A piece of business that Sir Fred Goodwin got right

Sponsorship of Andy Murray has paid dividends for Royal Bank of Scotland

Peter Jones

“As a nation waits to see whether Andy Murray can advance to the final of Wimbledon and become the first British man to win since Fred Perry, no organisation is watching his progress more eagerly than Royal Bank of Scotland.

Its logo adorns the Murray sweatshirt, the Murray T-shirt, the Murray shorts. For RBS this is not just a showcase event that may restore some of its glory. It is an investment that goes back seven years when Andy and his brother, Jamie, the Wimbledon mixed doubles champion two years ago, were highly promising juniors, desperately short of funds for their training.

RBS spotted the potential. Others got it wrong – Richard Branson’s Virgin company was approached, but turned the offer down.

Murray’s commitment to RBS now is every bit as great as the bank’s is to him. The day after becoming the first British winner at Queen’s Club since Bunny Austin in 1938, instead of nursing a hangover or practising for the finals at Wimbledon, he was at work for the bank at a primary school in southeast London.

The money invested by RBS does not simply give it the valuable privilege of having its name on the sleeves of the brothers’ shirts and gaining massive exposure to millions of television viewers. The players have to work for it too.

Andy and Jamie Murray were at Heavers Primary School, in South Norwood, promoting the RBS Supergrounds scheme, through which the bank has given 800 schools money to help them to improve their playgrounds.

Andy is happy to do the work for the bank, says Judy Murray, his mother and mentor; not only does he find it worthwhile and fun, but also because he knows that without RBS’s financial help when he was a 15-year old prodigy he would never have made it as a senior professional.

Mrs Murray said that the family decided in 2002 that if Andy were to make the step up to the senior ranks he needed to go for coaching in Barcelona at the Sánchez-Casal Academy. The cost was up to £35,000.

“We had been offered some money by the Lawn Tennis Association and by SportScotland but we still needed between £15,000 and £20,000,” she said. “We approached the Royal Bank of Scotland to see if they would be interested in helping Andy.

“They had never sponsored a junior, or a tennis player, or an individual. I think that in the great scheme of things it was a relatively small amount of what they were spending on their sponsorship programme, so they agreed to help us.”

The money went a long way. In junior tennis there was no prize money and yet to reach the standards of professional tennis, a player needs a lot of money to pay air fares and hotel bills for himself and a coach travelling to tournaments for perhaps 35 weeks of the year.

“When you are on the ATP Tour you need to be in the top 150 to 100 players. That’s when you start to bring a little bit of money in, otherwise you are paying out more than you are getting in,” she said.

It was not until 2005, three years after the RBS deal was struck that Andy broke into that winning elite, starting the year ranked at 407th and finishing it with a world ranking of 64.

“Between SportsScotland, the LTA, a bit of help from Tennis Scotland, and a lot of help from RBS, we managed to make it. The backing he got from RBS really gave him the confidence to lift him up to where he is now,” Mrs Murray said.

RBS has had a torrid time, with the media and politicians criticising it for the estimated £200million paid out in annual sports sponsorship when Sir Fred Goodwin was chief executive. Formula One was the biggest beneficiary. Under the new management of Stephen Hester, the Formula One deal was cancelled and the bank’s sponsorship of sport will be halved by 2010. Andy Murray, who was on an estimated £1million a year, has volunteered to take a cut.

He was happy to do it, his mother said. “We have a very strong commitment to RBS because they have been sponsors of Andy and Jamie for a very long time. Now it is pay back time for RBS. For someone like Andy, who is very Scottish, is very patriotic, and who has been supported by a very Scottish bank, he is glad to help and, my goodness, we need a strong Scottish bank. It is a very positive match.” (Peter Jones, The Sunday Times). http://www.timesonline.co.uk/tol/news/uk/scotland/article6597798.ece

As much as public opinion has turned against bankers, RBS’s breakthrough support for this should be recognised – if we encouraged kids to play sport more we’d have far fewer problems to worry about.  And good on Andy Murray for a) offering a salary cut and b) working so hard to promote sport to kids.

