Criteria for a New People's Bank ....The Anti Crisis Economics Banking Charter

There are a number of alternatives to using the big banks to look after our finances, but there are problems with regulations relating to many of the alternative institutions. These may regard the investors who are allowed to invest. They may have to be wealthy. Others are not part of any scheme which protects a fixed amount of deposited cash, such as the F.S.A.'s protection of the first £85,000 of all account holders. Some institutions are of little benefit to the economy because of the high interest rates they charge to borrowers. Many have problems of accessibility due to few or no branches.

One of the reasons we use the big high street banks is originally one of convenience. Before internet banking, we needed to be able to get to a bank to make many of our transactions. However, today their success is much down to their historical convenience. It is also partly down to the fact that we want to create a track record with the potential provider of loan to buy a home. There would seem little point in investing your savings in a credit union if they were unable to provide you a mortgage when the time to buy your own home comes. The rest of the big banks' success I am afraid to say is created by £Billions spent on misleading advertising which tells little of what really is happening to the invested savings of ordinary people whilst saving for that deposit for a home.

However, one of the reasons of sticking with the big banks- in-order to obtain a mortgage to buy a home, does not stand up any longer as a reason to want to persevere with one of the big banks. Because unless you are wealthy, it is probably unlikely the bank will want to provide you with a mortgage as they are preoccupied with other activities which are more profitable for the bank. This may involve various stock market activities or business debt. Lending for corporate buyouts or the issue of corporate bonds. Instead of benefiting businesses, many of this actually causes the indebted businesses to suffer, often eventually to the point of collapse. Because the big banks can sell debt, which ultimately ends up in pension funds and similar, the banks can on the whole still be successful when businesses collapse as a result of debts inflicted on them by the banks. Collapsing businesses therefore is not a deterrent preventing banks loading up businesses with debt, whilst they have their own bankers' bonuses in mind. However, much of what the big banks are doing with ordinary people's savings these days is a deterrent to them using the money for more sustainable and economy boosting investments such as  loans to buy homes and loans to small businesses with business plans which show where the money to pay off debt is actually going to come from! Much of the debt to big businesses does not have this criteria. Hence, big businesses often have to slash costs in order to recoup the money to pay off debt. Resulting in  many redundancies. The problems may then be compounded by refinancing by banks !

So then, if we do not yet have the ideal solution to our financial needs then what would the criteria be for our solution to our financial needs. Here is a list which should be considered when thinking of moving your money. Much of the list comprises of criteria which banks generally don't discuss with their account holders, but may be you should bring the issues up with your bank, Building Society or other financial service.

The Anti-Crisis Economics Banking Charter.

1. Selling of Debt to Other Financial Businesses.

An Anti-Crisis Economics finance business should not sell its own loans to other financial businesses. This is because, it has been proved to contribute to irresponsibility by banks. This is because a lender is paid initially for a loan for which it is going to transfer the risk of non-payment of the loan to another party. When a lender  knows it is going to sell the loan off, the possibility of default on the loan becomes almost irrelevant to the original lender as by the time of default it will be some one else's problem. Therefore, this has encouraged banks to be irresponsible with lending, both to domestic customers and very much so to commercial customers primarily within the business finance world. Banks should therefore keep loans on their own books until the loan is paid off.

2. Policing of the Financial Business.

In addition to any over seeing by financial regulators and ombudsmen, individual employees by the financial service will be monitored by appropriately trained people who will be required to reprimand any individuals who deviate away from the Anti-Crisis Economics Charter, or involve themselves through their work in any activity which could cause financial losses to an account holder, other investor, client, the general economy in this nation or any other.

