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Thursday, 29 January 2009

SOROS prognosis

George Soros, in this extract from his latest book, does not claim short-selling makes no difference. He explains why it took off after 2007 - the ending of the "up tick rule". But first, his assymetric risk explanations are most interesting:
" default swaps played a critical role in Lehman’s demise. My explanation is controversial and all three steps of my argument will take the reader to unfamiliar ground.
First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.
The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks. The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract. No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.
The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.
Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination. That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.
My argument raises some interesting questions. What would have happened if the uptick rule on shorting shares had been kept, in effect, but “naked” short-selling (where the vendor has not borrowed the stock in advance) and speculating in CDS had both been outlawed? The bankruptcy of Lehman might have been avoided but what would have happened to the asset super-bubble? One can only conjecture. My guess is that the bubble would have been deflated more slowly, with less catastrophic results, but that the after-effects would have lingered longer. It would have resembled more the Japanese experience than what is happening now.
What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.
This graphic is not from George Soros. But, it provides further background. What about credit default swaps? Here I take a more radical view than most people. The prevailing view is that they ought to be traded on regulated exchanges. I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies. CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime."
For more see FT article:

Tuesday, 27 January 2009

Short-selling: the ideology & the Paulsonian reality

It is one of the wonders of rivers how salmon manage to swim upstream to spawn against everything pouring fiercely down-river. It demands great fortitude and courage. But, don't think of hedge funds and short-selling like that, not this year or last, or the year before. The picture above is not liquid but marble. Sensible short-sellers have seen their opportunities etched in marble. It's a wonder that far more hedge funds have not profited as well as for example Paulson & co. (more later).
In the UK, short selling of designated financial sector stocks was restricted with effect from 19 September 2008 until January 19. The restrictions prohibited the creation of, or increase in, a net short position giving rise to an economic exposure to shares in 34 banks. The US introduced a prohibition of naked and covered short selling for 306 financial stocks on 22 Sept.'08.7 After 8 Oct. the ban only applied to naked short positions. The FSA was expected by The Guardian to bow to political pressure and media outrage to renew its short-selling ban. It didn't and didn't tell Chancellor Darling until too late. He was furious. The FSA's excuse? They claimed that hedge funds (AIMA etc.) could sue the FSA if it didn't drop the ban. Why? Because AIMA, ISLA and LIBA had commissioned academic research from Professor Ian Marsh (pictured below) and Norman Niemer of Cass Business School, London, that found no strong evidence that the emergency short selling restrictions imposed in various markets around the world changed the behaviour of stock returns. When shares are about to be diluted by new issues, it is a glorious time for short-sellers - traders who prodit on price falls. Stock markets have fallen all year, misery for investors, but for short-sellers it has been Christmas all year long!
Stock lending may in normal times of orderly markets be useful for reasons other than short selling. But, in a long falling market, stock lending is overwhelmingly for short selling. This is when stock is borrowed by one trader for a few days and sells into the automated markets where FTSE index funds and last week’s short-sellers are buying. When the price falls enough that day or next day, the trader who borrowed can buy it back for less than he sold it, keeping the profitable difference. Short selling depends on the ease and low cost of stock borrowing for short periods of a week or a month. Borrowers require lenders. Stock lending is a practice with 200 years of history. It is over-the-counter dealing, which means it is not transacted via exchanges. It used to be an honourable business of a bilateral agreement between two parties. In recent years it has increasingly become a marketplace brokered by intermediaries. The public need to understand how when equity markets fall value is not merely wiped out; the losses of investors can be turned into short-sellers' cash profits. As it were, what you see rising and falling about the water has its counterpart below the water. Institutional investors lend out their inventory to gain small % incomes that may or may not accrue to the ultimate owners of the shares. The Institutional Investors ideologically morally comfort themselves with the idea that they are not contributing to the fall of shares by lending our shares. They take comfort in the self-serving ideological view that short-selling does not move share prices and is good for the efficiency of the equity markets. These ideas are entirely bogus.
