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If HBOS can only borrow money at more than 6.5% then that doesn't look very good for mortgage customers.

Dear Robert
Brown and Darling (bd) Bloody Duncies, have done it again, ripped everyone off with another stealth Tax, 18.000,000 more will suffer at Labour hand yet again, "What are these two maniacs doing to us"?
They have ruined the very people they say they want to help, the poor and the pensioners, THEY JUST HAVE TO GO, THIS TIME FOR GOOD.

Excellent article, and lots of very interesting questions. I wonder how long we will have to wait for the answers?

Regarding the UBS sale, it would be interesting to know the terms of the loan, including the interest rate payable and any exceptional clauses.
But the upside for UBS is clear - they have removed the risk from their balance sheet and replaced it with a loan that is nominally safer.
The downside risk remains, of course, but for that to eventuate the 22 billion notional value of debt would have to drop to 11 billion, which is a 50% drop. If that happened UBS would be not the only ones in trouble. The whole US economy would be in deep recession.
So it looks a reasonable gamble, doesn't it? And looking at it like that, the downside risk has been shared with Blackrock.

The other intriguing question is how much the discount agreed by UBS represents their own estimate of the real value of the sub-prime debt, and how much it represents simply the anticipated profit margin of an unwilling purchaser?
Or is the term 'real value' a meaningless phrase? Are there, in the end, only agreed values between willing buyers and sellers?
Perhaps another lesson of the credit crunch is that the value of property is like the value of everything else - set by what people are willing to pay for it at the time.

This blog asks a very important question as to how are so called star bankers rewarded?

The implication is simple in that they have all taken huge cash bonuses based on apparent profits that have effectively turned to rubbish and will cost some banks many billions in losses and may force some out of business or be taken over.

Surely the only sensible way is for bonuses to be paid mostly in corporate shares and only a small amount in cash.

If a bonus is paid in shares these can be released in stages over a period of time in a tax efficient way. Thus saving the banker a huge tax payout and ensuring they have an interest in the long terms survival and profitability of the bank.

If the bank continues to thrive this bonus of say 拢 1 million in shares may be worth much more when they are released in several years time. If the so called profits are merely illusory then the share price will have fallen and the banker will not get as much for his shares.

Until so called star bankers have their bonuses tied to the long term profitability of the bank there will be a fundamental split in the requirements of staff and shareholders.

This comment was removed because the moderators found it broke the house rules. Explain.

#3 - if you believe the BoE, and the brokers, there is no risk that UBS have removed from their balance sheets. If IFRS FV amounts are a worst case scenario, then all UBS have done is sold an asset at the trough of the market at a value far less than the net present value of the expected future cash flows.

This suggests that either this deal was not motivated by the usual ideas of risk and profit (i.e. cashflow problems) or that things are very much worse than we have feared even in out worst nightmares.

No succour for the suckers! n'est-ce pas? Nes pa!

It makes more sense when you remember that UBS's $11.25 billion loan to the buyer is in 'credits' and not actual $$$s. They are after all a bank and operate a deposit to loan ratio.
The money they lent has just crossed a few internal accounting boundaries; helped on or to individual bonuses; and ultimately not left the building.
They're accounts however no longer show a massive exposure to sub-prime.....

Would it be safe to say that House Price has fallen by 32% so far?

As the banks have reduced the valuation to the real market value.

And the UK mortgage sub prime has not even taken started yet.

Wait for more fun to arrive.

Robert, I agree with the analysis you gave in your programme on 'greed' in the city, but, it's pie in the sky to imagine anything will change. These bankers feel little sympathy for anyone but themselves. Some of them have lost their jobs, others will too, but, there's a whole generation of bankers ready to take over when they go. And when the time's right, this new generation will, no doubt, consider it OK to gamble madly to their hearts content.

And now the new CE of Northern Rock tells us that the assets in NR are more at risk than they first thought (well surprise, surprise should have read the Peston Blogs)and they will only be able to reduce their assets by exposure to the best mortgages while at the same time holding the risky ones.
Mr Sandler said "There is a risk of adverse selection. Those customers who represent a better credit risk will get mortgages elsewhere.

