papers themselves are desperate to get your eyeballs, the ideal economic situation would therefore be for them to pay you to choose them.  But that’s impossible on a practical level, so instead they end up forcing a non-monetary cost on everybody by slowing everyone down and annoying the hell out of people.

Since Associated Newspapers still have a 24% stake in the Evening Standard, this will probably mean the end of the afternoon freesheet (I imagine that the Metro in the morning will stick around), but even if it doesn’t, it will almost certainly mean the end of the obnoxious vendors forcing themselves on people.  They’ll just stick the London Lite in the same bins that they use for the Metro instead.  Presumably those vendors are being paid (minimum wage, I would guess) and so getting rid of them might make it narrowly profitable if there is just one afternoon freesheet.

Hallelujah.

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Playing cricket in England

On Saturday night, just before midnight, Daniela and I were roped into playing a game of cricket on Sunday for a team of ex-pats.  Well … “roped” is the wrong word and much too unfair: we signed up with enthusiasm.  No, that’s not quite right, either. Dani gets incredibly excited by this sort of random adventure and she signed up with genuine enthusiasm.  It was inevitable at that point that I sign up as well (with Australia levelling the Ashes up in Leeds, I did have a patriotic duty to join the fray), but my enthusiasm was buoyed somewhat by the wine and had a slightly greasy patina of apprehension.  I hadn’t played a proper game since October 1992 when I was in my high school team and Dani had only played a couple of games of backyard cricket with the dog chasing the ball.  Still, we were assured that experience and ability were by no means necessary, so we agreed con gusto.

We only got to bed at 3am on Sunday (it was a big night – a friend was leaving London), but managed to wake in time to gather with the rest of the team in central London at 11:30am, coffee in hand.  To the casual eye, my whites may have looked a bit like an old pair of khakis supplemented with a borrowed white polo shirt.  Dani, of course, was resplendent in white from top to bottom.  The team we played for represents a charity and, it turns out, there are charities that offer transportation services to other charities, so we all piled into the mini-bus more usually used for carrying disabled children to be driven for an hour and a half to the interminable maze otherwise known as the Oxfordshire countryside.

We must have spent 40 minutes twisting and turning and silently swearing at the perpetually manic directions of the lady in the SatNav (“Recalculating.  After point four miles, turn left, then turn left.”).  I was sitting next to our captain – an Indian chap with an easy grin who was about to submit his Ph.D.  He alternated between trying to figure out where we were, pouring scorn on the English badminton team for pulling out of the world championships in India and declaring confidently that, as an Australian, I must be a fantastic fielder who would happily throw himself horizontal to stop a boundary.  I mumbled something about a bit of practice in the nets before the match and stared anxiously at the six-foot hedges.

redkites

We eventually found the Ipsden Cricket Club [Google Maps].  It’s a beautiful ground that backs onto a (recently harvested) wheat field and has a gigantic ash (?) tree down on the long boundary at the western end.  The pavilion even has a piece of the original floorboards of the Long Room at Lord’s.  The weather was superb, with barely a cloud and a fair breeze coming from the north west.  I guess that the temperature would have been in the mid-twenties (Celsius).  There were some Red Kites in the sky and quite a few gliders were out for the day.

A couple of the guys padded up and we took turns bowling in the nets.  I somehow managed to keep mine in the general direction of the stumps, managed a few yorkers and even clean bowled one of our batsman once.  The captain told me that I would bowl in the match and our friend that had invited us expressed some joy that he wouldn’t have to be bowler number five all on his own.  I started to pick up some confidence.  It was fun.  It was relaxed.  I didn’t suck.

The game was to be 35 overs each; we fielded first.  The Canadian on our team used to play as a catcher in baseball and became the wicket keeper.  Dani alternated between Third man and Long on, while I swapped between Point and Mid-wicket.  We had two good bowlers, two pretty-good bowlers, and me and my mate who’d invited us.  We did pretty well in the first 10 or 11 overs.  We got a couple of wickets and they weren’t scoring too quickly (maybe four per over?).  I didn’t fumble my first couple of touches of the ball and Dani was enjoying herself.