Shareholdings of 3% or more have to be published as regulatory news. The FSA required short positions of 0.25% in bank stocks to be reported to it, but did not renew this on the 19th January. Such restraints on short-selling are a joke to all involved! More serious embarassment awaits the stock lenders if the FSA publishes its so far unpublished report about them. This may not happen, since the unit trust funds and others are busy remontrating with the FSA to drop the publication idea for fear of exposiing their (and that of the custodians and collateral holders) stock lending 'strategies' - surely another egregious joke at shareholders' expense, who now massively include the Government!
We do not know how much of trillions wiped off share prices are short-sellers’ profits, mainly gained by hedge funds. All we know about stock-lending is part guesswork. We know it can account for more than half of trading on the LSE and other exchanges. We also know that lots of small sell orders can move a share price far more than one big sell order. The FSA’s code and ban on ‘naked short-selling’ is a sick joke. In Europe and the USA there may be nearly $20 trillion of securities owned by investment funds that are available for lending for a short time, a week say or a month, for a small percentage fee. As we saw on Friday, it takes only 1% of shares to be sold for the share price to fall twenty times this!
I have just read the CASS Business School report and find it is completely unreliable and worthless as evidence of anything. Also note that the report was finished on 30 Nov. but not released until 29 Dec., presumably so that its pro-short-selling sponsors could check it first!?
The report attempts to find correlations based on intuitive assumptions that all also being equal the group of 'protected' stocks should perform better than expected during the ban? This approach had at least 4 fatal weaknesses:
1. proving the ban did not change returns is also evidence that the ban was ineffective or too weak, not least because short-selling could shift to derivative puts, but also because it was based on a high reporting threshold of net positions by end of day of 0.25% of a company's stock, per investment trading firm. There was no attempt to first determine what short-selling of UK banks continued despite the so-called 'ban'.
2. the study failed entirely to look at stock lending data; what % of each bank's stock was out on loan and what % level indicates short-selling and not trade settlement efficiency needs. Not all 'protected' stocks as a group were shorted on the same days or to the same extent. Short-selling does not operate against other factors operating on the same day to pull down a share price. The key test therefore is to look at how short-selling can 'move the price' not just profitably ride the fall. The study did not examine this despite being part-funded by the International Stock Lending Association? It looked at the whole matter at a distance, abstractly statistically far removed from detailed realities, including trying to absurdly isolate theory proof against a background of "all other things equal", when they most patently were not and could not be!
3. how prices change ('price discovery') and can be 'moved' in equity (cash and derivatives) markets is essential to know. The FSA ban by setting a reporting threshold of 0.25% clearly believes prices can be moved by short sellers. But, of course it is not a matter of individual short-sellers moving the prices, but also how they collectively do so.
4. Research of many years standing including some I pioneered (when advising Reuters) showed that prices are a quarter of the time moved by 3rd party news and as much again by peer-group or sector moves, and most of the rest by company announcements and results. In 2008 banks during capital issues became especially vulnerable. Prices are also moved by the 'frequency of direction' of orders far more than by order size. Hence a 100 sell orders are far more effective than 1 big sell order. This is how very small share borrowings used to sell short can have major price movements. The truth is that short-selling is so easy and safe in the past 2 years it's a wonder far more are not doing it? Hence the FSA's 0.25% threshold was far too high to be effective. And the only true effectiveness would have been to severely restrict or ban stock lending! Even on days of relatively positive news we can find cases of 1% or less of a company's stock traded and the price falling same day by 20%. My conclusion is that the FSA was never seriously committed to banning short-selling! Even the LSE was not interested in protecting a very important part of its total market capitalistaion; it was more interested in encouraging CFDs (contracts for difference - the small short-seller's favourite trade) that were 40-50% of transactions i.e. the LSE is more interested in order flow (for commercial reasons) than it is concerned about market quality!
Stock lending data is sample-driven and reported 2 months late. That, plus the high 0.25% hurdle setting of the FSA's rule, means that too little data shows up. One exception has been the Paulson hedge fund. In January, it had 0.97% of HBOS shares shorted just before the merger with Lloyds. What else do we know about Paulson & Co?