Mr Sandler added "We do expect it will increase the riskiness of our book." He accepted that the bank may have to create a special category of mortgage "in extremis" for highly-indebted clients.

Where does that leave the taxpayer and the promise that Alistair Darling made that we, the taxpayer will make a profit.
All to save 2000 jobs in the North East while unemployment in the rest of the UK rises without comment.
This governments time is up.

As long as bankers bonuses are based on the same valuation principles that apply to the bank's shares and regulatory capital, there is no reason to change anything.

If this leads to excessive risk taking that does not appear on the balance sheet, the answer must be to change the way the balance sheet reflects risk, not to attempt to impose one rule for bankers remuneration and another (less stringent) for shareholders and the public.

So, if my little brain has deciphered this correctly, the FSA (Fundamentally Supine Authority, as Private Eye calls it) is suggesting that rewards paid to bankers should be based on the long term impact their decisions have, and that high risk decisions be supported by funds in reserve to act as a safety net. If that's true, all that will happen is that organisations which are not regulated by the FSA will take all of the really enormous financial risks in the future and be largely to blame for the next financial disaster (rather than the banks). After all, these organisations are only interested in making money so what will have really changed? Those who are employed to make money (and motivated to do so by large bonuses) will always find a way around the rules (or, in the case of the FSA, recognise that the regulator is napping on the job and carry on regardless) to make as much as they possibly can.

Thanks to Robert Peston for giving such a valuable and clear commentary on this crucial issue. As an economic semi-literate, I am very greatful.

For myself, having a 拢28.5k mortgage on a property that was last valued at ~拢80k I do not fear real losses from my property, furthermore I have substantial leeway for reducing my outgoings. But there are so many people out there at their limits.

This has only just started. Wait until lower bonuses/overtime and even redudancies start to feed-back on the "real economy", people's real ability to spend, and of course pay their mortgages.

It is not quite correct to imply that only when a loss is taken, that is, only when it is realised in cash, is it real. If you buy shares for 100 quid and they decrease to 50 quid, and stay at 50 quid for ten years, when do you quote take your loss unquote?

As an individual, you can stay in denial for as long as you like. But if you are a business you are obliged to value these shares at the lower of cost or market price at the year end. So you cannot remain in denial for more than a year.

So why, then, is it such a problem for the banks to mark their sub-prime holdings to their current value? The reason is that no-one knows the value, nor can they find out, with any given sub-prime security, until it is re-set.

Sub-prime and Alt-A mortgages were usually sold at very low short-term interest rates held for a fixed period of a few years. This mortgage would be bundled with hundreds of other similar mortgages. The bundle would be called a mortgage security. Rating agencies would give this an AAA rating, based on statistical probabilities (er, um).

These securities could be sold on, each time earning fees for financial institutions. They borrowed a principle from the shrink-wrapped software industry: make once, sell many times.

However, they had to appear to add some value before selling on. They borrowed ideas from the retail industry. Break bulk, then re-arrange and re-package. In this case they could create a new set of securities by bundling together a percentage of many different securities. As in slice and dice. In each case the glue that binds these security bundles will include words such as exotic or diversification or spreading risk. No fraud here. Definitely fees, though.

Certainly far too complicated to value the risk of default, to calculate the present value of the expected income stream, and estimate the market price.

In a given security, for example, one year old with two years to run, one can make statistical (er, um) projections as to eventual default rates based on the existing pattern of defaults, and compare across a range of securities. However, based on how these securities originated, such valuations would be completely unreliable.

So they cannot value the underlying mortgages. All is revealed after a few years, as each underlying mortgage is re-set. The existing deal comes to an end. Rates for a given mortgage revert to a standard floating rate. Its monthly payment could double or quadruple. Many such mortgages in the USA were without recourse. The buyer of the original house can walk away without being pursued for the money. Their credit record will suffer, but so what? Back to the trailer park.