Then I missed a ball badly.  I froze, didn’t get down to it and had to run swearing after the thing only to watch it dribble over the boundary.  Not to worry, it was only one mistake and other people were occasionally missing some too.  After a couple more overs I was called up to bowl.  I was okay in my first over:  clearly nervous and not very good, but not obscenely bad either.  My second over, however, was a shambles that in hindsight I’m almost oddly proud of.  It was chaotic, occasionally dangerous to the batsman and very, very expensive.  I was “rested” after that.

My second over also roughly marked the start of our mini collapse.  Without a fifth bowler, our two decent guys had to bowl 11 or 12 overs each (the Ipsden team very kindly waived the rule requiring no more than seven overs per bowler) and they started to get tired.  I was fading mentally pretty quickly and I missed four or five balls in what turned into a pretty farcical fielding display.  I even managed to have my feet slip out from under me on one occasion.  Drinks came out after 21 overs and our captain took the time to observe that we were fielding atrociously.

By that point the batsmen had settled in nicely, though and our fielding was rarely the problem.  Boundaries, boundaries, everywhere became the order of the day.  Poor Dani had to scramble down the embankment past the boundary to hunt for the ball in the bracken on more than one occasion.  I was out at Deep cover point and Deep forward leg by then and under instruction to stay on the boundary (not walk in with the bowler).  I may not have had the reflexes for the infield, but dammit, I could run around like a mad hare as sweeper.  For the last five overs or so, I switched over to the northern side of the field and played Square leg and Deep cover.  I managed to stop the three or four balls that came to me, saving a couple of singles and a boundary, so my fielding ended, if not a high note, then at least having recovered a smidgen of self-confidence.  Ipsden managed 3 for 236 after 35 overs, with one chap on 101 not out.  It had taken three and a half hours.

Our hosts put on quite a spread for the break.  Half a dozen types of sandwiches, some chips (“crisps” to the English) and a bunch of delicious sweet tarts and teacakes filled us up mightily with endless cups of tea.  The black labrador of the club president happily wandered between us, soaking up the attention.  I reminded Dani how to hold the bat (it’s not a natural position for someone new to the game) and we both earnestly hoped that we wouldn’t need to pad up.

Dani’s and my friend opened the batting along with the captain and it shortly became clear that the race was on.  I was surprised.  Apparantly last year the Ipsden team had gotten our lot all out for only 60.  Dani and I ended up sitting and watching a fine batting display as our batters clipped along to seal the win with two balls and six wickets to spare.  One of our lads managed a fantastic century and another 74.  The sun had started to set by the end and the wind, still fresh, began to chill a little.  Jumpers, cups of tea and the dog to the rescue, we were toasty warm through to the end.

It was the last game for our captain, who on top of the win to remember was presented with a bottle of champagne and a first-edition copy of C.L.R. James’s classic, “Beyond a boundary“, by the regular members of the team.  We got back to London about 9:30pm and were home by 10.  It was an absolutely cracking day.  We really enjoyed ourselves and the team was a great bunch of guys.  It was, in many ways, the very best sort of day in England.

Now if only I weren’t so stiff the day after that I can barely walk …

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The MP expenses scandal in Britain

It’s both spectacular and petty.  The fraction of MPs that truly scammed the system is tiny and the scale of the claims for the most part only seems offensive in a recession.  It was started by Cameron as a political stunt, but when Torys were implicated he had to take it nuclear or look terrible.  The Speaker was culpable, yes, but he was thrown under the bus by Brown all the same.  That The Telegraph got the complete list in a leak is more of a story, to my mind.

What style of Speaker will emerge is an interesting question.  If it’s another Labour party member, it will be easy to imagine the role moving somewhat  in the direction of the Speakers of the lower houses in Australia (where the role is quite partisan) and the USA (where it is extremely partisan).  In a parliamentary democracy (Australia, UK) , that will serve to grant the executive more power over the legislature, which is a Bad Thing ™ in my books, as it reduces the ability of the opposition to contribute to the legislative process in any meaningful way.

I’ve occasionally thought that in the event of Australia becoming a republic, the president’s primary constitutional role might simply be to ensure the fair operation of the judicio-political system.  So, for example, the president – or their appointee – might be the official Speaker of the House but would not have a vote (even in the event of a tie) and could not introduce legislation.

Of course, having the monarch appoint an independent Speaker of the Commons in the UK would get MPs’ knickers in a collective knot over the sovereignty of parliament.  Another reason to be a republic.