How the ECB’s fig leaf has completely withered away

Another great article by Anatole Kaletsky confirming the superiority of the UK & US fiscal approaches (over the ECB) to resolving the financial crisis.  The UK and US will emerge much stronger than the broader EU and interest rates are likely to remain low for longer than people expect (which is good for residential property in particular):

“Now that the global recession appears to have passed its low point, panicmongers in the media and financial markets are shifting their attention from deflation to inflation — and especially to the debasement of the dollar by the money-printing operations of the US Federal Reserve. Whether printing money necessarily always leads to inflation is a long-running theoretical debate which the economics profession shows no sign of resolving, there is a factual question related to this argument that is much more important and straightforward, yet completely misunderstood. Leaving aside the question of whether it is a good or a bad idea to print money, which of the world’s leading central banks is printing money faster: the Fed or the European Central Bank?

Last Wednesday, the European Central Bank injected €442 billion (£377 billion) of new cash into the euro money markets. This was the biggest long-term lending operation in the history of central banking and was equivalent to half the Fed’s entire monetary expansion in the past 18 months. Yet most people still believe that the Fed (along with the Bank of England) is engaged in a “reckless” experiment with inflationary quantitative easing (QE), while the ECB is steadfastly honouring the deflationist traditions of the Bundesbank’s “steady hand”.

The ECB Council debated for months about QE, the modern equivalent of “printing money”, since it involves the central bank creating money out of thin air by signing computer-generated promissory notes and then distributing these around the commercial banking system by using them to buy up government bonds. In the end, the ECB decided to print only €80 billion to buy on private sector bank bonds, in contrast to the $1 trillion (£606 billion) of bond purchases undertaken by the Fed. And even this trifling monetary expansion was ferociously attacked by Angela Merkel for threatening Europe’s inflation outlook and jeopardising the credit of the ECB.

However, if we look at the facts, the transatlantic difference is less clear. In fact, the ECB is printing money even faster than the Fed is.

It is also supporting fiscal policy more explicitly through debt monetisation and taking much bigger risks with its credibility and solvency. The first point is illustrated in the chart. Since mid-2007, central banks have expanded their total liabilities (the broadest definition of what it means to print money in the modern world) by $1.2 trillion in the US and by $1.5 trilllion in euroland. Given that GDP is 12 per cent bigger in the US than in the eurozone, this means that the ECB’s printing presses have actually been running 50 per cent faster than the Fed’s. Someone should point this out to Mrs Merkel: since the ECB presses were presumably made in Germany, it would give her something else to boast about.

Meanwhile, we can move on to a second surprising comparison between the European and US central banks: their willingness to monetise government debts.

Having established that the scale of the money-printing operation has actually been bigger in Europe than in America, the next step is to compare the methods used by the Fed and the ECB to achieve these expansions. On this point, consensus opinion is even clearer: the ECB is almost universally seen as more “prudent” in the way it has expanded its balance sheet. The Fed has been buying government and agency bonds outright, thereby exposing itself to the risk of capital losses from rising interest rates, which in turn could potentially constrain its future monetary decisions. Even worse, the Fed’s willingness to buy Treasury bonds, at a time when the US Government’s deficits are exploding, means that it has taken the first step down the primrose path of debt monetisation that leads ultimately to Zimbabwe and Weimar. The ECB, by contrast, has not weakened its balance sheet with long-maturity bonds and dubious corporate assets and, most importantly, it has refused to buy government bonds or engage in debt monetisation.