Most mortgages will re-set over the next two to three years. Many details are available on the internet. So we do not have to wait for long for the borrowers to remortgage or default, as Robert suggests.

In order to obtain a real current valuation we must look at what people do, not what they say. For example, if we want to know at what price UBS and BlackRock really value these particular Alt-A securities, the terms of this deal provides a clue. They are only guessing, the same as anyone else. The difference is they are putting money on their guess. So this is a real valuation for now, even if it changes later. And it does not necessarily apply to other securities.

Seems like scary stuff.

Assets sold at 30% discount with only 25% down-payment.

Does this mean that UBS was so short of cash that, they were prepared sell at this price to trouser the 拢3.75Bn up front or have they called the true value of MBS's?

What does this all mean in terms of the risks the Gov't have taken with Northern Rock?

The credit crunch is by no means over as it has still to permeate down the food chain to the actual debtors. The people being dispossessed now were in trouble before the crunch started: there is a whole lot more to come!

The measures implemented so far have been to stabilise the banking system and thus prevent a major catastrophic crash. These measures seem to have been successful.

In turn this is allowing the banks the time needed to resolve the signficant imbalances on their balance sheets.

I am pleased to see that the FSA is now making noises that the culture of bonuses and targets needs to change. This is a reasonable and moderate way of telling the banks to make their commercial culture less aggressive.

We might even get back to the old fashioned idea that banks serve the wider economy better if they are stable financial institutions, rather than risk-taking Masters of the Universe.

Is it prudent to sell below value? It's by high time some economist somewhere took the bull by the horns and says: "A pound is much more valuable when it does hard work?" Where are the new models? We can't go on speculating forever.

Whilst applauding Hector Sants latest comments about the way investment banks have incentivised their star bankers to do imprudent or reckless deals, I am bound to say that his words will have little effect on the dealers there.

These people have little or no regard for for normal business conventions or for people such as Hector Sants. If the FSA or any other regulatory body (including the government) tries to impose constraints on the way they do business then these banks will simply cry wolf and threaten to base their businesses elsewhere.

On a number of occassions in the past (and under different governments) these banks have threatened to go elsewhere and on each occassion the government in power buckled to their demands

Some questions may well be asked about UBS's motivations for this particular deal. Possibly just a case of balance sheet tidying.

To those who question whether this is a real "cash loss" compared with writedowns we have seen in recent months the answer is that yes, it is and is distinctly different from other write-downs we have seen from banks.

The current banking system, and most particularly an accounting concept called "fair value accounting" has caused assets to (probably) be over-marked down because there are no buyers. Subsequently when liquidity (the buyers) returns expect to see banks mark assets up to some extent again. Hence no cash loss at this stage.

Regulators need to be very careful that they do not rush in further measures that will cause more pro-cyclicality in the banking system (such as Basel II which becomes the standard in Europe this year). What is needed at this stage is stability, not knee-jerk reactions.

The question of bankers' pay is somewhat more complex. Why, if paying bonuses using a higher proportion of long-term share plans is such a good idea, was Bear Stearns (who did exactly that) the bank that went bust when the others didn't?

Also, there is some assymmetry to using share plans. The key decisions are made by executives at the top of banks and these executives bonuses are very often heavily weighted towards share plans. For people lower down in the organisation, however, to have their bonus determined by decisions made elsewhere in the bank tends to be unpopular for obvious reasons.

Additionally, whilst tightening bonuses may be beneficial for the industry as a whole, there is a need to recognise that there is an internal market fighting for the best people. Note, Merrill Lynch actually increased their compensation ratio in 2007 through fear they would see a big walk out. Investment Banking is, after all, a people business.

So, as ever it is a complex series of questions to which there is no simple answer.

Thank you Robert for opening the debate.

Looks like the banks are trying to trade their way out of this mess. Soon the true value of these bad debts will materialise as one of the banks is forced to sell with no strings or sweetners attached.

Post 19, I disagree strongly re Hector Sants views not having an effect on traders. Shall we ask all the sacked traders at Bear Stearns?

Or maybe some of the others let go recently at other banks?

