welcome to my latest newsletter. This month – and what a month it’s been! – I look at the latest contribution of bankers and accountants to the present crisis and ask whether we need to get back to basics. Later on in the newsletter I consider one bank’s response to Basel 3 and wonder whether it heralds the end of overdraft lending to small businesses.
This newsletter is brought to you earlier than normal because I’d already drafted the first topic before the problems at Dexia meant I just had to release it early!
Isn’t it now time to get back to basics?
I wonder whether world governments, the supervisory and regulatory bodies have any real idea as to the financial state of the world’s banks. At best you could say they are a few balls short of the 8 ball. Why do I say this?
Just three months ago, in July, a mere handful of European banks failed the EU Bank’s latest, we were told tougher, stress tests. Yet now, as this goes to press, Dexia, a reasonably large Franco-Belgium bank, is on the verge of going under despite being given a clean bill of health just a few weeks ago. I know that we have had the European Sovereign debt crisis over the Summer, but nevertheless the current problems at Dexia should hardly fill us with confidence in (1) the test methodology; (2) any of the governments, people or organisations involved; (3) the ability of the European Banks, even after three years of preparation, to best protect themselves (and their countries’ citizens) from risk. Just how prudent and all encompassing were those tests, just how good at their job are the regulators now, and do governments still think that adopting a pretend, defer and hope philosophy will work? Just how many more surprises are in store, and from where?
What also concerns me is the inaccuracy, some claim the widespread misrepresentation, of the banks’ accounts. It’s not just the volatility of the markets and the complexity of the banks’ operations that make it difficult to assess whether the accounts show a true and fair view, many, including me, simply don’t trust the basis on which they are prepared. You see, included in the accounts are major figures calculated on a ‘fair value’ basis. Proponents argue that this better represents the real position, others argue this creates major volativity at a time when that’s all we need. The debate over ‘fair value’ is one that accountants have been having for a good number of years and is probably best demonstrated by reference to the recent UBS debacle.
If you recall, a rogue trader lost UBS £1.5 billion. Yet as you will see from the BBC site here, its latest accounts didn’t show too bad a position. How was that? Well, the biggest reason was that it marked its debts down by £1.1 billion on a ‘fair value’ basis. In broad terms, if banks do badly, in theory they could buy back the bonds they owe at less than full value, so they devalue the carrying value and release the ‘profit’ created by doing so into the current profit and loss account. It’s a bit like you or me getting into financial trouble and saying that we are confident in negotiating a better deal with our creditors because we’re in such a poor financial condition, so this year we’ve not done too badly. The point is the profit so released is unrealised, it’s not real: it’s a mere balance sheet movement, it matters not that it could only be realised in 5, 10, 15 years time, it’s still taken to this period’s profit and loss account. And even then realising it depends on there being a perfect market: but even Greenspan has now admitted there’s no such thing. So just how is it possible for accounts prepared on a fair value basis to show a true and fair view? Aren’t they little more than guesswork based on a theoretical world that simply does not exist? As someone said in a blog post recently ‘if I filled in my tax returns the way banks fill in their accounts, I’d be in jail!’ Shouldn’t accountants get back to being the boring, prudent, beasts portrayed in Monty Python rather than living in the world of fantasy and fiction?
This takes me back to a point I first made in one of my earlier newsletters: how can bankers, the regulators or accountants’ governing bodies (which are largely run by the same people who were in charge when this first kicked off in 2007/2008), ever be trusted again? Three years into this downturn and the litigation through the courts is gathering pace, with more evidence of hitherto hidden liabilities coming out every week. And if there’s no trust, when will we know we have actually hit rock bottom?
Isn’t it about time more, and the most senior, heads rolled at the banks, and the regulatory and professional bodies?
Are we seeing the start of the end of the bank overdraft?
The banks have been given several years to implement Basel III, which sets minimum capital and liquidity requirements in an attempt to curb the credit and leverage excesses of the past and avoid the recurrence of a 2008 style banking crisis. The OECD suggests Basel III will have little impact on GDP, largely because it anticipates banks to adapt the way they lend rather than lend much less. This latter point remains to be seen. Some people anticipate Basel III will see the end of overdraft lending to businesses, in a similar way to how we are already seeing credit card companies withdrawing unused credit limits. With many asset based financiers having effectively exited the market, we can expect the bigger banks to bring more asset based finance products to market over time, replacing the overdraft facility. However up to now many asset based finance products have been expensive and fairly inflexible. These issues have to addressed. Lloyds Bank have done so: they have brought in a new debt factoring facility with lower fees but probably more importantly, greater flexibility. As it has no minimum term, no termination fees, and just one month’s notice of termination is required, it can be used as a long or short term solution. To find out more, contact Lee Mason on 0121 644 4300 or at firstname.lastname@example.org. If you hear of any similar products, I would be interested to know.
Finally, three things:
- here’s a link to my latest blog on surviving the recession: the 1/3rd, 1/3rd, 1/3rd principle;
- I am giving a presentation at Halesowen College Breakfast Club on October 19th on what happens when the worlds of insolvency and business collide, if anyone should like to come. I promise it will be both interesting, and challenging!; and
- Please let me have your feedback, good or bad, on my newsletter.
Midlands Business Recovery
‘the local insolvency practice offering real solutions’