Posts Tagged ‘Economics’

How can a company have £24bn bad debt when its turnover is £23.9bn?

Friday, February 26th, 2010

Hi, news today of Lloyds TSB Group figures say that it has made a loss of £6.3bn.  Slightly better than the previous year of £6.7bn loss.

Yet, behind these figures it seems Lloyds TSB has bad debt of £24bn, on a turnover [annual total income] of £23.9bn.

What’s going on?

Bad debt is defined as:

Accounts receivable that will likely remain uncollectable and will be written off. [from investorwords]

So in its dealings Lloyds TSB has got into deals where now it is going to [in all probability] write off the equivalent of a years revenue [probably its highest years revenue to date].

According to the BBC article on the issue:

The bank blamed the massive losses on commercial property loans made by Halifax Bank of Scotland (HBOS), which it took over at the start of last year.

It said these “impairments” were 21% lower in the second half of 2009, and would continue to see a similar rate of improvement throughout this year.

‘Impairments’ sounds like a vast understatement when £24bn is to be written off.  Their shares only fell 5% this morning.

Is this what the financial sector is getting away with?

I say getting away with, because it feels as though people are becoming inured to such problems…even though it is often the tax payer and consumer who end up funding this.  Lloyds TSB [+HBOS] got bailed out to the tune of £17bn in 2008.  Their market capitalisation went from nearly £60bn to £18bn and the government [tax payer] bailout resulted in a share in the bank of about 43.5% [BBC article 19 Oct 2008], yet all the tax payer did was, in effect, allow them to make decisions leading to £24bn in bad debt.

Inured means ‘to habituate to something undesirable, especially by prolonged subjection’.  [freedictionary]

Just to put it into context, the decisions of HBOS/Lloyds TSB that resulted in bad debt of £24bn is the same amount the UK government and local authorities spent on the UK’s transport systems in 2009.

Yes, I realise that it is not necessarily as simple as that.  Perhaps someone from the finance sector will make it more clearly complex for me.  For example: it’s not clear how much the total loan value was and whether the £24bn is a small percentage of the total loan value or not – that would be interesting to know.

The bottom line is that a public listed company whose market capitalisation was £25.5bn in 2008 [HBOS] seems to have gone into loan deals that have gone bad to the tune of £24bn.  A sum equivalent that UK government spends on all UK transport in one year.  A sum not much greater than the tax payer bailout of HBOS/Lloyds TSB.

In terms of human behaviour, the issues that spring to mind include:

  • What were the decision making criteria and drivers in providing loans?
  • What concepts of risk and risk assessment, and relevant economic context, were used?
  • Who were checking these, and ensuring that the loans were appropriate?  [I'd guess people were financially  incentivised for securing loans though that's only a guess].
  • The public seem to be inured to such news…what does that mean in terms of influencing change?  Does inertia in a social system mean problems are likely to re-occur? [hint on the 2nd part - yes, it does].
  • What is the impact on tax payers of such inurement and of the continuance of the existing system largely unchanged?  [largely unchanged because if you're inured to it the incentive for others to change their behaviours is small].
  • When will people come to realise that unless you are part of the solution, you are part of the problem?  Being part of the problem means that you reinforce it passively or actively [being inured to it is passive reinforcement - acceptance].
  • What is it within the world of economics and human nature that has got us to this point – where debt of such proportions is accepted, as are the behaviours that lead to it?  If I’ve missed the news, and it’s not accepted what tangibly is happening to ensure it never happens again?

Yours impassioned on a Friday afternoon,

Finn

PS: I realise that if your system is in meltdown then it all spirals out because there is not enough money for people to pay their loans etc at the taxpayer/consumer level.  Yet:

  • Tthe UK government, and other nations, shoved money into the system – where has that gone?
  • Come to that, where has the original money gone?  [mmm - am I showing a commoners lack of grasp of economics? or is the distribution of that money that is the problem?  or is it that fake money, 'debt', was forming an enormous house of cards?]
  • “The UK economy grew by 0.3% in the final three months of last year, faster than previously estimated.”  [BBC: 'UK economic growth revised up to 0.3%']

Saving the banks, what message was sent?

Thursday, March 26th, 2009

Yes, I know this is more about banking and economics you might say.  Actually it’s about human individual and social patterns, it’s just the examples are in finance/economics…to a point.  Today’s is a military and literary reference.

In the novel ‘Candide’ Voltaire wrote: (more…)

Short-termism, survival and risk…and economies

Friday, February 27th, 2009

Okay, one of another little series of thoughts on economy and basic human patterns.  How does short-termism fit in here?

If you borrow from the future (more…)

UK national debt set to surpass £2 trillion

Wednesday, February 25th, 2009

Hi,

Just a brief pause for thought.  This news of the UK debt [the link is to the Daily Telegraph article on it] prompted a call to a BBC Radio 2 show with someone suggesting that it would have been better for the government to give every adult citizen (more…)

Lender of last resort and emergency funds

Sunday, February 15th, 2009

Hi, I came across this phrase, ‘lender of last resort’, when doing my little bits of research on economics and where countries get their money from.

It usually refers to some entity, such as the Federal Reserve Bank or Bank of England, who, in extreme circumstances step in to ensure that an organisation or institution doesn’t fold.  The reason it does this is mitigate possible damage to the economy.  Such damage is usually either depositors losing their monies [and the knock-on effects]; widespread panic (more…)

If you’re in debt when do you stop borrowing?

Thursday, December 18th, 2008

Hi, the last post referred to comments from the German Finance Minister about crass Keynesianism.  There have been various other references in the press about borrowing in order to kick start the economy.

My understanding is that, in effect, the economy lacks cashflow.  Without which organisations cannot service their debt [pay the interest and the debt].  As a result lenders are going off that role except where they feel the risk is tiny, and the borrower is absolutely guaranteed of paying back the debt and the interest. 

In essence there is a whole load of (more…)

Something of economics and crass Keynesianism

Wednesday, December 17th, 2008

Hi, following on from the post ‘The money has to come from somewhere’

I asked how borrowing to encourage spending works.  I implied concern over borrowing, and how (more…)

The money has to come from somewhere…

Tuesday, December 9th, 2008

Hi, how are you all?

Aside from all the beautiful human patterns occurring, as ever, I thought I’d venture a comment or two on the current economic issues.  Not being an economist or financier I feel it would be best to do this by way of asking a few questions – questions that are probably out there and yet there seems to be little clarity on the answer [more on that in a later post].

In no particular order: (more…)

Competition in the UK postal market, war and who suffers

Tuesday, May 6th, 2008

It’s intriguing to read about attempts to change markets.  The UK postal market used to be wholly operated, bar courier services, by Royal Mail/Post Office. 

This market was ‘opened up to competition’ in 2006.  What has happened? 

Firstly you cannot introduce competition, all you can do is amend constraints to trade, introduce incentives or actively create new players in a market.  Whether they compete or not is up to them, both individually as organisations or as a group.  Often, without explicit agreement, they will act in a fashion that reduces competitiveness.  The system will find a point of acceptable equilibrium.  One player will make a tentative gesture and the others respond.  How the others respond determines (more…)