In an efficient market, capital will flow to those banks and traders that have made better than average profits in the long run.

For today's star trader that loses money tomorrow and continues to lose money they will very shortly get the black bin bag and a quick goodbye as they are escorted out of the building.

Trust in traders is a bit like one's virginity. Either you have it or you don't and once lost it cannot be recovered.

A wide boy will make some money for a few years but to make money long term that is a completely different matter. The money and the capital will follow the latter not the former.

With no bank and no capital there is no trading it is as simple as that.

It seems to me the Banks with the most to lose are those Banks which do Investment Banking on a Grand scale.

Not so much the poor old Mortgage Banks who seem to be being hit by the fall out.

Of course when will the investigation into Short sellers begin ?

These are the people who have profited by this parody of a financial market.

And their actions have materially damaged a number of Pension funds now.

Investigate the Hedge Funds and shortselling systems !

It would be interesting to know how many journalists (for example running false takeover rumours) are involved in spreadbetting (shortselling) or with hedgefunds.

Write to your MP !

Don't let this people manipulate the Market and run down your Pension Funds assets!

Given the very special position of bankers in relation to the health of the overall economy it is surely far too simple to suggest that the size of their bonus should depend on how well or otherwise the bank they actually work for is doing.

Perhaps it would be much better if bonuses were connected to other indicators such as the size of the trade deficit.

Think not what your country can do for you but .......

It's interesting they predict a fall in House prices and they may well all be right.

But in the areas I travel thro Sold signs rather swiftly follow For Sale signs, obviously I have no idea on the selling prices agreed, but the market seems quite busy.

I also wonder how much of the turmoil is being made worse by rich Financiers who have taken a dislike to Mr Brown ?

Create an economic crisis and he'll be thrown out and someone more pliant and malleable will be appointed the next Leader...........

And if their Private Funds can buy some cheap UK Pension assets all the better they may like it.

Call me a cynic or paranoid if you like, but this whole crisis is starting to stink of Politics to me.

By the way, I don't vote Tory, do own shares, and have a pension fund, property etc.

PS: even the end of the world would not convince me to Vote Tory not after Thatcher!

The next bubbles might have been already set.
As the authors of the following two articles suggest, the game has probably moved to other sectors. (commodity and energy, maybe?)

The articles:
鈥淢cCain defends 'Enron loophole鈥�
and
鈥淣o oil or housing shortage, just a lack of common sense鈥�


Open your eye! :)

Why haven't you posted my earlier comment?

Did you not receive it?

Freedom of expression and free press, right? Can you not accept another point of view?

Post #16, magicjack1000

Yes, assets sold at 68 percent of face value, with only 17 percent cash payment.

This simply sets the boundary conditions of the negotiation. The value is 68 cents in the dollar, says the seller, so that we can take this as the most optimistic valuation.

Sure, but we will pay you a cash amount of 17 cents in the dollar (3.75b as a percentage of 22b), says the buyer, which is the most pessimistic valuation.

This is quite a range (between 17 and 68 percent of face value) which is some indication of how little the market is prepared to rely on a single point estimate of the value of these opaque securities. The most important part of the negotiation would have been to agree on the portion each party receives once the final amount is discovered.

How about us having a small wager on the eventual amount? What about all of us on this blog chipping into a blog pool? Oh, no, of course, I must have a secret yen to be an investment banker or hedge fund trader. That is the sort of thing they do, is it not? They bet very large sums, in fact, which I would also like to do if only someone would let me bet with their money.

The HBOS sale of securities could cut either way. As you say 500 Million is a 'piddling amount'. When the treasury gets all these bankers in and gives them a rocket what did they do? They went out and organised a rights issue in fairly short order.

RBS got the short straw and went first. And they were received with open arms. Yeah, good one, get some cash on your books, consolidate your position. What didn't happen was a run on the bank. So now it's safe for everybody else to make a rights issue.

Now it's HBOS' turn to be first in re-establishing the Mortgaged-Backed-Securities market. Sure it's not the kind of rates we've become used to but it's just proof of concept. And if them's the rates that have to be paid then the BoE's rates are irrelevant. The market has spoken and folk can look forward to a lot higher interest rates on their loans than the BoE rate might suggest.