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How to value toxic assets (part 6)

Via Tyler Cowen, I am reminded (again) that I should really be reading Steve Waldman more often.  Like, all the time.  After reading John Hempton’s piece that I highlighted last time, Waldman writes, as an afterthought:

There’s another way to generate price transparency and liquidity for all the alphabet soup assets buried on bank balance sheets that would require no government lending or taxpayer risk-taking at all. Take all the ABS and CDOs and whatchamahaveyous, divvy all tranches into $100 par value claims, put all extant information about the securities on a website, give ’em a ticker symbol, and put ’em on an exchange. I know it’s out of fashion in a world ruined by hedge funds and 401-Ks and the unbearable orthodoxy of index investing. But I have a great deal of respect for that much maligned and nearly extinct species, the individual investor actively managing her own account. Individual investors screw up, but they are never too big to fail. When things go wrong, they take their lumps and move along. And despite everything the professionals tell you, a lot of smart and interested amateurs could build portfolios that match or beat the managers upon whose conflicted hands they have been persuaded to rely. Nothing generates a market price like a sea of independent minds making thousands of small trades, back and forth and back and forth.

I don’t really expect anybody to believe me, but I’ve been thinking something similar.

CDOs, CDOs-squared and all the rest are derrivatives that are traded over the counter; that is, they are traded entirely privately.  If bank B sells some to hedge fund Y, nobody else finds out any details of the trade or even that the trade took place.  The closest we come is that when bank B announces their quarterly accounts, we might realise that they off-loaded some assets.

On the more popularly known stock and bond markets, buyers publicly post their “bid” prices and sellers post their “ask” prices. When the prices meet, a trade occurs.[*1] Most details of the trade are then made public – the price(s), the volume, the particular details of the asset (ordinary shares in XXX, 2-year senior notes from XXX with an expiry of xx/xx/xxxx, etc) – everything except the identity of the buyer and seller. Those details then provide some information to everybody watching on how the buyer and seller value the asset. Other market players can then combine that with their own private valuations and update their own bid or ask prices accordingly. In short, the market aggregates information. [*2]

When assets are traded over the counter (OTC), each participant can only operate on their private valuation. There is no way for the market to aggregate information in that situation. Individual banks might still partially aggregate information by making a lot of trades with a lot of other institutions, since each time they trade they discover a bound on the valuation of the other party (an upper bound when you’re buying and the other party is selling, a lower bound when you’re selling and they’re buying).

To me, this is a huge failure of regulation. A market where information is not publicly and freely available is an inefficient market, and worse, one that expressly creates an incentive for market participants to confuse, conflate, bamboozle and then exploit the ignorant. Information is a true public good.

On that basis, here is my idea:

Introduce new regulation that every financial institution that wants to get support from the government must anonymously publish all details of every trade that they’re party to. The asset type, the quantity, the price, any time options on the deal, everything except the identity of the parties involved. Furthermore, the regulation would be retroactive for X months (say, two years, so that we get data that predates the crisis).  On top of that, the regulation would require that every future trade from everyone (whether they were receiving government assistance or not) would be subject to the same requirementes.  Then everything acts pretty much like the stock and bond markets.

The latest edition of The Economist has an article effectively questioning whether this is such a good idea.

[T]ransparency and liquidity are close relatives. One enemy of liquidity is “asymmetric information”. To illustrate this, look at a variation of the “Market for Lemons” identified by George Akerlof, a Nobel-prize-winning economist, in 1970. Suppose that a wine connoisseur and Joe Sixpack are haggling over the price of the 1998 Château Pétrus, which Joe recently inherited from his rich uncle. If Joe and the connoisseur only know that it is a red wine, they may strike a deal. They are equally uninformed. If vintage, region and grape are disclosed, Joe, fearing he will be taken for a ride, may refuse to sell. In financial markets, similarly, there are sophisticated and unsophisticated investors, and unless they have symmetrical information, liquidity can dry up. Unfortunately transparency may reduce liquidity. Symmetry, not the amount of information, matters.

