Wednesday, December 19, 2007
Tea
Have decided the system needs a break from the pints of Early Grey (weak, without milk but with lemon) I have been drinking every day lately. Back on the green tea - the last bout of which was terminated by it acquiring a fishy flavour (see above). The current bout is a sort of green tea which comes in small green balls, say a couple of mm across which open up into small leaves, maybe a couple of cm in length. Experience enhanced by using a proper tea cup, rather than the Beryl ware which is our usual fare. The green Beryl ware from the Wood's ware range which was near universal with British Rail, mental hospitals and teacher training colleges (in no particular order) in the late sixties. After that, for a while, it was very easy to pick the stuff up from car boots sales. We have rather a lot of the stuff in consequence. Good everyday stuff which one does not get tired of.
But the green tea has been doing the work of several pints. Been pondering, on the way to Cheam, on the economics of Northern Rocks. My understanding goes as follows. A bank A borrows £Bbn at i1% interest and lends lends the same amount at i2% interest where i2 is bigger than i1. B is a large number but less than 1,000. Then there is a rule (rule(1)) that the bank must have B times C cash in the piggy bank as working capital to cope with the in and outs on the loan book. And another rule(2) that it must have B times D in capital assets of reasonable quality - near cash assets to back up the actual cash.
All of this means that the idea for the bank is to make A as big as possible - assuming always that i2 is indeed bigger than i1. Banks being, like the rest of us, greedy, will try to cheat. The particular cheat in vogue is to parcel up a proportion P(B) of the loan book and sell it on, its value being a function of its size and the differance between i1 and i2, that is to say the net income stream the new owner might expect from the loans making up P(B). P(B) then disappears from the loan book of bank A and something is added to its cash or capital account - or perhaps paid to share holders or share option holders. Bank A is then free to build up the loan book again without breaking rule(1) or rule(2). And so on, ad infinitum. Now some banks were crafty and actually sold the P(B)s to somebody else for cash - so that when all of a sudden i2 became smaller than i1, the P(B)s became liabilities rather than assets (and certainly not capital assets of reasonable quality) and the whole business model has collapsed - they didn't have the problem. The somebody else did. Some banks, however, were not so crafty and sold to some subsidiary of themselves, perhaps something obscure in Jersey. In which case, rule(2) kicks in and the bank has to unbundle the P(B)s back onto their loan book, which is apt to mean that the bank has then broken rule(1) big time and has to unwind its loan book as fast as possible. Net result, bank A is no longer in the business of lending money to anyone much.
A nice tidy story which accounts for the facts as I know them. But now many other stories would have the same explanatory power?
And before the government gets all high and mighty about people working fiddles by juggling things between current and capital accounts, let's remember that the government does exactly the same thing with its PFI projects, amongst other things a wheeze to reduce the official figure for government expenditure for EC/eurocrat consumption.
But there is one loose end. When the Bank of England pours money into the system to try and free things up again, is it just printing the money (a rather inflationary activity) or does it have a big piggy bank of its own. My bet is on the former so now need to find out to resolve the bet in time for Christmas.
But the green tea has been doing the work of several pints. Been pondering, on the way to Cheam, on the economics of Northern Rocks. My understanding goes as follows. A bank A borrows £Bbn at i1% interest and lends lends the same amount at i2% interest where i2 is bigger than i1. B is a large number but less than 1,000. Then there is a rule (rule(1)) that the bank must have B times C cash in the piggy bank as working capital to cope with the in and outs on the loan book. And another rule(2) that it must have B times D in capital assets of reasonable quality - near cash assets to back up the actual cash.
All of this means that the idea for the bank is to make A as big as possible - assuming always that i2 is indeed bigger than i1. Banks being, like the rest of us, greedy, will try to cheat. The particular cheat in vogue is to parcel up a proportion P(B) of the loan book and sell it on, its value being a function of its size and the differance between i1 and i2, that is to say the net income stream the new owner might expect from the loans making up P(B). P(B) then disappears from the loan book of bank A and something is added to its cash or capital account - or perhaps paid to share holders or share option holders. Bank A is then free to build up the loan book again without breaking rule(1) or rule(2). And so on, ad infinitum. Now some banks were crafty and actually sold the P(B)s to somebody else for cash - so that when all of a sudden i2 became smaller than i1, the P(B)s became liabilities rather than assets (and certainly not capital assets of reasonable quality) and the whole business model has collapsed - they didn't have the problem. The somebody else did. Some banks, however, were not so crafty and sold to some subsidiary of themselves, perhaps something obscure in Jersey. In which case, rule(2) kicks in and the bank has to unbundle the P(B)s back onto their loan book, which is apt to mean that the bank has then broken rule(1) big time and has to unwind its loan book as fast as possible. Net result, bank A is no longer in the business of lending money to anyone much.
A nice tidy story which accounts for the facts as I know them. But now many other stories would have the same explanatory power?
And before the government gets all high and mighty about people working fiddles by juggling things between current and capital accounts, let's remember that the government does exactly the same thing with its PFI projects, amongst other things a wheeze to reduce the official figure for government expenditure for EC/eurocrat consumption.
But there is one loose end. When the Bank of England pours money into the system to try and free things up again, is it just printing the money (a rather inflationary activity) or does it have a big piggy bank of its own. My bet is on the former so now need to find out to resolve the bet in time for Christmas.
# posted by Jim @ 8:55 AM 
