Failed regulation in the Irish market

There are three broad benefits to regulation of a financial system.

Firstly, avoidance of negative externalities, often the societal costs of these outweighs the private cost and prevention is possible when a regulator is function well and doing their job correctly. They do this by preventing excesses, by promoting conservative risk management in the financial sector and helping to maintain confidence by ensuring (for instance) that a liquidity shortfall in one institution doesn’t spill over into others (i.e. avoiding multiple bank runs which take down well functioning solvent banks in their wake) resulting in a widespread credit crunch.

Secondly, to set solvency and reserve requirements for banks, at times there are significant asymmetries in information within the consumer/institution relationship, or worse still, information gaps (where both institution and consumer don’t have full information – as happened in the sub-prime loan market in the USA), when nobody can determine the quality and reliability of a financial product a strong regulatory environment will ensure that banks are in a position in which they can …

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When will we get a real picture on repossessions in Ireland?

The mood has definitely changed in the markets and across the world in the last year, we have gone from being on the precipice of total destruction to being tentatively optimistic, and in many cases outright bullish. The news is becoming ‘less bad’ (perhaps we are getting immune to bad news too!) across several key metrics in many countries such as the ‘speed of the increase in the rate of unemployment’ – which is a roundabout way of saying ‘lots of people are losing jobs but not as quickly as before and thus its a good thing’.

One of the headline grabbers this year was that of repossessions, they make for poignant reading and often they are naturally heartbreaking stories, but are we seeing the full picture? Today we will consider some of the reasons why we believe that we are not seeing anything like the full picture, and it relates to the implementation of several key policy areas which have essentially delayed the problem for another …

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What is the mortgage market like lately?

People ask me ‘how is business’ a lot, is it macabre fascination or do they want to hear something reassuring? I don’t know, but my general answer is ‘can we talk about something happy?!’. There are so many intermediaries that have shut down that on many levels (I feel I speak for the entire firm on this) we feel privileged to still be operating through the downturn. While we all know that there is a crisis, and we are reminded of it every day, I think it is worth considering the changes that have occurred in the mortgage market in the last year,with an emphasis on 2009.

Mortgage debt is decreasing: Our total ‘indebtedness’ on the mortgage market is coming down, we are deleveraging as a society. This is happening as people start to shun debt and fear the forward commitments of borrowing, in the same way that companies and funds have been deleveraging, everyday people are doing the same. In the past, recessions generally had a large debt element to …

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The future of compensation in financial services (perhaps!)

I wrote before about the errors of compensation in financial services, in a nutshell people were earning money for short term performance in a long term game. However, what I had failed to do was provide potential solutions, this post is about alternative solutions, it will focus primarily on brokerage (because that is what I know best) but it can equally apply to banks or any financial company.

The basic tenets are

1. Long term reward for long term performance 2. Ensuring that bonus’s, while delivered in the short term, have some kind of long term implication. 3. Creating schemes that reward consistency and best advice, rather than one based on transactions.

I would state in advance, that enacting any of these plans will mean further economic pain for a group of workers who are already at the epicentre of the worldwide financial storm, it would also require considerable will to roll out, as well as the co-operation of the banks, the Financial Regulator, …

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Irrational banking, non-competition creating profits unexpectedly.

That banking in Ireland is a little irrational at present is a given, however, there are occurrences in the market which will change pricing structures in the near future, interestingly, by trying not to compete for business, several banks will ultimately make the market more profitable for all of the banks, achieving almost the opposite of what they had hoped to do.

I’ll explain, at the moment we have seen widespread Sovereign Credit Retrenchment, that’s a fancy way of saying that banks who are bailed out by certain countries are only really focusing on their indigenous markets because it is those markets that bailed them out. Irish banks have done this, Irish owned UK operations are closed. Equally, UK banks here are doing this by making their existing business rates higher and their new business rates exceptionally high.

Bank of Scotland’s new business variable rate is 6.19%, a whopping 5.19% over the ECB, they are doing this to avoid lending, and they are also paring back LTVs so that you have to have greater equity in the deal to borrow, …

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‘Are we there yet?’…. when will the bottom of the housing market be reached?

The most popular question I am asked as of late is whether or not we are at the bottom of the housing market, and the answer is ‘no…. but perhaps closer than we think’. Today we will consider a few of the things we will need to see in order for ‘recovery’ to occur.

First of all we need to see a reduction in the massive overhang of housing stock, even if the number reduces, they all need to be sold and a degree of scarcity will need to develop in order to make prices go up again, currently supply is swamping demand and that dynamic will leave uncertainty in its wake.

However (and here is part of the ‘perhaps closer’ bit), NAMA will likely take a lot of housing off the market, in particular it will take it off the market and drip feed it back in, if this happens then it will avoid devastating fire sales, it might also lead to stagnation …

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The end of Wall Street

This is an insightful look into the financial crisis, looking at it from the view of how mass borrowing for residential real estate lead to a bubble, the political input into the causes as well as the packaging of these loans and how it ultimately lead to the closure of Bear Stearns and Lehman Brothers.

This is a great video set, surprisingly the Wall Street Journal are the makers of it, you don’t see that kind of departure from vested interests very often.

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Hedgefunds, risk, and finding the silver lining of any dark cloud.

Here is a simple question: ‘how do you protect or even augment your portfolio returns when markets are crashing or where there is systemic risk?’ if you have an answer then you can be a little smug because the majority of fund managers, the best and brightest the world of finance has to offer, for the most part didn’t have an answer during the last two years and if they did they didn’t (by and large) act upon it.

The classic definition of a hedgefund is not the ponzi-schemes run by the likes of Bernie Madoff, rather it was a fund that strategically goes long and short to produce positive gains regardless of whether the market goes up or down, that was what Winslow Jones was doing when he started the first hedge fund in 1949, while managed fund managers are happy to post a 20% loss when the averaage is -30% (for instance), hedgefund managers are meant to be able to …

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Understanding why mortgage rates MUST rise.

We have been saying for some time that interest rates on mortgages must rise, you can look at supply and demand, or you can look at the types of products that have ceased to exist such as tracker mortgages (removing fixed margin loan products) and then there is the proliferation of variable LTV products which set the stage for the ability to manipulate margin on more loans. The question is ‘what all of this means’, and the purpose of this post is to explain how deposits, business lending and mortgages are all interconnected parts of the banking system and how margins are set based upon them.

Last week PTsb finally came out and said that they were considering an

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If you are in financial trouble, don’t be an idiot

A part of me feels bad about not having any pity for some of the people who recently had their homes repossessed. Note: I said some not ‘all’, the reality is that I agree with repossessions for people who bury their head in the sand. In many cases the person had made no payment in three or four years and avoided any contact from the lender.

How do you negotiate with a person who won’t even come to the table? Or worse yet, who refuses to acknowledge there is an issue to come to the table for! The IBF recently decided to start working with MABS on a new protocol for people in financial difficulty, we fully support such a move, and for people in mortgage arrears, or indeed any financial arrears we even wrote a guide for …

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