Citigroup has suddenly gone from zero to hero. One of the architects of the credit crunch has been profitable for the past two months according to chief executive Vikram Pandit, who professes to be encouraged by the strength of the business.
Now we have heard optimistic pronouncements by many banks over the past couple of years, only to be disappointed, but I doubt if Pandit would really be so stupid as to make such a positive statement if he was not satisfied that it was justified. After all, a fairly modest claim of improvement would have sounded quite heroic in the circumstances.
Now, just as one swallow does not make a summer, one bank does not make a recovery. Even so, there has been so little to cheer about in the banking sector that we must be thankful for small mercies. We can start to believe that a floor has been put under the cause of the financial crisis, though not yet under the crisis itself.
There is a much wider reason to hope that Pandit has signalled the bottom of the banking debacle. If banks are turning round then the British taxpayer will reap considerable benefits. Much has been made of the potential cost of bailing out UK banks but the worst may never happen.
Avoiding pouring more billions into the black hole is a welcome thought. And the sooner banks get back to normal, the sooner the Government can start cashing in its chips. The profits from the bail-out could be considerable, which is only right and proper given the enormous risks that the Government has taken, and would help to fill the other black hole, the one in government finances.
Citigroup’s timely words of encouragement helped to rescue global stock markets after a particularly bad week. I cannot feel equally hopeful of the other development, a rule to stop short selling in the US.
Short sellers do not cause stock markets to fall, however much they are used as bogey men. They simply take advantage of weak markets. If investors are not confident of the performance of quoted companies then they will not buy shares. That is what causes market weakness.
It is true that speculative selling drives down the market more heavily than it might otherwise have fallen but that simply leaves scope for bulls to step in and buy cheaply when the short sellers cash in to cover their positions. If you can borrow money to buy shares because you believe that the market will go up, I do not see why you cannot borrow shares to sell if you think the market will go down.
All in all, we got off lightly this week. I feared that once we dropped below 3,750 points we would go all the way to 3,200, and that could still happen. Much will depend on how well the financial sector holds up next week.
Quantitative explaining
I have been asked by a reader for further clarification of quantitative easing. It is hard to spell, a devil to pronounce and almost impossible to comprehend.
Although this has been referred to by myself among others as printing money it is more accurately a case of crediting bank accounts. Financial institutions and wealthy individuals will buy gilts and sell them to the Bank of England, with the proceeds credited to bank accounts. The hope is that this money will be lent or spent, thus getting the economy going.
Unfortunately the impact on money supply depends on how quickly the money is moved on. Having twice as much money going round at half the speed simply takes you back to square one.
However, I must say my faith in the financial systems has been partly restored by news that some funds are already busy buying gilts from the government and selling them on quickly to the Bank of England at a profit. Nice work if you can get it.
Mad, mad, mad
Lord Jacobs, the former Liberal Party chairman, complains that he has lost millions in the Bernard Madoff mad investors’ scheme. Rather than ask himself why he put so much money into one investment, he blames the regulators.
Forgive me for being a little blasé, as I didn’t have any money with Madoff, but I hope he ran his party’s finances better than his own. We didn’t have anything like as much regulation when we had a Liberal Party but we have always had crooks willing to part the gullible from their money and always will have.
The lesson is to spread your investments and to be suspicious of anything that looks too good to be true. You should be able to look after your own financial affairs better than any regulator.