This is the conventional wisdom, but again consider the facts. It is certainly true that the ECB has expanded its balance sheet almost entirely by lending money to the euro-area banks, while the Fed’s new lending has mostly been to the US Government and agencies. But does this really mean that the Fed has taken greater risks than the ECB or done more to facilitate profligate public borrowing? The answer to the question is a clear “no”. The ECB’s loans to eurozone banks at the latest count stood at $1.5 trillion — before accounting for last week’s €442 billion bonanza. Are these loans really as safe, or even safer, than the Fed’s $1.7 trillion of US Treasury and agency bonds? According to ECB apologists, its loans to the banks are completely safe because they are secured by collateral that can be sold if the borrowers default. But this reassuring claim disregards the massive reduction in the quality of collateral that the ECB has been accepting since the start of the credit crunch.

Unlike the Fed and the Bank of England, which only accept AAA public bonds as collateral for their lending operations, the ECB now lends against low-rated mortgage bonds, commercial loan books and other dubious assets that the markets would treat as “toxic” were it not for the ECB’s willingness to turn them into instant cash. The ECB has been praised for the boldness with which it has set aside the traditional rules of central banking in the crisis — and this is perfectly justifiable, but the ECB’s apologists cannot have it both ways. Those who praise the ECB for its “imaginative” response to the crisis must also acknowledge that it has accepted much greater credit risks than the Fed. Which brings us to the question of financing public debts.

The Fed has “monetised” roughly $1 trillion of US Government debt since 2007, if we combine its Treasury and agency bond buying. Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.

In effect, therefore, the ECB has been lending money by the shed-load to governments, with commercial banks acting merely as a fig leaf for what would otherwise be seen as a blatant monetisation of the most insolvent European countries’ public debt. In normal circumstances, this fig leaf might at least have theoretically protected the virginal purity of the ECB by interposing the commercial banks’ own balance sheets between the government borrowers and the ECB.

In normal circumstances, if the Greek Government defaulted, damaging the collateral deposited by Greek banks at the ECB, the losses would fall on the Greek banks, rather than the ECB, since commercial banks remain the beneficial owners of the collateral they deposit. But in today’s conditions, this Maginot Line between the credit problems of European governments and the ECB’s balance sheet is a joke, since the Greek, Irish and Spanish banks queuing up for ECB funding are near-insolvent and would certainly be insolvent were it not for the limitless supply of money they are getting, in exchange for dubious collateral, from the ECB itself. In short, the commercial bank intermediaries interposed between the ECB printing presses and European governments’ borrowings should not even be described as a fig leaf — more like the climactic G-string in the world’s most expensive strip show.” (Anatole Kaletsky, The Times).  http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6597813.ece

G8 signals the end of the financial crisis, but what caused it?

Succinct summary of the cause of the financial crisis by brilliant economist Anatole Kaletsky:

“The weekend G8 communiqué, coming after four months of stabilisation in most financial markets, seemed to mark the official end of the financial crisis. If so, what lessons should be learnt for economic and financial policies in the months ahead? The history of the crisis in the next few paragraphs may not be the standard version presented by most commentators and economists, yet recent events suggest it to be a plausible account of what went wrong.

The blunders that produced last autumn’s financial crisis had nothing to do with the supposedly inflationary monetary policies of Alan Greenspan, or the fiscal profligacy of Gordon Brown, or with Mervyn King’s lack of practical market experience, or Hu Jintao’s mercantilist approach to currencies and exports. All these and many other factors contributed to the vulnerability of the world economy, but none of them would have been enough to cause its near-collapse last autumn. For that we can blame the unforced errors of a man almost forgotten since he slipped quietly out of office at the beginning of this year: Henry Paulson, the former US Treasury Secretary and ex-chairman of Goldman Sachs.

