The latest plan from the European Union on how to deal with bank failures in future is starting to look a lot better but my question is why did we not do this originally ? In a capitalist system when a company fails, it is the shareholders who get wiped out first and then it should be the bond holders next and other creditors last. What happened in the financial crisis is that tax payers were stumping up cash hand over fist while the shareholders and bondholders were left protected to a large extent. What should have happened is that the shareholders were wiped out, followed by the bond holders with the State taking over the banks on a temporary basis. After a period under State control the banks then being sold off with the proceeds of the sales going back to the taxpayers. Had politicians done what I suggested then literally tens of billions if not hundreds of billions of taxpayers funds could have been saved and in the future shareholders and bond holders would make sure that banks were better managed so reducing the chances of future crises. Bondholders do not have to invest in bank bonds but if they do they should make sure they hold a diversified portfolio so that if one bank goes bust they can still survive with their portfolio largely intact. If a bondholder faces enormous losses in a bank failure then that is the bondholders responsibility NOT ME THE TAXPAYER! Here is the link to the proposed EU bailout deal link .

Top bankers and politicians both tend to have big egos, prior to the commencement of the credit crunch in August 2007 politicians were mainly in awe of the much better paid bankers who had become the "Masters of the Universe." We now know that the awe that bankers were held in was total unjustified and in many ways their conduct and performance has been even worse than that of the politicians. The recent release of Bankers at Anglo Irish discussing how they were getting €7 billion out of the Irish government as a "starter" so that further bailouts would follow, shows just how easily the bankers have been  milking the taxpayers - the eventual bailout cost of the Anglo Irish bank was in act a mind boggling €30 billion of over €10,000 for each person in Ireland.

Mr Bowe a former executive suggests that the Anglo Irish  management team knew that €7billion would be insufficient to save the bank,“Yeah, and that number is seven, but the reality is that actually we need more than that,” he then adds “But you know the strategy here is you pull them in, you get them to write a big cheque and they have to keep, they have to support their money, you know.”

Here is the BBC link

Well I think the tape reveals just how easily politicians have been hoodwinked by the banks.  When a bank needs taxpayers support it is clear that politicians need to be much tougher, taking a significant equity stake and then sacking the chief execs who through poor management got the bank into trouble.

Often people think the world of finance is very complex but in essence it is not that complex. Take for example sovereign credit default swaps:

A protection seller sells credit protection on a 5 year credit default swap on Greek debt with a face value of €10 million for 400 basis points (i.e.4%).  This means the protection buyer will pay an annual premium of €400,000 (split into 4 quarterly
payments per annum of €100,000 per quarter) for insurance against a credit
event (eg. A Greek default) on the debt.

Scenario 1 There is no credit event on the Greek debt
In this case the protection buyer pays €400,000 a year for 5 years which means the protection buyer has paid €2 million in total and gets  nothing in return. The protection seller will have a profit of €2 million (plus any interest earnt on the premiums).

Scenario 2: The is a Greek Default on its debt after year 1
If Greece defaults after 1 year then the protection buyer will have made 4 quarterly payments of €100,000 each making at total of €400,000. These payments  will now cease, the protection buyer will now need to hand over Greek bonds with a face value of €10 million to the protection seller. Let’s assume that these are now trading at a discount to their face value (because of the default) at €3 million in the market. Once in receipt of the bonds the protection seller will
then make a payment of €10 million to the protection buyer.

 The net result is that the protection buyer has handed over premiums of €400,000 and bonds to the value of €3 million and so is better off than if they had not bought the CDS by €6.6 million.

By contrast, the protection seller has received premiums of €400,000 and holds the Greek debt at the market place valuation of €3 million  and so is €6.6 million worse off than if they had not sold the  CDS.

 What happens if the probability of a Greek default rises?

If a credit event has not occurred but the probability of a Greek default rises then protection sellers will want to charge a higher premium on any new CDS contracts that they write. This means that the CDS spreads they charge will rise. For example, they may increase the premium from 400 basis points (i.e. 4%) to 1,000 basis points (i.e. 10%) if this happens the fee rises from €400,000 per year (i.e. €100,000 per quarter) to €1,000,000 per year (i.e. €250,000 per quarter).

Below are some selected Sovereign CDS contracts on Sovereign bonds measured in basis points through the duration of the financial crisis.

 

News today is google is likely to pay $1.1 billion to buy waze.com to stop Apple buying it. Now I know a lot of these deals go badly wrong or are just plain stupid in retrospect. Microsoft bought AQuantitative for $6 billion in 2007 and has basically written the whole lot off, facebook bought instagram for $1 billion and to me that is a waste of money as there are plenty of other ways to make photos look pretty for cheaper, yahoo bought geocities for $4 billion in 1999 what a waste that was ! News corp bought myspace for $545 million in 2005 and sold I for $35 million in 2011. HP recorded a whoping $8.8 billion in 2012 on their $11.1 billion purchase of Autonomy less than one year after buying it. These losses are huge and extremely wasteful - Why is it that managers end up paying silly prices? I think it points to managerial theories of the firm where managers are more concerned at making their mark and "growing" their companies and satisfying their egos rather than looking at the value of what they are acquiring. Another word also comes to mind INCOMPETENCE!