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Friday, 15 December 2017

On Dexia, public-sector lending and bankers' mousetraps

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Anthony Peters, SwissInvest Strategist

They keep on telling us that Greece will not default but then have to nationalise Dexia because nobody believes them. Mutti and Sarko announce that they will announce something but don’t tell us what they will announce and, apart from telling us that it will not be until a few weeks from now, expect us to all dance for joy that everything is really going to be much, much better and that, I suppose, the nationalisation of Dexia is really ought only to be a temporary measure. Yeah, yeah, sure and if my auntie were a bloke, she’d be my uncle.

I follow the daily writings of Alex Moffatt (plain “Moff” to his many friends here in London) who used to grace the global money markets with mis sharp, double breasted suits and trademark bow ties but who has since withdrawn to the more genteel state of being a bona fide private client stockbroker in sunny Melbourne. Moff is a rare creature in that he is an equity beast who actually understands bond markets and the way fixed income people think. Nevertheless, he remains perplexed by the way asset markets, especially equities, are not following what earnings are telling us. As a junior credit analyst – I did my training in commercial banking, not investment banking – we were taught to follow the cash. If you could track it without it disappearing here and re-emerging there which always smacked of creative accounting, you had a sound business. Moff can see the cash but can’t see why stocks are not only getting cheaper and cheaper but why nobody seems to want to pounce on that visible cash-flow.

How Dexia found itself up to the gills in American sub-prime lending is another matter

I agree with him to a certain extent. However, the shenanigans surrounding Dexia do make one want to question many underlying assumptions. We should not forget, as I pointed out last week, that Dexia is essentially a dedicated public sector lender. The fact that the bank already came severely unstuck during the 2007/2008 leg of the current crisis – I note here for those who don’t know that I: a) hate the term “credit crunch” as that vacuous head-line phrase is lacking of any meaningful definition and b) I don’t subscribe to the notion of a double dip recession as I am of the opinion that we never left the first one, and just mis-read the mother and father of all dead cat bounces as a sustainable recovery – but how Dexia found itself up to the gills in American sub-prime lending is another matter.

Just as the wheels began to fall off in 2007, I wrote a piece that asked the following: If the chairman of a bank had stood up at his annual shareholders’ meeting and had declared that his bank’s ROE was going to be 2% lower than that of its peer group because he didn’t like or agree with the their lending policies and appraisal of risk, do you truly believe he’s still have been chairman twelve months hence if he’d have declared lower dividends than the others?

And here comes the point: Any bank which was by definition involved in lower-margin lending – like Dexia with its focus on the public sector – was needy of quick and easy earnings and the US mortgage market looked to be providing just that. You bait mousetraps with cheese and banker traps with yield. This also helps to explain to some extent how the likes of the Landesbanks all went sailing into abyss, whereby the profusion of vain, greedy and clueless politicians in non-executive director seats, who saw “their” bank as a fiscal free lunch and set fixed ROE targets in a falling interest rate environment. Need I say more?                                        

Job growth still lagging

Alas, markets took on board the better than forecast US labour numbers of Friday even though the manufacturing payroll fell and the unemployment rate stubbornly remained at 9.1%. Allowing for rounding errors, this has remained nearly unchanged throughout this year even though the reported anaemic non-farm job creation is not supposed to be enough to absorb new entrants into the labour market and to keep the number stable.

That looks to me as though the number of unemployed falling off the statistic after the mandatory two year period exceeds the number of new job filers. Let us remember that until job creation as north of 250,000 or so, there will be little impact and evidence of proper growth.

Finally to my MP, the Rt Hon “Call me Dave” Cameron - I can’t work out how he could defend his “good friend” Andy Coulson while juggling his Defence Secretary like a hot potato for doing more or less the same for his chum Adam Werrity. If Dr Liam Fox has misbehaved, then he’ll have to accept the consequences of what is now usually referred to as “an error of judgement”. However, the speed in which Cameron demanded a report on the events looks like him trying to look whiter-than-white very shortly after he had found himself in an invidious position himself. Not very becoming in my view.

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