To understand how a localised financial problem in one segment of the US mortgage market turned into a near-collapse of the global financial system we need to recall Mr Paulson’s astonishing misuse of mark-to-market accounting standards to expropriate the shareholders of Fannie Mae and then to bankrupt Lehman Brothers. What made matters even worse was his inability to understand the systemic consequences of what he was doing. Anyone who doubts the importance of individuals in economic history should recall that the single worst day of last autumn’s entire financial crisis, as measured by the widening of risk spreads on interbank credit, was September 23. That was the day Mr Paulson appeared before the Senate Finance Committee to explain what he wanted to do with the $700 billion he had requested from Congress. This was the moment when everyone realised the world’s most powerful economic official did not know what he was doing.

Once the key role of personalities and financial policies is recognised, it is hardly surprising that things began to improve almost as soon as Mr Paulson was replaced by a competent Treasury Secretary, Tim Geithner. A collapse of share prices on Wall Street triggered by the Lehman bankruptcy in September ended the very day after President Obama responded to attacks on Mr Geithner’s personal probity by offering his unqualified support. A week later, the suicidal mark-to-market accounting regulations were dismantled. And it is no coincidence that the financial crisis, at least in America and Britain, effectively ended that week. From that point onwards, the US Government found itself collecting tens of billions of dollars in repayments from supposedly insolvent banks. Far from being forced to nationalise almost every bank and running out of money with which to refinance toxic assets, as predicted by panic-mongering Nobel Laureate economists, the US Treasury now finds itself almost embarrassed by the hundreds of billions of dollars it has budgeted for supporting a banking system that no longer needs state support.

So much for the history of this crisis. What does all this imply for economic policies in the months ahead? First, that borrowing by the US and British governments, whether from their own citizens or from China, was not among the main causes of the crisis. This is not to deny that excessive public spending will damage long-term productivity growth and living standards in Britain, America and much of Europe. But the fact that fiscal policy needs to be tightened does not mean that it should be blamed for causing last year’s crisis. In fact, it was the financial crisis that caused enormous government deficits, not the other way round. It is, therefore, essential for governments to wait for their economies to return to adequate growth rates before they cut public spending in the years ahead.

The same is true of monetary policy. Last year’s crisis was not caused by Greenspan’s monetary policies after the 2001 recession, as is often suggested. And nothing in recent experience should discourage the Fed and other central banks around the world from keeping interest rates at rock-bottom levels until growth is restored and unemployment is reduced to more acceptable levels. In fact, the best contribution that central banks can now make is to keep interest rates extremely low for much longer than markets are expecting. By doing this, they can create conditions for governments to tighten fiscal policies without jeopardising economic growth. For central banks to raise interest rates at the same time as governments are increasing taxes or cutting public spending would be economically suicidal and fiscally counterproductive, as evidenced by 15 years of experience in Japan.

Finally, what about regulation? Perhaps the clearest lesson of the crisis, if only policymakers are willing to accept it, is that regulation needs to be better targeted and more intelligent, rather than more extensive. Rather than extending their reach into areas such as hedge funds, which had nothing to do with the financial crisis, regulators must make sure that systemically important banks have enough capital and risk-free government bonds or central bank reserves to cope with liquidity withdrawals. Equally, regulators must avert any repetition of fiascos such as mark-to-market accounting, risk-based capital requirements and reliance on private credit-rating agency models. All of these errors reflected the market-fundamentalist ideology that the markets are always right.

If markets were always right, there would no need for regulation and there would never be any financial crises. The reality is that markets are usually right, but are sometimes disastrously wrong. The challenge for governments and central bankers is to judge when markets should be left alone and when they require intelligent and focused regulation. A good way to start would be to look more objectively at the mistakes of the past 12 months.” (Anatole Kaletsky, The Times).  http://business.timesonline.co.uk/tol/business/economics/article6499355.ece

Property Week: Let’s not tempt fate, but …

“… prime central London property is showing signs of recovery

Talk about tempting fate but that dreaded phrase, ‘Green shoots of recovery’, is being bandied around the UK housing market with increasing regularity following modest rises in prices and activity in a slew of official data. Prime property in London is starting to experience the same positive shift in sentiment.

