Eschew the stress and carry on
Don’t believe everything you read in the papers. Following the second round of stress tests which were released on Friday, the weekend press has been predicting Armageddon in the markets for the coming week. I beg to disagree.
We all know the old chestnut about whether, if a thing works in practice, it might work in theory too? I don’t think the markets really needed the EBA stress tests to tell them where the bodies are buried and, hence, they should take the results, especially with respect to who failed and who is at risk, in their stride. If not, I’d query what markets and the key participants have been up to for the past four years. As I suggested last week, the objective of the stress tests is to bring a little bit of order into the debate and there is nothing at all wrong with that. However, to assume that this morning the world will be a significantly different place than it was on Friday is perhaps mildly childish.
The most interesting element of the entire process has been the howling withdrawal of HELABA from the process. Having been slated to fail the exam, it contested the calculation of its capital base by the EBA and decided to take no further part in the stress testing exercise. This is not good. Germany is supposed to be the paragon of virtue when it comes to all matters European and to see the churlish response by the management of an institution as core to the German financial system as a Landesbank must have more people than just me scratching their heads.
Does it truly matter? We all know that the Landesbanks are on life-support and even if it had been awarded straight As, I doubt too many investors would have believed it. However, when the head of BaFin, Jochen Sanio, stepped out and criticised the entire process – presumably for not being generous enough in weighting some of the hybrid capital tools used by the Landesbanks, the wheels fell of the stress test waggon.
The question remaining is whether the market has learnt something it did not already know. Volatility is about known unknowns and unknown unknowns. The EBA has not provided any unknown unknowns and therefore I suspect that the fear being spread by the press with respect to the outcome should prove to be excessive.
Here in the UK, the telephone hacking scandal continues to claim scalps. The most recent is the former head of the Metropolitan Police, Sir Paul Stephenson who in detail seems to have done nothing wrong but who has decided that he does not want to be the object of further accusations and has stepped down. At the beginning of the News International crisis, I suggested that this might be the British Watergate. I have repeatedly been asked what in my view the hacking scandal has to do with Watergate.
I believe that Watergate changed American political culture for ever (or at least until next time) and I believe that these events will change British political culture too. It was Maggie Thatcher who identified that the government needed the support of Murdoch’s papers if it was to win elections and she began the culture of grooming News International and its senior people. I had drinks with a chum over the weekend who had attended a meeting with John Major. It was suggested to Major that he too needed to sweet talk the Murdoch lot but, so I was told, he replied that he’d rather lose the election than get into bed with that lot.
Tony Blair had no such scruples, flew half way round the world to attend some grand Murdoch shin-dig and came back with the Sun having switched support to Labour from Conservative. And so it was to stay until the last election which brought David Cameron to the fore.
David Cameron, just like Ed Miliboy, has grown up in a world where snuggling up to the press – News International and all the others – has been a significant part of political life. Policies in themselves were important but never as important as how and by whom they were communicated.
Personally, I think that excessively castigating the Prime Minister for his close relationship with the News International bunch would be wrong; he was trapped in a world not of his making and the dismantling of which would always have been beyond his powers. Had Labour won, the situation would be no different. The release from this strait-jacket should be celebrated but with party leaders whose political instincts were honed in an age when kissing journalists feet (and any other body parts required) was the norm, it is understandable that they are a bit discombobulated.
It will take time for them to adjust the new world. However, unless David “Call me Dave” Cameron very quickly gets the message that the rules of the game have changed, he might find a removal van outside Number 10 before too long.
I was asked shortly after the crisis started and after the first sell-down of News Corp and BSkyB shares whether they might be a cheeky buy. I suggested not. So far the Australian listed share has lost 17.53% since the news taker has become the news maker. The US listed stock bounced slightly on Friday but is down 13.73%, probably with more to come today.
Rupert Murdoch has wanted to create a dynasty. His eldest son. Lachlan, walked away, as did Elisabeth, his second daughter although she is back in the fold. James is the top dog at the moment with a seat on the board of News Corp and as chairman of BSkyB. In the eye of the storm, he will likely have to be sacrificed as internecine warfare is beginning to break out in public. The fate of the empire now rests in the United States where its hard right politics is well out of favour in O’bama’s Washington.
The Chinese proverb says “May you live in interesting times”. My answer to that is “We do, my friends, we do!”