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Athens, 8 June 2012

LOSING IN ORDER TO WIN

To understand European finance these days, there seems no point in studying dusty old economic textbooks like Lipsey or Samuelson. What you need to do is to study magic – particularly the conjuring trick that produces rabbits out of hats. You know the shtick. First the hat is empty, then it houses a rabbit. How come?

Take money, for instance. In the old days, you had to earn your bread by the sweat of your brow, as the Bible says (mind you, my Biblical exegesis is a bit dusty now, too, so don’t quote me on that). Actually, most of us still have to do just that: knuckle down on Monday morning – doncha love ‘em, Monday mornings – and keep our minds focused rigidly for the rest of the week on Friday night’s pay packet (yes, I know, that will mark me out as an old-timer).

But there’s one sector to which this does not seem to apply – and that’s banking.

It was bad enough in the old days. Banks lent you money so that you could work for them and then, when you had earned something, they took most of it back from you.

That was old-fashioned banking.

There was only one thing the banks had to do in the old days to earn their crust – they had to make sure that you would be in funds when the time came for you to pay them back.

The banks had to be prudent. They had to be damn sure that they would get their wonga back.

So they were cautious. They didn’t lend to any Tom, Dick or Harry like you or me.

And quite right too. I wouldn’t lend money to someone like me. Nor to you, either, for that matter.

Only now all that has changed.

The banks don’t need to worry any longer about whether a borrower will repay them. They have invented sophisticated economic investment vehicles called “non-performing loans”.

Note the new language, too. What we used to call credit and loans, they call “investment vehicles”.

Now what are these “non-performing loans”. Well, they are a bit like “performing seals” at a circus – except for one crucial difference: they don’t perform.

Actually, it’s very difficult for old-school economists like you and me to get our heads around this concept.

It means essentially that they have lost the money. Yes, that’s right. They lent the money out, hand over fist, and it’s never going to come back.

One might almost begin to feel sorry for these bankers. They went out and were nice to people and lent them loadsamoney for anything at all they wanted to buy – and, lo and behold, the buggers have done a bunk. Gone. Vanished. Volatilised.

Except that it doesn’t matter at all. To the bankers, that is.

Because, lordy da, now they can get “recapitalised”. Just like that. They can lose as much money as they want, in fact. It really doesn’t matter.

They just turn up the next day at their national central bank, or the European Central Bank, or the Ruritanian Central Mint – and get as much money as they want. Just like that. Just for asking.

You see, unlike you and me, these banks are too big to fail.

That too is a difficult concept to take on board.

An ordinary person might think that they were failing all the time, losing all that money. And, you might imagine, the bigger the bank, the more they would lend. And the more they lent, the more they would lose. So the bigger the bank, the harder they would fail.

Anyone who thinks like that hasn’t a clue about modern banking.

If you and I fail, we’re out. It’s all over. If we lose all our money, well that’s it. Finished. Kaput. If we’re lucky, we get put on a convict ship bound for Tasmania.

But that’s not how it is in banking.

“Recapitalisation” means that when you lose all your capital the central banks – the lenders of last resort, a sort of last chance saloon – not only make your losses good but give you billions and billions of euros, dollars, punts, forints  – or whatever currency you want – more than you lost in the first place. This is because you might need it in future. It is intended to reassure the markets (which mainly consist of banks and para-banks such as hedge funds or private equity investors) . Investors have seen how the banks non-perform. They take the reasonable view that the banks will continue to non-perform. Hence, they need to know that the banks have access to a bottomless honey pot in which to scoop up fresh money when the time comes that they need it. That gives what is called confidence to the market (which is essentially the banks, as I have just tried to explain).

Which brings me, in a roundabout way, admittedly, to Greece.

On 29 May 2012 the Hellenic Financial Stability Fund injected 18 billion euros by way of “recapitalisation” into the four main Greek commercial banks: National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank and Piraeus Bank.

The very next day National Bank of Greece announced what is described in the Greek media as a “surprise” loss of 537 million euros in non-performing loans – an increase of nearly 50 per cent compared with the year before.

It may have come as a surprise to the Greek media but it will no longer come as a surprise to the readers of this column, for the reasons we have just given. As I have tried to explain, it goes like this: you lose your money and then you are “recapitalised” to an extent that more than offsets the money you lost. In other words, a loss is a win – if you’re a banker.

But it doesn’t stop there. Now that they have been “recapitalised”, the banks can go cap in hand to the European Central Bank and ask for yet more money. You see it goes on and on. But I’d better stop there.

Meanwhile, Piraeus, the country’s fourth biggest bank, has announced that it lost 80 million euros before tax. However, using “an outstanding deferred tax asset related to a bond swap” – think rabbits and hats – it was able to post a profit of 298 million euros. This was despite the fact that provisions for non-performing loans were up by 78 per cent compared with the same period last year.

What I would like to know is where does all this money come from? And where is it all going to end?

It’s all Greek to me.

To cap it all, we learn today that the Spanish banking sector needs mind-bogglin bail-out of no less 40 billion euros. [Since we wrote that last sentence six hours ago, the bail-out on offer to Spain has been jacked up to 100 billion euros. This is funny money. The figures mean nothing. They just pick the numbers out of the hat. Why not 45o billion euros while we are at it?  Or, why not, 635 billion? Or even a trillion? The people in charge of our economies are round the bend, loonies, stark raving bonkers. Bring on the men in the white coats before it is too late – except that it is probably too late already.]

You couldn’t make it up. Where do they get these figures from? Do they just make them up? Think of a number, double it, multiply it by a trillion and that’s what we’ll have, thank you very much.

We can now understand why a quartet of bankers in London once bought a bottle of Château Pétrus for £40, 000.

It was so good, they bought another.

By the way, any body out there heard of Lehman Brothers?

Sorry to spoil the party, chaps.

And, by the way, how do I get to be banker?

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 You might perhaps care to view some of our earlier posts.  For instance:

 1. Why? or How? That is the question (3 Jan 2012)

2. Das Vierte Reich/The Fourth Reich (6 Feb 2012)

3. The shoddiest possible goods at the highest possible prices (2 Feb 2012)

4. Where’s the beef? Ontology and tinned meat (31 Jan 2012)

5. What would Gandhi have said? (30 Jan 2012)

Every so often we shall change this sample of previously published posts.

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