Posh prices

In its latest research, Knight Frank reports that prices in posh parts of the capital rose 1.6 during May on the back of a 0.4 rise in April.

Properties in the sub-£1m bracket have now risen 2.7 since March and are leading the recovery in prices. Demand appears to be strongest in Mayfair and Marylebone, where prices have risen 2.9 and 2.7 over the same period.

This apparent upturn needs to be put into some context for, as Knight Frank’s prime central London index also shows (see table), prices are still down 22.3 from the March 2008 peak. Even so, as the firm’s head of residential research, Liam Bailey, points out, those very same sharp falls in values are tempting overseas investors back into the market – particularly those armed with US dollars or euros who can exploit the weak pound.

The May figures, he says, reflect steadily improving conditions in a market that is ‘unrecognisable’ from the gloomy London of just six months ago. Don’t mention City bonuses but, as Bailey observes, ‘We have even seen some bankers back in the market after a noticeable absence.’

London’s high-end residential market is an interesting work in progress right now. There remains little of the frustration over mortgage lenders cutting off the money supply to the mainstream house market. And gratifying though it is that the Bank of England cuts or holds interest rates, it is of marginal influence.

But prime property does reflect the health of the London economy, as well as investor sentiment towards the UK from overseas. Knight Frank says that in the £10m-plus sector – where much overseas money was deposited in the boom years – the recovery has been slowest with prices just 0.8 higher over the past three months. But Bailey suggests this sector is starting to get busier with Russians who have managed to retain their wealth keen to place their cash in London’s best locations.

The same is true of investors from the Asia-Pacific region, reports King Sturge. In another echo of the boom years, the firm has made several trips to Singapore, Hong Kong and Malaysia, marketing developments such as St James Urban Living’s Silkworks in Lewisham and Galliard Homes’ City Peninsula in Greenwich. Such locations are hardly prime London, but nevertheless the firm claims to have generated 188 sales at these and other similar schemes since March. This Far Eastern haul is worth £54.5m.

The overseas investors are showing some faith in London, although the capital must still carry a health warning. Market activity is still very low compared with the turnover of the boom, which makes the data less than wholly reliable. And there are often false dawns in the housing market as the wider economy struggles out of recession.

Perhaps the best indicator of London’s change of fortunes comes not from Russia or Asia but the news that Berkeley Group has paid more than £20m for a development site in Belgravia, as revealed by Property Week last week.

Berkeley managing director Tony Pidgley has an enviable reputation for calling the market correctly, and this is a significant deal. But this is a development site – one for the future. Pidgley is not punting Belgravia now but a year or two down the line. There will be a few more lurches in prices and dips in confidence before Berkeley actually tests the market with a flat for sale.” (Doug Morrison, Property Week).  http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3143188

Home Economics: a capital sign of recovery

More clear signs that the London Residential market is recovering well ahead of the rest of the UK (as has traditionally been the case): 

“So many surprising things have happened over the past couple of years that it is encouraging to see something reverting to type. The norm is for the housing market in London to lead the rest of the country, and that is what seems to be happening.

The latest survey from the Royal Institution of Chartered Surveyors (Rics) reveals increased activity, with prices starting to stabilise — and the capital is showing the way. On an unadjusted basis, a balance of only 5% of surveyors in London saw prices down last month, against 89% in December. Looking forward, more of them in the capital expect prices to rise than fall in the next three months.

Nationally, the balance of surveyors reporting a fall in prices has dropped from 84% to 36% (74% to 44%, seasonally adjusted) since December. At the other extreme, a net 82% of surveyors in the West Midlands say prices are falling; in Yorkshire & Humberside, it is 69%.

David Adams, head of residential at Chesterton Humberts, thinks London prices probably bottomed out last month, but that the rest of the country will not stabilise until November. This would be consistent with the ripple effect of previous cycles.