3. Not to Create an Imaginary Demand for Assets.

Invested money in bank accounts or from any other source will not be used to create an imaginary demand for assets in the stock markets such as shares in businesses or commodities like gold or debt from other financial institutions converted into investment products. Demand for these is created not by the asset itself, but due to the stockbroker, hedge fund, asset manager's desire for profit. Their access to invested money which needs to be invested then inflates the prices of these assets, creating the conditions for profit to be made by buying them ! Businesses under the  Anti-Crisis Economics Charter will not use investors money to buy gold just because it is rising in price, as the money would be more ethically used in a way which would more directly improve a business where there is a rigid business plan, or to fund the buying or building of a new home. Any Financial business under the Anti-Crisis Economics Charter would therefore systematically create stability in home buying market. Even though homes had never been intended as a stock market commodity, homes have been treated as one by the banks. Gold currently gets $Billions of investment, even though the commodity is practically useless with exception to its use in jewelry and some other cosmetic uses. But it is not jewelry which is creating the demand, because lots of jewelry is being melted in order to turn it into gold bars ! If people want to buy gold with their own money then fine. But, the business you trust your finances to should not be buying gold with your money if you have not asked them to do so. Because it could be of much more use to the economy. Much more jobs would be created in building homes than in a gold mine. And there would actually be a genuine demand for the product !  

4. Corporate Buyouts, Management Buyouts, Private Equity Buyouts.

Due to the demand for investments created by a mountain of invested cash in investment accounts, pension funds etc, banks have created a use of this cash which on a long term basis means that businesses effectively get re-mortgaged again, again and again. The money is lent against the purchased company, which enables the owner of the company, having benefited by remuneration and dividends funded by debt, to then sell the company, usually at a profit...due to the demand for investments held in accounts and pension funds. Sold at a profit, even though the company is worth far less than previously purchased as it now has a load of debt attached to it. These companies go up in value for basically the same reason as explained for commodities in the stock market -like gold, as explained above in '3'. For this reason it is quite easy to 'off load' these indebted businesses on the stock markets, where they are merely fodder for investments, just as gold currently is.
Many businesses go out of business as a result of this irresponsible debt. However many will survive due to raising costs for the product or service to its customer. If you want to know the real reason why there has been an escalation in costs to gas, electricity, petrol, diesel, care home services, health care businesses, health care products, then look no further. This is a major contributory factor with all these types of businesses.

There is absolutely no doubt that these buyouts would not happen if ;
1) The person who borrowed the money to buy the company was held responsible for paying off the debt.

2) If pension funds were not paying the mortgage of these businesses when the business collapses under the debt. Banks use pension funds as a safety net who will pay the mortgage off even when the business has collapsed.

Any Anti-Crisis Economics business investment will need a rigid business plan which must show how the business will benefit and that the economy will benefit from the debt. There will be no abuse of the system which is purely for the benefits of a few executives who can pay them selves excessively for a few years with the debt, whilst sharing that debt with the banks, and increasing bankers bonuses.........at the cost of the ultimate failure of the business in debt, the jobs it provides and the economy.

5. Not  Lending to Any Investment Businesses Which Undermine the Economy

Financial businesses will not lend to landlords unless they can provide a business plan showing how the business they are in will benefit the tenants and the general economy. The buying of property in order to rent to tenants under mines the economy as the tenant is paying the mortgage for the landlord. Landlords tend to maximize their profits by increasing the price to what ever the tenant can stretch to. Whilst this goes on, landlords of commercial property raise their rent, meaning businesses are able to pay staff less. Those staff may find them selves unable to pay their own rent because they are not paid enough or are made redundant. Rents still rise while property prices are at their lowest for many years. It is therefore impossible for a financial business to support landlords whilst they as a matter of course under mine the economy.

6. Responsible Levels of Credit.

Credit to be given to customers on temporary basis. To fund a specific item, home improvement or vehicle. Financial businesses should not treat customers as a cash cow where they are constantly requiring credit. It then becomes normal for the customer to be in thousands of pounds of debt which results in income for the financial business, but little benefit to the economy in the long term as the customer over all has less spending power and will contribute less to the economy.