And the 'fat' of backing 500 million of MBS with 800 million of assets demonstrates that at some point the market expects these assets to drop to 500/800 of their value ie reduce by almost 40% before recovering and they want the option to sell out at any point without taking a loss.

Yeah, sure Caroline Flint, 5-10% at best. In your wildest dreams. More and more I begin to suspect a deliberate faux-pas with the transparent briefing notes. If the folk in the know expect mortgage assets to come 40% off their peak value before a recovery then 5-10% was just the latest disingenuous Nu-Labour 'leak' of duff information.

Glad I don't have a mortgage.

Dear Mr Peston,
This is excellent stuff.
I hope you take on the role of badgering the life out of the banks on behalf of the British public, most of whom feel totally swindled by super-rich bankers who, as many of us have suspected for years, dont know what they're doing.
It needs someone of Robert Pestons standing to verbally attack these bankers, and those who are now bailing them out.
Most of us ordinary folk dont have the clout to show up this incompetence, and the rich rewards that are still flowing into the bankers pockets.
Give them hell R.P.

As my recent 成人论坛2 documentary, Super Rich: the Greed Game, showed, this asymmetry between bankers' personal rewards and risks was an important contributor to the bubble in financial and asset markets that led directly to the credit crunch.

As I have stated a number of times before, the real cause of the current credit crunch was the reduction of interest rates by the Federal Reserve, Bank of England, ECB etc to ridiculously low levels when the various bubles burst at the turn of the millennium. They did so in an attempt to defeat the economic cycle, but in doing so caused investors to chase yield and therefore loans were made to unsuitable borrowers in order to generate anything like a reasonable return. This is the law of unintended consequences. The actions of the central banks worked short term, but simply sowed the seeds for the longer term problems now being faced.

And as if that wasn't bad enough, the Federal Reserve is trying to repeat the trick! Talk about short memories. Only this time they will simply destroy the US economy through inflation. Ah well, you reap what you sow. At least Claude Trichet at the ECB is talking some economic sense; perhaps if irresponsible idiots like David Blanchflower were ousted from the MPC then Mervyn King could steer the committee towards making the correct economic decisions for the long term benefit of this country, rather than bowing to all the external, self-interested pressure.

Re: Post 22 -Ian the chopper

I am quite sure the sacked traders at Bear Stearns and at all the other investment banks, are now feeling full of remorse over what is now happening to them.

None the less I stand by what I previously said because the size of their performance related remuneration packages and the manner in which they are calculated or decided encourages rouge traders to take undue risks. There are now too many rouges opreating in the finacial markets who, are not being properly controlled and are hoping to trouser the money before they are found out so they will be set up for life. As for being sacked or given the black bin bag treatment, that also applies to people working in other sectors of the economy when things go wrong.

Finally I would like to say that I read an extract of recent report by a respected professor who carried out a survey of several hundred traders and he concluded that their moral and ethical standards were consistantly lower than average.

The past cannot be undone, but it can be our undoing. I think where we want to be is a balanced economy with fair dues to everyone, more or less.

OK so we are in deep dodo, but not up to our necks, for the vast majority, some will drown but most will not. In '29 was it not the second order effects caused by the panic that caused most of the long term suffering?

I want to head more about the way forward from pundits and commentators. The past is a different country.

Some rules of thumb: Labour should be fairly rewarded as should capital. Houses need to be able to financed on one persons salary - if not the home, and procreation become economically problematic and the middle classes reduce their propensity to indulge in household formation!

My maternal grandfather, an artisan, spent 12% of his income on his home and he could thus afford to bring up 3 children and send them to university - and society was self perpetuating and had a structure that remained balanced over time. That stability is what economists must seek. Look to the future.

Food needs to be available and affordable as does a fair supply of energy - although I do not prefer a money based rationing system as it unfairly disadvantages the poor I would like to see, for example, rationing of air travel, by license to travel, or to be a tourist, rather than by price. Why should visitors to London not have to apply for a limited number of tickets to visit the capital - alloted by random ballot?