Only a handful of hedge funds disclosed their positions, notably one run by John Paulson Ipictured) in the US, who took out a near-£1bn bet that share prices in British banks would fall heavily. Short sellers borrow shares they do not own and sell them in the hope of making a profit by buying them back more cheaply when the time comes to return them to their rightful owners.
The FT reported (27 Jan.) that Paulson & Co, made a profit of at least £270m betting on a fall in the share price of RBS over the past four months. Investors say Paulson held a short position for 4 months in RBS, suggesting profits could be far higher. The decision to cover the short on 23 Jan. maximised its profit, when RBS shares jumped almost 20% on Jan 26. HoC MPs will on Jan 27 interrogate hedge fund managers, including from TCI, Marshall Wace and Blackrock, called before the Treasury Select Committee, following a letter from the committee's chairman, John McFall MP, to the FSA questioning its lifting of the ban. The US Congress quizzed hedge funds similarly last November.
RNS filings reported in December showed Paulson & Co. firm had taken huge short positions on four of the five biggest UK banks. It borrowed and then sold Barclays shares worth 1.2% of the bank’s value, approx. $55m. His positions also included similar bets on Lloyds TSB - approx. $412m, and RBS - approx. $464m, with the combined stake totaling about $1.6bn. Judging by the RBS data the profit could be anything from 50% to 150%. The stake in HBOS reported in mid-January at 0.97% coincided with a 30% share drop. HBOS had been shorted all year long by hedge funds, including infamously Morgan Stanley in mid-summer at the same time as it was acting as c0-underwriter for HBOS's £4bn share issue. Morgan Stanley borrowed and sold short about £140m of the bank's stock. Shadow-banking, Hedge funds and short-selling especially are like a great nuclear submarine in freely rampaing around under a fishing fleet. The 52-year-old Mr. Paulson's New York firm gained a superstar reputation by betting against the housing market netting over $3bn. This year, according to Wall Street Journal, that will reap another $500m. The firm's 3 main funds are up between 15% and 25%. Paulson Advantage Plus fund netted a return of 20% for the year to the end of August against 158.75% for '07 (growing with new investors coming in as well as market gains from $100m at start fiscal ‘07 to almost $9bn today). Paulson’s Advantage fund gained over 100% in 2008. Paulson's Credit Opportunities fund by Oct.1'08 was up 12.95%, having made 351.72% in '07. These numbers are impressive considering the average hedge fund is down more than 17%. For all of 2007, Mr. Paulson’s $35bn raked in more than $15 billion in gains. It is quite possible the firm has gained over $1bn of the fall in UK banks' shares. And this hedge fund may be only one of several to have done so? But, very interestingly and honest, George Soros does not seek to minimalise the impact of short-selling. I might only question his support for recapitalisation where this involves rights issues, which are clearly just more food for short-sellers. His expolanation about short-selling is important and fascinating (see next post above). See also this link: gives some insight into the scale of stock lending and that it changed importantly after 2000 when a much wider range of securities were involved. Shorting goes on in every market. It seems about 5% of all equities are on loan at any time? That is easily enough to move markets dramatically. In fact the number of $trillions on loan is probably an indicator as good as any for guessing how much hedge funds have to play with e.g. say $600bn in money amrket funds then use certificates of deposits from the MM funds as collateral for borrowing $2-3 trillions in cash equities and derivatives. Stock available for borrowing is in the many $trillions and stock loans can be for days, a week, a month i.e. short periods were the leverage involved in getting the stock is far greater than other leverage ratios that are declared for financial reporting periods.
What do the institutional investors think they are playing act by lending our customer's shares? Should customers sue the unit trust, investment funds, pension and life assurers for risking their shares at the hands of short-sellers? Are the lenders not acting like turkeys voting for thanksgiving when they lend out shares:
It was short selling the currency that hit the pound in 92 and is doing so again now - and short selling by small German as well as foreign banks that were main reasons for the massive depreciation of the Rmark in 1923!
Then what happens when benchmarks are discounted?
This can be especially important at the time of shareholder meetings or when mergers are afoot such as between Lloyds TSB and HBOS. In September, over 7% of Lloyds TSB shares were loaned out, down from 11.48% in August. In September, at least 5% of HBOS market cap was on loan - but this was three times higher at 16% in July (higher figures have also been estimated including above 20%) and 11% in June. The fact is that we need far better oversight to know the truth of all this!

