All the US bankers I talk to say how relieved they are that this financial crisis has coincided with the US presidential elections. Apart from the delight of watching Hillary Clinton being trumped by Barack Obama, the long run-up to the November's elections means that it is highly unlikely that Congress will put through any emergency regulation to reform the financial or banking systems.
Memories are still smarting from Sarbanes-Oxley, the last big emergency legislation, which was introduced in a rush in response to the corporate and accounting frauds at Enron, Tyco International, WorldCom and others. The last thing bankers want from the dying days of the Bush administration is another Sarbox, which produced onerous and expensive new regulations.
George Soros, the legendary financier, has been particularly eloquent in his warning of the dangers of a rushed response to the sub-prime crisis. What he is referring to is the recent suggestions by Hank Paulson, the US Treasury Secretary, that government regulation should be reorganised to let the Federal Reserve take over the supervision of the broker-dealers from the Securities and Exchange Commission.
Soros says Paulson's attempt to fiddle misses the point, arguing instead that the regulators had the legislation in place to stop a lot of what was happening but failed to use their teeth.
For example, the Federal Reserve has had authority over the mortgage market for decades. Did it fail to spot the wild and excessive lending over the past few years or did it believe the market would rectify itself? As Soros says, the problem was the Fed's total belief that the market would self-correct. Anyone could see the banks were stuffing themselves with the toxic waste from irresponsible lending, dressed up as derivatives.
That's why in his latest book, The New Paradigm for Financial Markets, Soros argues that rather than reshuffling regulatory agencies, the authorities ought to prepare for the "next shoes to drop". The first pair is the huge number of credit default swaps contracts still outstanding – about $45,000bn (£23,000bn). The second is the potentially explosive level of foreclosures. About 40 per cent of the six million sub-prime loans will default within the next two years.
Soros has two suggestions, which should be taken seriously by politicians – those in and those on their way into the White House. To help stave off a CDS crisis, he suggests setting up a clearing house to which all these contracts can be directed and managed with strict capital re-quirements. But it's on housing that he is most sensible. Rather than letting homeowners default, which in itself will depress the market, he demands government intervention to halt foreclosures.
Democrats already have two proposals before Congress – one is to allow mortgage terms to be changed in the courts, and the other is for the Federal Housing Administration to guarantee to pay off mortgage holders up to 85 per cent of a property's value. Both Clinton and Obama have supported these moves, which would restructure about $400bn of mortgages, at the cost of up to $20bn to the taxpayer.
Belatedly, Republic runner John McCain has jumped on the bandwagon. Although not as interventionist as the Democrats, he knows there are votes to be had from showing simpatico on this issue. McCain is proposing that homeowners have the right to apply directly to the federal government to restructure unaffordable loans – but only those who were creditworthy when they took them out. Of course, the Democrats are rubbishing his plans. So far Clinton has been the most voracious; with Obama ahead in the race, she has more to gain. While waiting for the outcome of the make-or-break Pennsylvania primary at the end of this month, Obama should find time to seek out Soros for a little brain-storming.
Anyone for nukes? We can't serve British Energy into foreign hands
I usually buy the Wimbledon argument: so long as the UK holds the tournament, it does not matter if we don't have the top players. But this doesn't hold up when there might be no British players at all. That's the danger with what's happening at British Energy, the UK's only nuclear generator and operator of eight stations, supplying 20 per cent of our electricity.
Germany's RWE, which already owns npower in the UK, has expressed interest in bidding for British Energy, suggesting an indicative price of 700p a share. France's EDF Energy (basically an arm of the French state) is also keen. British Energy shares have soared to 735p, as the hedge funds and short-term investors pile in to get a piece of this one-off monopoly.
British Energy has been talking to RWE and EDF for some time about possible joint ventures following the Government's decision to give the green light to new nuclear power stations. As talks progressed, RWE and EDF suggested marriage rather than flirtation. Centrica has also suggested getting together, but can't afford to pay cash, although it could do a share offer. It is also in talks with RWE and EDF about possible link-ups should they bid. Seven of British Energy's generators are past their sell-by date, but it owns the sites for the next generation of stations. At least three or four new generators, costing around £3bn each, are needed to maintain current electricity supplies and ensure the lights stay on past 2012. But British Energy says it can't do it all alone; it needs outside expertise.
The Government, which still owns 35 per cent, says it doesn't mind a foreign bid, but it has muttered about giving away a monopoly. So it should. British Energy is too strategic an asset to pass into foreign hands. Already 60 per cent of the UK's electricity comes from foreign-owned operators. That's enough. This is not zenophobia but careful housekeeping. And do we want to risk a rerun of Ferrovial/BAA?
Centrica is the outsider but should be welcomed on board and helped to make a national champion, or least make a decent doubles partner to British Energy to play the long game.
22 years on, we're seeing light at the end of the Tunnel
President Nicolas Sarkozy, who came to London last month for a state visit, accompanied by his wife Carla Bruni, was spot on when he talked about a new era for Anglo-French relations. Last week Eurotunnel reported its first profit and predicted it would be paying a dividend next year. The Channel Tunnel operator's chief executive, Jacques Gounon, also hinted at expansion plans once the company starts making serious money in 2010. Eurostar will tomorrow confirm the arrival of the new age of the train when it reports excellent profits for the first quarter and another increase in the numbers of people travelling, boosted by the opening of the high-speed link from St Pancras. Last year 8.26 million people used Eurostar; this year, even more TGVs will start linking Europe's main cities. It's 22 years since the tunnel opened but it might just be the time to invest in Napoleon's vision.Reuse content