Yet this cycle, we were told, would be different. With the City and Canary Wharf hit hard, and bonuses in short supply, some feared the London market would be hit hardest. At the top end, though, the loss of bonuses has been compensated for by overseas buyers — especially Europeans taking advantage of the weak pound. Italians, in particular, seem to have decided that this is the time to buy a luxury flat in London.

Lower down the scale, estate agents quoted by Rics talk of returning confidence, limited supply and a perception that the worst is over. Even for those working in financial services, recent months have seen a shift in mood. Last autumn, they thought their world was coming to an end. Even in January and February, they weren’t sure. Now they are optimistic, and the concern among agents is that prices will bounce back too quickly, threatening the sustainability of the recovery.

Such thoughts are a long way off for many parts of the country. They have to hope that, as in the past, where London leads, they will follow.

– As many as one in 10 homeowners are caught in negative equity, the Bank of England reports. It says the scale of the problem is similar to that of the early 1990s, but it has emerged more quickly, because of the sharpness of the fall in house prices from their peak in mid-2007 to the first quarter of this year. Thanks to low interest rates, however, the level of mortgage arrears and repossessions has, so far, been far lower than last time around.

– Confidence appears to be coming back to the market for farmland after nine months of falls, with prices now beginning to edge above £5,000 an acre and, in some case, reaching £6,000, according to research by agents Knight Frank. Sentiment is being boosted by the return of investors, who had helped drive prices above £7,000 an acre at their peak. Future growth is expected to be steady rather than spectacular.”

http://property.timesonline.co.uk/tol/life_and_style/property/article6487270.ece (David Smith, The Sunday Times).

Normal service resumes in the housing market

Great article illustrating the change in the market over the last few months and the relative difference in value/prospects time between London and the rest of the UK:

“In a downturn, properties are mostly bought and sold for three reasons: debt, divorce or death. In the past few weeks, however, people registering with estate agents are citing less dramatic motives, such as needing to be near a good school, moving to the country or simply wanting a larger — or a smaller — house.

This evidence that people are once more viewing properties for the “normal sorts of reasons” is another sign that the market is stabilising, according to Savills, the estate agent, in research published yesterday. Savills’ growing conviction that there has been a “real change” in mood follows more positive price, lending and transaction data from the Land Registry, the Department for Communities and Local Government, and the Royal Institution of Chartered Surveyors (RICS) and others.

RICS members also highlight that more people are interested in buying because “they want to get on with their lives”.

Lucian Cook, Savills’ residential research director, even discerns a few signs of a “herd mentality”, with buyers eager not to be caught out by a sudden uplift in prices. He hopes that they are making a reasoned assessment of conditions.

The return from the slough of despond to something resembling normality is evident in almost all locations. But the pace of improvement continues to be fastest in London, although there is also a rebound in areas such as Tunbridge Wells and Winchester, towns within easy commuting distance of the capital.

Homeowners in London and the South East typically have a larger cushion of equity, or more cash than those elsewhere, putting them first in the queue at mortgage lenders, which continue to ration finance. Last month in London, Savills handled the exchange of contracts on 42 per cent more properties than in April; the May tally was 32 per cent up on the same month in 2008. Homes in areas as diverse as Putney and Belgravia are coming on to the market and going under offer within days at their asking prices, so long as these valuations reflect the market decline.

However, some homes are fetching much more than expected. A terraced house in Portobello Road in Notting Hill was offered at auction last month for £700,000. It went under the hammer for £980,000.

The increase in activity is encouraging a few previously reluctant sellers in the capital to put their properties up for sale. This will represent the first significant test for the tentative recovery, which, until now, has been powered by a shortage of homes for sale.” (Anne Ashworth, The Times).  http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6481784.ece

Labour stumbles closer to historical oblivion

“The crisis of capitalism was supposed to be the Left’s moment. Instead, Europe’s voters decisively rejected left-wing parties” – http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6473898.ece (Anatole Kaletsky, The Times).