Friday, 23 January 2009


Many people might imagine that banks accounts are today not unlike one of the Circles of Hell in Dante's Inferno or Heironymus Bosch's painting of Hell (painting detail above) that awaits all sinners who do not look up and who discount the all-seeing Owl (symbol of Christ and high moral view, as in painting detail later below). We expact the accountants and AIBD and FASB accounting standards to be the owls of public companies' accounts, and most especially of financial services where cash flows are highly leveraged and subject to fast moving market prices (and also by ratings agencies' risk grade models), but that is what we expect of them. There are different cultural attitudes to accounts. In the UK, business is dominated by accountants and therefore by corporate governance based on information in the statement of accounts. In the USA, where business is dominated more by lawyers, corporate governance focuses more on what is done and said in the markets. This kind of distinction may be alternative views of 'agency theory' and goes to the heart of issues that are being raised in the courts by aggrieved shareholders whether in Small Claims Courts or in massive 'class actions' in the higher law courts. The relationship between management and existing shareholders that has become strained past breaking point for credit crunched banks is the classic principal/agent problem. Management, the agent, has 'free' scope for action, but shareholders must monitor that 'freedom', using the information in financial reports. This is why financial accounts are presented at shareholders company meetings, and why at this time especially the authorities must be especially vigilent regarding 'market abuse'. It is the shareholders' forum to question and vote on the performance of management, where financial reporting is involved in determining future cash flows, not merely predicting them. A popular term for the process of monitoring management is corporate governance that depends on company laws and accounting standards. It is bizarre therefore to see directors of banks advising shareholders on the basis of assurances (such as about liquidity risk problems, takeovers and mergers) without reference to financial statements, in effect rejecting the relevance of detailed financial reporting to corporate governance. Reasons for this include the lack (before IFRS7 and Basel II standards) of forecast scenarios, the difficulties of 'fair value' pricing in 'turbulent' markets, and different origins and forms of the U.K. and U.S. regulatory systems for financial reporting. These two cultures conflict within Anglo-saxon banking and in the accounting standards and regulation laws. I experienced this very recently in the HBOS takeover by Lloyds TSB case when it came to be approved by Edinburgh Court of Session where I (with Ian Fraser, intervened as petitioners and in the interest of future law questioned the 'Scheme of Arrangement' regarding what we saw as 'Market Abuse' and negligent and misleading information by management. The UK system's culture is based on company law, whereas the USA's is based on market regulation (the Securities Acts). The latter emphasises belief in the accuracy of markets and their prices for information relevant to future cash
flows, whereas the former lays greater trust in corporate governance. The FASB’s Conceptual Framework reflects U.S. institutional culture and favours the market view. In the EU, where in most member states business is less dominated by publicly quoted companies, the legal tradition and accounting regulation strongly favours the company law approach and on corporate governance mechanisms, including as in the UK, the idea of management as 'stewardship'. Auditors have to venture into the burning books like NYC Firemen into the towering infernos with miner's lamps and fireproof jackets. The light from the lamps is one thing, fire=proof jackets is another. It is that latter aspect that motivated LAST WEEK THE MAJOR ACCOUNTING FIRMS TO ANNOUNCE THE PROBABILITY THEY WOULD HAVE TO QUALIFY ALL BANKS' ACCOUNTS NEXT YEAR! AND THIS THREATENS THE BANKS IN VARIOUS WAYS NOT LEAST THEIR CREDIT RISK GRADES! The problem is really that the banks have not got their approaches and systems organised to truly analyse with scenario modeling their Economic Risk Capital Models as required under both CRD (Basel II) regulations and IFRS7 (the new accounting standard mandatory in 2009 that require stress-test scenarios and forecasts of exposures). Hence, the problem, from the accountancy firms viewpoint, includes the banks' inability, especially in the current financial panic and recession, to fully deploy IFRS7. This does not mean that the banks' accounts will be qualified for showing too little credit loss and asset writedowns. They may also be qualified for showing too much loss when IFRS7 allows more 'stochastic' realism to value assets at fair value over a longer time period. The FSA is in talks with top auditors to try to ensure banks are not destabilised by accountants making a qualified judgement in annual accounts on their capacity to continue as a going concern. The talks come amid fears that auditors could qualify accounts of big banks because of uncertainties around their funding and dependence on government money.