OK so I have just been reading my copy of Manuel and Manuel - French Utopias, And Anthology of Ideal Societies- pub 1966 price 75/- - but why do we have to let the doom merchants pull us down?

It is somewhat refreshing to hear ever stronger voices that worlds financial actors failed to regulate themselves; the euphoria about free market is fading fast. The credit crunch scam - pyramid selling of overvalued debt contracts - has shown how easy to camouflage and pass on fraudulent financial products, as long as the players are happy about their fees. Who were these scammers? Will they get justice? Until this is tackled, I will have zero confidence in the banking system: to me, they are all crooks. OPEC clearly said that there was no reason to increase oil production - no increased demand for crude. This means that the free-market oil price formation is another myth, it is all down to speculators in currencies, derivatives, derivatives of derivatives in the energy market, etc. Unlike the dotcom bubble, however, this inflated, groomed and riddled with corruption (just think of oil supplier countries) market is sucking in our hard cash now. Who will blow this froth off the price formation mechanism? Same with food it seems! Politicians are silent (or silenced), but it is high time to do something about it, before we are all enslaved by the artificially created debt.

It's worth remembering that the real losers in this fiasco are the Pensioners of tomorrow.

Bearing in mind that over 75 percent of the shares in Banks are owned by Pension Funds whose performance provides Pensions for Millions of people.

The Private Equity people will lose out to.

They rely on selling on the businesses they have plundered at a high mark up to small investors (Debenhams Woolworths etc etc).

If the small investors give up on the stock market these people won't have rubes to sell to.

They can only do so many back room deals before the run out of Funds to swindle.

Good fun for all !

With Oil - well if everyone used as little as possible - eventually this will feed through.

Of course, if overseas demand remains high or OPEC(and others) continue to limit supply, then no difference will be made.

People need to plan for a life without Petrol, or with a Petrol minimal lifestyle.

This can be quite hard if you have like most people a distance to travel to work.

Public transport is completely inadequate where I live. Only in the Cities or Big towns does it even slightly approach the levels it will need to be.

Bring back the Horse and Cart !

@38 - supercalmdown - "OPEC(and others) continue to limit supply"

That isn't the problem. If production were doubled tomorrow it would make little difference. The problem is refining capacity.

The refinaries are working at virtually full capacity. More crude production would just sit in storage because there's nothing that can be done with it.

To build new refinaries would take 15 years from time of start , but there won't be any because it's not in the oil companies interests to bring the price down.

Oil is a finite substance and it will virtually run out within 100 years. The oil companies will make as much as they can and, even more bizarrely, while the price is high fields that had become non-profitable are being brought back into production.

Get used to the idea. The days of cheap oil and cheap energy are over. As a result, the 'global economy' will eventually wither to be replaced by the 'local economy'

Forget the banks pulling in bonuses: there are companies out there right now advising boards how to structure pay and bonus deals within the current "difficult environment" to squeeze them past shaerholder meetings. I believe this is how JPG at GSK got his humongous bonus past the shareholders after a lot of hoohah and one rejection.

They'll get their millions no matter how obscene or destructive it is to the tiny ants below (i.e. us).

Fight club, anyone? :)

Reference the 拢2.7 billion borrowed to meet the 10p tax debacle.

As I understand it, the chancellor stands at the head of a vast group of civil servants who implement the policy of the politicians. It is surely the task of somebody in the civil service to institute a detailed examination of the effects of a major policy change before that change is announced. How therefore was it possible for such a dramatic and disastrous policy to be announced? Did the civil service have the opportunity to review the effects of the new tax instruction? Or was this a "bright idea" from a chancellor who was convinced that it sounded like a good idea and did not need the scrutiny of those who are paid to know better?

UBS Ltd's Return on Assets is (as at 31st December 2007) 0.01% - the lowest of all the profitable banks in the UK. Source: Bank League Tables www.bankleaguetables.blogspot.com.