tony's blog

Wednesday, April 28, 2010

Is there a doctor in the house?

World financial markets are far from recovered. While the Germans try to administer very unpleasant medicine to Greece, other countries among the PIGS (perhaps they need a Vet) risk getting the symptoms of contagion. Yields on Portuguese national debt, for example, are heading north at an alarming rate.

It was once said that when the US sneezes the rest of the world catches a cold.
The credit crunch demonstrated the alarming truth of that. But the pressing issue now is one of rebound. If Greece effectively keels over (how can that be allowed to happen?), we all will feel the resulting impact on the global banking system. We just can't afford to have that level of destabilisation so soon after finally getting things under control again. The downgrading of Greek national debt to junk status by Standard and Poor’s is bringing havoc to markets with some traders privately admitting that anything that is offered up now is “too little too late.” Liquidity is fragile and this will do nothing to help the global flows of capital as banks will rush to protect their positions, shore up their capital adequacy and become paralysed while they reconsider new strategies. The flight to quality is in full swing.

If the PIGS were to go under the consequences for global capital flows would be profound and this just can’t be allowed to happen. No country in today’s world is isolated and the illness of one is felt by all.

Monday, April 19, 2010

Politics, politics........

And so it starts. 

As I write this week, political parties of all colours are launching their manifestoes, blitzing the media, and indulging in the inevitable mudslinging that leaves you under no illusion that a general election has started.

Interestingly, never before have decisions about the future of our industry had so many ramifications for our ability to do just about anything else. Whether defence, health, or education, the financial crisis is now affecting our view of how much or how little we can do with all these important areas of public policy.

The Financial Services industry and the City of London in particular, have become amongst the most important features of the UK economy. But the financial crisis has focused everyone’s critical faculties (some greater than others) on its contribution. Of course, there have been and continue to be considerable benefits for UK plc from our industry, but, as we have now discovered there were also major systemic risks which spilled over into the rest of the economy. It is the job of politicians as policy makers to cut the risks relative to the benefits. But, short of sound bites about bashing bankers, and more regulation, little will be heard about this.

This is a shame because the mortgage market faces decades of instability unless the Government addresses the impending funding gap, which will widen by a further £312bn with the cessation of the Govt special schemes in 2012 and 2014.  

Industry insiders are all concerned by the scale of the problem facing mortgage lenders if wholesale funding continues to be difficult to come by. There is no silver bullet to this funding issue. Retail funding is as vulnerable to market change as any wholesale model, is too small in relation to the overall funding gap and is inherently short-term in nature when what the markets requires is a medium to long-term funding solution. Given, the volumes of maturing debt, as well as the need to continue new lending, there is a case for the Bank of England to extend the SLS, or better still, replace it with a long-term liquidity mechanism and work with the industry to allow securitisation and covered bonds to be seen as attractive and safe instruments for investors again.

Most recent comment by both Mervyn King and Lord Turner give some encouragement in this regard.

Parties will trade blows over cuts, the timing of cuts, and headline giveaways. But my overall impression is that the electorate will remain unaware of the major economic choices and their ramifications. 

Perhaps that suits us, perhaps it does not. I worry that in this election, too many may be fiddling while Rome burns.

Tuesday, April 6, 2010

The real test will be to see what has changed by this time next year

First of all, my thanks to all the contributors and attendees at this year’s Mortgage Funding Conference. Initial feedback and coverage has been very positive. My thanks are also due to Sidley Austin for their sponsorship of the event.

I am particularly pleased as the conference was the first of its kind since the credit crunch gripped the industry. My aim is to establish an ongoing collaborative event – a ministry of all the talents if you like - that can highlight, discuss and maybe even resolve the issues that are affecting everyone. From time to time the vested interests of financial services need to put differences aside and pull together so it was gratifying to see all manner of market commentators: lenders, distributors, bankers and regulators in attendance in full voice.

Our overall aim then is simple: to move towards a fully funded and competitive mortgage market underpinned by an increasing number of mortgage lenders ready, willing and able to lend, or to lend more.

The lack of a level playing field was a theme that ran through many conference addresses and perhaps unsurprisingly, the lack of action from the authorities in support of wholesale funding markets and the broad range of mortgage lenders was criticised by many speakers.

My own view is that we cannot expect guarantees in this market from the government. But there are postives, as Robert Plehn, head of structured securitisation and covered bonds at Lloyds Banking Group, noted in his excellent presentation. While a RMBS guarantee scheme set up by the UK had not been able to be put into practice, it did represent a “tipping point” for investor sentiment towards UK RMBS as it demonstrated that the government was willing to act in support of the asset class.

Other highlights included Rob Thomas’ passionate defence of wholesale funding noting that the necessary guarantee of retail savings deposits by the Chancellor had shifted the balance unduly in favour of retail funding. Indeed the FSA is continuing to accentuate this bias in its pursuit of lower wholesale funding ratios as part of their change to bank and building society rules for maintaining liquidity. These actions in isolation never seem as bad as when considered in their totality.

On a positive note we should also welcome the fact that Mervyn King and Lord Turner have recently endorsed the importance the securitisation and covered bond markets: Lord Turner said only last week that “securitisation will continue to play a significant role in the credit intermediation process and ... could perform a socially useful function of enabling improved risk management.”

It seems to me that we are moving on and the high attendance at this conference and positive feedback received proves that there is commitment to diversified and robust funding across the industry in one shape, form or another. The real test will be to see what has changed by this time next year.

One thing is clear: we need more mortgage lenders to be active in the market than there are today and this means getting the funding markets working efficiently again with a diversity of funding sources or we are in danger of markets (and I mean both the housing market and wider economy) wallowing in the doldrums.