As important, or more important, are the risk grading agencies who grade the assets of the banks and the banks themselves according to the banks published accounts. While the banks may be adequately covered in their assets (loans) by security and collateral and, as anyone would agree, also secured by Government insurance, guarantees, shareholding or funding either actually committed or available such as from The Bank of England, these solvency supports are not taken into account by the ratings agencies models. There is a danger of the ratings agencies downgrading banks to below unsecured borrowing status, which could be as fatal as it could be ludicrous! The FSAy has met twice at least with the top six accounting firms to discuss key issues, including how it can help to avoid any problems with the auditor opinions. Most banks are busy trying to finalise year-end reports. These are much harder to fairly calculate given shareholder financial panic and the credit crunch turmoil plus worsening recession fears. This makes many assets hard to price, and the banks’ net cash-flows harder to predict when there are many non-cash flow items that can impact profit & loss totals. A bank that is quite sound in its net trading profit may nonetheless look insolvent when 'paper losses' are subtracted. A clean audit opinion means auditors consider the accounts to be fair and that the company is viable for a year from the date of sign off. At worst, companies can receive a “qualified” or adverse opinion, meaning auditors have serious qualms or an unresolved disagreement or simply cannot agree a single firm price and might have to consider reporting a range of values and a range for P/L. This would be deemed very unsatisfactory. Accounts should be definite, not a probability of somewhere between A and D.
A qualified opinion is extremely rare and never likely as it could prove disastrous. Auditors told the FSA that any issues that severe must be resolved before accounts are published. But, even then, banks and other financial institutions may receive embarrassing footnotes to the accounts or some kind of “added emphases” i.e. paragraphs in the audit opinion designed to draw attention to key disclosures, but stopping well short of a full 'qualification of accounts'. The problem for the banks is like a trapeze artist's, how to spring safely from one old accounting and banking culture to a newer risk=based culture and to do so across the chasm of credit crunch and recession. Governments sensibly recognise the problem and have strung out the safety net, but cannot be sure if it will hold. They know that logically it will. But, for that to succeed the general public, taxpayers and also shareholders have to believe, see the logic and calm down, stop panicking. This is not easy when there are doomsters and short selling hedge funds and others with an interest in maintaining the panic so they can profit from it. Stocks continue to be loaned to avaracious short-sellers who short banks, knowing full well how to push the prices down using very small sell orders, and pulling down other companies' share prices too. The FSA under pressure from possible law suits by hedge funds - absurd - caved in and lifted the ban on naked short-selling. The ban was absurd anyway; far too ineffectual and not geared to reality with only a 0.25 % of stock short position next day reporting threshold. Bu, then short-selling bans are innefectual unless internationally applied. The effective solution is to ban stock lending if only for a year or too, gaining time thereby for new checks and balances. But banning stock-lending has never even been considered or broached outside of the media.
The now rather lame-duck FSA confirmed it had met with the auditors as part of its supervision of the banks. Auditors are not concerned with systemic problems affecting the whole finance sector. neither is the FSA (this being the responsibility of the Bank of England). The FSA is concerned about solvency of each bank or other financial institution. Auditors are both concerned about systemic failures in a bank's accounting system, such as an unexplained mismatch between two sides of double-entry book-keeping (the general ledger), just as FSA is concerned about mismatches between risk accounting and regular accounting (the calculation of regulatory and economic capital).