7. An even playing field for all requiring credit.

Many financial businesses are exploiting people who have no assets for security and are earning high interest whilst giving those who need the credit to a lesser degree a far lower interest rate. A lower across the board interest rate on a credit card or over draft would help less wealthy pay off debts and this would help them to add more to the economy in the future. Currently, rising interest rates on credit cards, whilst not providing mortgages to many potential home buyers is only adding to future economic problems.





    

Sorry George, You've Lost My Interest. I'm not Investing ! ; Why we need to build an alternative to our current banks. Where people can invest their money knowing it will not be used to under mine the economy.

In recent days, George Osborne and David Cameron have announced that there are to be new regulations which will protect retail banking from the so called 'risky' investment banking.....

If the new law gets through, it will take at least another year before it will begin to be enforced.

There are however some reasons why we should not count on this new regulation actually ever making any difference to the banking system. These reasons are as follows;

First of all,
Politicians have been talking about this division between retail banking and investment banking for a number of years, but have avoided actually activating the rule. This is because of the effects it will have on the investment banking side. If this law is enforced vigorously on the British banks, it should mean investments in deposit account are only used for mortgages to buy homes, personal loans, overdrafts, and similar. I think this is more likely the illusion that George Osborne would like to create. The chances of this actually happening are I think are in the region of one in a million.

The reason for this is that, investment businesses like hedge funds and private equity companies borrow money from all the big banks. Up to now, much of this money has originated from ordinary deposit accounts.
Therefore, the deposits of ordinary investors has bolstered activity in the private equity buyout business, Asset management businesses, hedge funds etc. All activities by the previously mentioned firms, whilst carrying out their activities then support the stock markets, and thus the stock markets support these businesses. Therefore, contrary to what is popular belief, ordinary money in ordinary account is an important part of investment banking. Come the day you ring fence that cash, investment banking, stock markets and all that are related are without doubt going to suffer as a result...............

It is likely to affect the share values of big companies. Hedge funds and asset managers are always buying and selling shares in these companies, and the money they borrow which originates from me or you affects the values of the big companies as a result. If there is suddenly a reduction in the amount of cash available to these investment businesses, share values on the whole will reduce. In fact if you were running one of these investment businesses, you would probably want to start selling assets off as soon as you are aware that the ring fence becomes imminent ! Currently, in the beginning of 2013, the big business buyout market seems to be on the move, with a number of big business buyouts such as Heinz- $28 Billion, Virgin Media- $23.3 Billion (£15 Billion) , the merger of American Air Lines & U.S. Airways, total value $11 Billion . Also, potentially one of the biggest ever mergers has just been given the go ahead between X-Strata & Glencore by all share holders and various regulators......If there was to be a significant change in the way the banks operate, which reduced the money on the investment banking side, the success of the afore mentioned deals could be put at risk. When buyouts take place, the last thing the new owners of these companies would want, is for there to be a reduction in available cash to buy them should they be put on the market again in the future. A significant reduction in available cash to the business finance world will damage the values of big  businesses. It could contribute to a 'recession' in the business finance world. Some hedge funds and asset managers could even decide not to take a chance, and decide to sell off their assets long before any enforcement of a ring fence begins and shut down completely. Then a domino effect could begin, leading to a major stock market crash ! Has George Osborne thought of this? Without doubt he has. I don't believe this ring fence is going to be enforced, because it simply will not work. I believe the whole thing is to create an illusion that something has been done, when virtually nothing has. The proof of the pudding will be in a years time when the rule begins to be enforced, if given clearance. The retail side will have to invest in the things we all need the banks to invest in. Mortgages and loans for home improvements. Otherwise the retail side will be investing in nothing at all which will mean that it will not be possible to pay interest on deposit accounts. If the rule really is enforced, there are other major problems ahead.....

