Like the cast of a bad sitcom, the stars of the credit crunch are reuniting.
We have the banks. You’ll remember from the first series that they’re the ones who parcelled up a load of mortgages and then sold them on... with less-than-hilarious consequences.
We have the credit ratings agencies. Their role last time round was to give dodgy debt an AAA rating, so that someone would buy it when the banks sold it on.
But one cast member — the market — has refused to take part in the new project. So the central bank will play that role instead.
On January 23 this year, my colleague Garry White wrote: "Last year was the year that investment bankers proved to the world that they are not as clever as they think they are. Will this year be the year when central bankers prove the same?"
It looks like it could be. On April 21 the Bank of England unveiled its special liquidity scheme (SLS). The idea was to provide £50 billion of funding to UK banks. They could access this funding by swapping mortgage-backed securities for government bonds. They could then use these bonds as collateral to borrow funds.
There has been some speculation that the banks would shun the scheme. There was a fear that any bank using the scheme would be stigmatised as unable to borrow elsewhere. And besides, the borrowing fees are high.
The Bank of England got round the first problem by guaranteeing that any loans would be made in secret. If you request the names of borrowing banks under the Freedom of Information Act, your request will be denied.
The second problem was tackled, quite simply, through a marketing drive. The Bank encouraged lenders to use the scheme, and dropped the hint that they would be prepared to breach the £50 billion limit.
That hint has been picked up by the banks. Far from being shunned, the SLS is expected to be oversubscribed. Lenders are looking to swap up to £90 billion of mortgage-backed securities for government bonds.
But here’s the rub. The Bank of England is taking onto its balance sheet assets for which there is currently no market appetite. These are rated AAA (a necessary requirement of the SLS), but they’re rated by the same agencies that gave that rating to assets that were anything but.
Ultimately, there’s a risk involved in all this. We don’t know how big a risk, but there is one thing we can be sure of — taxpayers’ money is underwriting it.
You and I are being dragged unwittingly into the next phase of the credit crunch.
"It’s all the same clowns doing all the same tricks," says colleague Frank Hemsley, Fleet Street’s resident angry man. "It’s a bloody circus — and we’re being forced to buy a ticket!"
The experience of the European Central Bank (ECB) isn’t exactly encouraging. The ECB has its own bad-assets-for-good-assets swap scheme. And its people are a little uneasy about the way it’s being used.
Yves Mersch, a member of the ECB’s governing council, says it is "looking very hard at whether there is not a specific deterioration of collateral" that the ECB is accepting in return for funds.
Indeed, there are suspicions that some banks are deliberately creating assets to swap for ECB Treasury bills. This shouldn’t surprise us. Banks are staffed full of ingenious people who’ll try any trick or wheeze to make a few quid.
The irksome thing now, though, is that ‘few quid’ could end up coming out of our pockets.
Gold vs Oil — what’s the best inflation hedge?
There’s a debate raging in the FT today about the best way to hedge against inflation. Traditionalists say gold, but the yellow metal has slipped lately.
Meanwhile oil, which like gold is denominated in dollars, has surged ahead. Oil investors have done better in recent weeks than those holding gold.
"But why do we have to choose?" asks Garry White. "I say we can have our cake AND eat it."
(As an aside, let me assure you our commodities editor knows all about having his cake and eating it. I still remember the time Garry made a beeline for a plate of éclairs I brought into the office).
As Garry explains in his article today, a sensible investor doesn’t get side-tracked by artificial debates. He remains focused on the long-term goal — growing his capital and protecting his wealth from inflation.
Gold and oil both allow you to do this. Let Garry show you how.
A smarter way to play the energy boom
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Liquefied natural gas, to be precise.
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Qatar is not alone. The whole region is taking off. But you only have a few days to get in on Manraaj's Number One Gulf Investment.
Until tomorrow
Ben Traynor
