Mark Carney sends Goldman Sachs an early invitation to the next bailout party


Jim Armitage@ArmitageJim
Thursday 20 August 2015 10:07
Goldman Sachs Manhattan headquarters
Goldman Sachs Manhattan headquarters

Next time there’s a financial meltdown, your money could be rescuing Goldman Sachs.

Yes, thanks to a new deal struck by Mark Carney, the former Goldman man now running the Bank of England, the US investment bank could end up enjoying the next round of British taxpayer bailout money.

During the last crisis, Goldman’s non-British status meant we would never have been on the hook, even if it had asked. Goldman could only rely on American taxpayers. And it did – getting billions of dollars via the bailout provided to financial giant AIG by Hank Paulson, the Goldman man then running the US Treasury.

But it emerged that the Bank has struck a deal whereby if Goldman is ever short of cash in its London trading operations, we taxpayers will offer it temporary liquidity to get it over the hump.

Some would smell a rat here, or maybe a giant vampire squid. A Goldman Sachs alumnus yet again offering special favours to Goldman Sachs?

But there is no rat. Rightly, the Bank wants to offer emergency liquidity to all big players in the City – not just Goldman Sachs – to prevent the market from seizing up if we get into another crisis. If all the international broker-dealers and counterparties regulated to trade in the UK are guaranteed good for the money, that’s positive for the market – and for Britain’s financial reputation.

What’s bad is the perception that, yet again, it is a Goldman man in the key decision-making position.

Bankers from Goldman are strewn across key policy-making arenas across the world like no other financial institution.

As well as the Governor of the Bank of England, his deputy Ben Broadbent is ex Goldman, as were two previous Monetary Policy Committee members, David Walton and Sushil Wadhwani.

Across the Channel, European Central Bank chief Mario Draghi is a Goldman man, while in the US, Goldmanites make up a quarter of the Federal Reserve system’s regional presidents.

It would be absurd to suggest we put a global ban on Goldman stars moving into public office, but we should find more diversity than we’ve currently got.

Perhaps Britain’s incoming commercial secretary to the Treasury, Jim O’Neill, could launch a review. Oh. Hang on…

Banks' gentle words are at odds with Glencore reality

Read some of the big banks’ advice to investors on Glencore and you’d think all was well. “Not a bad set of numbers”, one research note declared. “Year-on-year improvements in cost targets”, said another. “Balance sheet better than expected”, “net debt of $29.5bn a positive”.

But all is far from well at this misshapen beast. These were a “bad set of numbers”. Tinkering with cost targets is not enough for a business whose shares have collapsed 47 per cent this year. The balance sheet – far from deserving “better than expected” praise –remains terrifying: net debt at nearly $30bn is a long way from “positive”.

True, as the City analysts champion, that debt pile has fallen by $1bn and, yes, Glencore has pledged to cut it further in the coming months. But as a proportion of its plunging underlying profits, debt actually increased by 13 per cent over the first half. And that balance sheet stretch comes despite the old one-off trick of lengthening payment terms for suppliers from 46 to 63 days.

Credit rating agencies don’t like this kind of debt. To them, it looks like a big wooden box marked “TNT” with a fizzling cord dangling out of the side.

Ah, the analysts say, but don’t worry. Glencore can cut debt by turning down its trading operations a notch, reducing the cash it needs to buy the shiploads of copper and grain it trades around the world.

But that is to miss the fact that trading makes up more than a quarter of Glencore’s earnings, now that mining is on its knees. In fact, trading is one of the few parts of the business where profits should improve in the second half of the year.

Furthermore, if you believe Ivan Glasenberg’s business model, the trading arm of Glencore – with its high-level contacts among buyers, sellers and governments – is crucial to that fabled Glencore insight into future commodities prices. At least, that’s what he told us at the time of the flotation, shortly before Mick Davis got him to pay a 13 per cent premium for Xstrata, just before prices tanked.

Anyway, with notable exceptions (JPMorgan, take a bow), you won’t hear that from the banks and brokers, despite the collapsing share price.

Could that have anything to do with Mr Glasenberg’s canny move back in 2011 to get 23 of them on the payroll for the Glencore float?

David Miles makes a fair job of deflating bubble hype

Bravo to the outgoing Monetary Policy Committee member David Miles for calmly deflating a somewhat dramatic prognosis on the BBC about price bubbles in the bond market.

Yes, the pebble-specced Bank man said, interest rates will rise soon, but in tiny increments to a “new normal” some way below the pre-crash averages of around 5 per cent. The increases should be slow enough gently to deflate asset bubbles with relatively little pain. And we should embrace these tiny rate rises as a welcome sign that our economy is on the mend. In other words: don’t panic

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