I’m completely okay with this. Symmetric access to information and symmetric understanding of that information is the ideal. From the first paragraph and then the last paragraph :

… Not long ago the cheerleaders of opacity were the loudest. Without privacy, they argued, financial entrepreneurs would be unable to capture the full value of their trading strategies and other ingenious intellectual property. Forcing them to disclose information would impair their incentive to uncover and correct market inefficiencies, to the detriment of all …

Still, for all its difficulties, transparency is usually better than the alternative. The opaque innovations of the recent past, rather than eliminating market inefficiencies, unintentionally created systemic risks. The important point is that financial markets are not created equal: they may require different levels of disclosure. Liquidity in the stockmarket, for example, thrives on differences of opinion about the value of a firm; information fuels the debate. The money markets rely more on trust than transparency because transactions are so quick that there is little time to assess information. The problem with hedge funds is that a lack of information hinders outsiders’ ability to measure their contribution to systemic risk. A possible solution would be to impose delayed disclosure, which would allow the funds to profit from their strategies, provide data for experts to sift through, and allay fears about the legality of their activities. Transparency, like sunlight, needs to be looked at carefully.

This strikes me as being around the wrong way.  Money markets don’t rely on trust because their transactions are so fast; their transactions are so fast because they’re built on trust.  The scale of the crisis can be blamed, in no small measure, because of the breakdown in that trust.

I also do not buy the idea of opacity begetting market efficiency.  It makes no sense.  The only way that information disclosure can remove the incentive to “uncover and correct” inefficiencies in the market is if by making the information public you reduce the inefficiency.  I’m not suggesting that we force market participants to reveal what they discover before they get the chance to act on it.  I’m only suggesting that the details of their action should be public.

[*1] Okay, it’s not exactly like that, but it’s close enough.

[*2] Note that information aggregation does not necessarily imply that the Efficient Market Hypothesis (EMH), but the EMH requires information aggregation to work.

Other posts in this series:  1, 2, 3, 4, 5, [6].

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How to value toxic assets (part 5)

John Hempton has an excellent post on valuing the assets on banks’ balance sheets and whether banks are solvent.  He starts with a simple summary of where we are:

We have a lot of pools of bank assets (pools of loans) which have the following properties:
  • The assets sit on the bank’s balance sheet with a value of 90 – meaning they have either being marked down to 90 (say mark to mythical market or model) or they have 10 in provisions for losses against them.
  • The same assets when they run off might actually make 75 – meaning if you run them to maturity or default the bank will – discounted at a low rate – recover 75 cents in the dollar on value.

The banks are thus under-reserved on an “held to maturity” basis. Heavily under-reserved.

He then gives another explanation (on top of the putting-Humpty-Dumpty-back-together-again idea I mentioned previously) of why the market price is so far below the value that comes out of standard asset pricing:

Before you go any further you might wonder why it is possible that loans that will recover 75 trade at 50? Well its sort of obvious – in that I said that they recover 75 if the recoveries are discounted at a low rate. If I am going to buy such a loan I probably want 15% per annum return on equity.

The loan initially yielded say 5%. If I buy it at 50 I get a running yield of 10% – but say 15% of the loans are not actually paying that yield – so my running yield is 8.5%. I will get 75-80c on them in the end – and so there is another 25cents to be made – but that will be booked with an average duration of 5 years – so another 5% per year. At 50 cents in the dollar the yield to maturity on those bad assets is about 15% even though the assets are “bought cheap”. That is not enough for a hedge fund to be really interested – though if they could borrow to buy those assets they might be fun. The only problem is that the funding to buy the assets is either unavailable or if available with nasty covenants and a high price. Essentially the 75/50 difference is an artefact of the crisis and the unavailability of funding.

The difference between the yield to maturity value of a loan and its market value is extremely wide. The difference arises because you can’t eaily borrow to fund the loans – and my yield to maturity value is measured using traditional (low) costs of funds and market values loans based on their actual cost of funds (very high because of the crisis).

The rest of Hempton’s piece speaks about various definitions of solvency, whether (US) banks meet each of those definitions and points out the vagaries of the plan recently put forward by Geithner.  It’s all well worth reading.

One of the other important bits:

Few banks would meet capital adequacy standards. Given the penalty for even appearing as if there was a chance that you would not meet capital adequacy standards is death (see WaMu and Wachovia) and this is a self-assessed exam, banks can be expected not to tell the truth.

(It was Warren Buffett who first – at least to my hearing – described financial accounts as a self-assessed exam for which the penalty for failure is death. I think he was talking about insurance companies – but the idea is the same. Truth is not expected.)

Other posts in this series:  1, 2, 3, 4, [5], 6.