IFRS7 bridges between these two perspectives. It introduces risk accounting more fully into regular accounting to align better with the CRD. And in essence this requires banks to align their pricing and performance with their understanding of the underlying financial markets and general economic conditions. This is very hard for them to do well. They mostly do not know how to do this succinctly and globally! It is an immense intellectual challenge. Intellectual challenges cannot be met by organisation with a dysfunctional silo mentality i.e. when banking groups are really a conglomerate of separately run businesses with their own discrete profit centres and financing that can make light of or duck oiut from under group-wide capital risk concerns. Sometimes this is because the subsidiary businesses are separate licenses or have fiduciary duties to honour that do not fit with the crisis that group management finds. Good examples of this include trustee management of customers' life, insurance and investment funds, and company pension funding gaps, structured products, and in retail banking (for households and SMEs) the powerful advice of Government to maintain lending levels. A further factor getting in the way of everything is the bonus culture, which is frankly current in a systematic mess, but cannot be done away with. Bonuses are like football star fees, minimally conditional on sensible goals such as winning the cup or avoiding relegation or gaining league promotion. the reason is that fees are dictated less by fundamentals than by market competition. Investment banking in certain areas remains a people relationship business. Pay the bonus or lose the team? I expect that the FSA may have hinted to auditors that they want to see some auditing of bonuses in the annual accounts. What are the models, the algorithms and the justifications? But, before auditors can even begin to go there they have to determine what the bank's performance really is. And that is already looking far to difficult and avoid qualifying the accounts! Meetings of auditors and the FSA began in December. Auditors told the FSA they needed extra information from the Bank of England about its so-called discount window facility. This concerns confirming the individual drawing rights of the banks. For example, does HBOS have a liquidity problem if it has a £38bn draw-down available? The conditions attaching to assets that my be swapped at the SLS change, and the drawing rights are discretionary, not fixed. Therefore how can auditors rely on this funding resource as a definite security supporting the solvency of the banks. This is not trivial when the bulk of interbank liquidity funding is occurring via the central's bank's SLS window, which has turnover rolling dates and is necessarily short term (less than 1 year) to ensure the debt is off the books of the National Debt? Some newspapers reported this issue was largely cleared up in the measures announced on Monday when the Bank of England said it was extending the window, where banks can ease liquidity problems by swapping assets for government bills, from a one-month rollover limit to a full year. But, actually that was always understood to be the reality. It is merely now formally confirmed, which is helpful.
The big accounting firms are international. It would be egregious if they qualified UK banks' accounts and failed to dos so when auditing similar situations in foreign banks either in UK or abroad. Half of all banking assets in the EU are managed in the UK by UK banks and by branches of foreign banks. Any upsetting of a level playing field, moving or narrowing to goalposts at one end, and the game and distribution of banking business will change dramatically. More on these vitally important matters to come.


Dear Readers, I apologise for radio silence here so far this year. This is because of my day in Edinburgh's Court of Session as an 'intervening petitioner' regarding the court's sanction of the convening of the general meeting of HBOS and The Schedule of arrangement for raising new capital via issuing new preference shares, share conversions, and takeover / merger of HBOS by lloyds TSB to form the new Lloyds Banking Group. In court we raised issues of cross-shareholdings pertaining to restricted voting by associated companies, potential for market abuse, malfeasance in withholding critically material information, and our disclosure (with the evidence) of £45bn in fund-raising by selling mortgage asset backed very long-dated paper achieved by HBOS (that the bank failed to publicise) over the very period during which the bank was claiming to be in a liquidity crisis and having difficulties in precisely the long end of the interbank funding markets? In Court it was also reported that HM treasury has destroyed all copies of the "Secret Dossier", a matter about which we can only speculate, but which seems highly questionable. When the only reason for the EGM and takeover was the bank's liquidity crisis, the absence of any supporting data that could be independently verified is a major questionable problem! Shareholders could only rely of the assurances of publicly discredited or 'disgraced' directors of the bank in the media and by politicians of all parties. This is furthermore a matter in which Government is not exactly 'independent'. In these turbulent times, however, there is scarcely a bank's prospectus that is not capable of being critiqued for misleading or negligent information. In this exceptionally important case, where the legal fees cost is about a quarter of a £billion (or 3 times the cost of President Obama's inaugeration ceremony) and where there is immense political and Scottish national issues, the matters we raised have a heightened sensitivity, about which our intervention was as judicious and responsible as we could manage. For the publicity (still continuing) see:

Ian Fraser

Robert McDowell