Wednesday, 8 September 2010

bits and Bob

"The UK Royal Mail's £26bn pension fund made a 29% return on its money last year, helped by a sophisticated derivatives strategy, reducing the company's £10.2bn deficit and potentially helping along its possible privatization"

well it turns out that the "strategy" was buying equity futures, aka taking a leveraged bet on the market, very uhmm sophisticated.

The story that has been hogging the headlines in the UK has been the appointment of Bob Diamond as the new CEO of Barclays. Today Vince Cable (who now apparently prefers to be called Dr. Cable) has been calling for the breaking up of the large 'universal banks'.

This as a measure to reduce risk makes absolutely zero sense. Utility banks will still have to invest their depositors cash, any belief that making loans on commercial property or residential mortgages is not risky really should have been destroyed in the credit crunch. The financial world would merely have more firms with more linkages, and as such there would be no amelioration of counterparty credit risk, nor the removal of the moral hazard of 'too big to fail'. It is the systemic nature of financial intermediation and the lack of penalties on bondholders and creditors of financial institutions that propogate poor investments. There is only one logical solution and that is a pigovian tax on all creditors.

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