The second problem is that, as much as politicians may refer to the U.K. financial system, implying it as being separate from the Eurozone and the United States. The truth is that all though there are variations on regulations, the U.K., the United States and Europe are all part of the same financial system. It is also joined to financial industries all round the world. Nothing could have made this more clear than the financial crisis.
Even though reducing the amount of money available to the apparent riskier side of 'investment banking', on a world scale, would probably reduce the risk of the industry creating problems in finance and the wider economy, there are clear problems on individual countries reducing access to available cash. One is obviously that hedge funds, asset managers etc will turn to countries where restrictions are less, where there is no ring fence of retail banking. This is in fact what made the U.S. and the U.K., the leaders of the world finance industry in the build up to the financial crisis. There simply were very few restrictions to stop banks lending cash and gambling with it, and lending to other businesses that only wanted to gamble with it. I'm fairly certain that George Osborne and David Cameron have no intention of the U.K. taking a back seat in the financial industry. For one reason, governments have a direct pipe line into the financial system. This pipe line, the leaders certainly will not want to obstruct. Has George Osborne worked out away of creating a ring fence around retail banking, without affecting investment banking. May be he has. But I think there needs to be a lot more clarity on how exactly this ring fence is going to be applied. I hope this is not a publicity stunt for the build up to the next election, which is a lot of hot air and no substance. After all it wouldn't be the first time that a high profile announcement by the current U.K. leaders evaporated into nothing within a few months.

Incidentally, going back to the international financial system. Obviously individual countries bringing in their own regulations to improve their finance industry will always invite problems as other nations could exploit the situation and profit from even more deregulation themselves. (The U.K. has done this at great cost to the rest Europe in the past !) This is why this problem needs to be dealt with unilaterally. It simply will not be solved any other way. Until this happens in fact, I do not think there will be any great improvements in the way the big banks take care of our finance. This is one of the reasons why we should begin to look to a new alternative for those who want to opt out of the current mess!

Big Buyout 2013 No.3 ; Heinz by Warren Buffet & 3G Private Equity.

Heinz, a food manufacturing conglomerate is to be bought 50-50 by Berkshire Hathaway and Private Equity company 3G.

Berkshire Hathaway is a holding company owned by Warren Buffet that buys shares in many businesses and  also buys whole business. An insurance business that is owned by Berkshire Hathaway provides cash for many of the investments made by Warren Buffet. This means he has less interest to pay on debt, as he has more direct access to capital than many other similar companies who also aquire shares and businesses. 

Warren Buffet has accused private Equity firms of being "financial engineers who don't love their companies."

The total amount of debt which will be put on Heinz, relative to the total size of the deal is comparitively low compared to other deals involving private equity companies.

However, Heinz will go into an additional $12 billion of debt....... in addition to its current debts !

If you don't know much about the buyout business , it may come as a shock that the banks, adding  $12 billion of debt to this business can be justified, when the company is not necessarily going to look visibly different when this deal is completed. Thus, where this $12 bn is going to be recovered from in order to pay the mortgage is worryingly unclear !

As much of a shock this may be, the debt added as compared to the total value of the deal is only 42% debt as compared to the total deal value. In private equity buyouts,the debt to total deal value ratio is usually in the region of 60% and 80%. You can see other X-Economics posts explaining how banks justify this debt. But the point here is that, Heinz costs are just about to increase substantially as a result of this debt.

Prices of Heinz products are likely to rise. Or the business may cut costs by redundancies or complete closures at the more expensive plants. You should note (It goes without saying really..)also that the debt added is likely to reduce expansion possibilities ! (I mean real expansion- building new plants, not more buyouts!). This is because banks are more likely to lend for existing assets, rather than assets which do not yet exist ! To put another way, they encourage a lack of progress rather than progress in big businesses !

Is this really good business ? Well it clearly isn't. This business with no doubt would be better off continuing as before......But this is providing great business for the bankers providing the debt and other financial businesses including Berkshire Hathaway and 3G Capital. Stuff the rest of us...it seems !

Finally, as proved with a previous buyout of a large company by 3G, Burger King; If you can keep everything intact for a while, you have the option of floatation on those ever enthusiastic stock markets, some time in the future, where you can recover all your costs, make a profit  on the sale and leave the debt with the new share holders..........Who could be you .....if you have a pension fund or similar investment !.... Because in the stock markets....No one is using there own money !