The BBC announced spending cuts last week, fearing that the recession will lead to TV licence fee evasion and reduced revenues. According to the FT,  it banned the corporate purchase of champagne in a sop to the newspapers, after being forced to reveal an annual spend on the bubbly stuff of £40,000. Of course, if the BBC had something to celebrate, this expenditure–provided it was on Veuve Clicquot–would not look like such a mistake. Meanwhile, on Tuesday, the Beeb brass were defending themselves in Parliament for the Brand/Ross/Sachs scandal.

It’s bad to bash the BBC if you get a lot out of the BBC, as I do. But it does often seem to be an organization that has lost its way. It remains somewhat technically innovative, although with unintended consequences (iPlayer), produces good costume dramas (Jane Austin/Dickens etc), entertains the kids well on Saturday evening (Dr Who, Robin Hood, Merlin) and continues its flagship natural history programmes, although these are starting to be more photographic than informational. Don’t tell anyone, but for the past few months I’ve come to believe that Radio 3 might actually be perfect.

More generally, though, its editorial and commissioning decisions seem not to be informed by either a current or future sense of what its public service needs to be. I’m waiting for the day, for instance, when its senior management is hauled before the UK’s Treasury Select Committee to answer questions about the role its programmes on property played in fuelling the real estate bubble.  But then, I wonder if the committee members have yet gotten round to reading any Robert Shiller. This, of course, is old news, well visited by belligerent websites, and even mainstream newspapers have pointed a similar finger, except of course that their own property supplements played an essential part in peddling the idea that rising property prices were for keeps.

But given that we are now at the end of a period of speculative excess, that we collectively passed the last outpost of the Shit Creek Paddle Company some time ago and failed to take on supplies, it is hard to explain a programme I saw last week called Beat the Bank. Dragons’ Den fitness millionaire Duncan Bannatyne invited a young couple to wager their £10,000 house deposit on the abilities of one of three alleged experts to exceed the return from bank interest over three months.

The leading experts brought in were from the world of fine wine, antiques and fine art. Charming though these people were, they represented markets one could reasonably assume are highly correlated with the recent credit-fuelled boom, and not without their own fair share of fakers and finaglers to make the average punter’s chance of “beating the bank” slim at best.

But what bothered me was the premise that money in the bank was for schmucks. And none of us would want to be schmucks. The opposite in fact is true. Most of us are schmucks, and the bank is the best place for our money. The social service that the banks provide, or should provide, is as a repository of funds where we (the clueless, idle, or generally insecure) should choose to lay down our hard-earned, our windfalls and our easy-pickings, while the bank lends it out with discretion and on reasonable terms to the those with ideas, the adventurous, the quiet risk-takers, entrepreneurs and even the occasional desperado, each individually to try their luck: to fail, break-even or succeed, and on balance pay us back a decent rate of interest. All that while keeping the bank in sturdy buildings, functional IT, an occasional boozy lunch and not to forget the annual bonus payment–which should be conditional and deferred by 10 years (at least).

The idea that we should set a challenge to deliver excess returns over a three-month period flies in the face of all that a public service broadcaster should be providing in way of financial education. It would not be so bad if the three-month expectations cycle did not already blight the ability of many publicly-listed firms to deliver sustainable economic growth, lure them into all sorts of obfuscation or encourage all sorts of counter-productive hoop-jumping to appear to be performing satisfactorily.

If there’s a lesson that the BBC might better highlight to the risk-taker–whether in the domain of business, art, or experimental science, or even for those planning to cultivate a great vintage– it’s that you may have to bleed for forever and a day waiting for your ship to come in, before the muse descends or that eureka moment arrives, or some final vindication materializes from out of the blue. Then you’ll feel justified in tearing off the foil, untwisting the wire and popping your cork.

Veuve Photo credits: Top: Andrei Z , Middle: Matt Hamm, Bottom: jillclardy

Paddle Shop:  SailorRandR

When I read Michael Lewis‘s book Liar’s Poker a few years ago, I was left with the uncomfortable feeling that the entire edifice of modern finance might just have become nothing less than the mother-of-all Ponzi schemes. And that the mutant moment could possibly have been the day Salomon Brothers’ Lewis Ranieri invented the mortgage-backed security, based on what amounted to a salesman’s whim. The securitisation business would transform itself over the next 30 years, until its unfortunate reconnection with reality in the mother-of-all Minsky moments. This is how BusinessWeek described Ranieri in 2004, celebrating him as one of the leading innovators of the previous 75 years:-

A less likely financial engineer would be hard to imagine. Ranieri, a Brooklyn native, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon’s mail room set him on the path to trading. A large, volatile man, Ranieri built the firm’s mortgage desk in his own image: “fat guys,” as author Michael Lewis described them in Liar’s Poker, promoted from the back office, who indulged in feeding frenzies and practical jokes while selling strange new bonds to doubtful investors.

Ranieri’s own mortgage bank, Franklin, was closed last week by regulators and has now been taken over by the FDIC.

Michael Lewis, who worked for Salomon Brothers in the 1980s–an experience on which the Liar’s Poker was based–has just written a piece this week in Portfolio in which he is, in effect, calling the end of an era on Wall Street. This is how it starts:-

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

If you did not see the Portfolio article, it’s worth reading all nine pages. It tells the story of a handful of people who saw that there was a wider problem, even if the full scale of the potential catastrophe eluded them too. Guys like Steve Eisman, of FrontPoint Partners, who did not play the standard Wall Street game and, when they had the chance, traded aggressively against the prevailing wisdom. It also paints a granular picture of what a short-seller really looks like, and why we should perhaps see them as the canaries in the coalmine rather than demonise them (as everyone from government to clergy did a few months ago here in the UK). There is a more interesting vignette in there too about how his short-selling was egged on by Wall Street firms for their own purposes. In all, it’s a great article. Lewis reveals, in the actions of his protagonists, some of that concept called bounded rationality, as identified by economist Herbert Simon and others. The following also stood out for me, highlighting the scale of the debt markets versus the more familiar stock markets which journalism, print and TV news, tend to focus on:-

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.”

This reminded me of some of my own fish-out-of-water experiences, begging for some capital allocation from the selfsame Wall Street in 2001. I was in the middle of a management buyout attempt for the news agency that employed me, the parent of which had been plunged into a Chapter 11 bankruptcy administration. Unsure that this editorial cost centre would work in any other organization, we formulated a set of independent online subscription news services, slicing and dicing our coverage into what we hoped would be viable longterm businesses. The biggest slice had the world of credit derivatives at its core. But at that time the labyrinthine and mushrooming world of the credit markets was one that most journalists or news companies would not have heard of, nor wanted to touch. And so it was. When I offered it to the board of one major company (let’s call them Thomson Financial) I was advised I’d be more successful focusing the business on sectoral equities, because that was “what the market really needed”. Thomson was then aligned in some peculiar defensive editorial content strategy with Dow Jones (now owned by News Corp) against Reuters, now owned by err… Thomson.

Ah well, no dice.

I think I’ve gone on before about the emotional and physiological effects that exceptional, unexpected events can have on people: an icy-cold sinking feeling of eviscerated powerlessness, for starters.  Such feelings must be especially intense for those who exercise significant power and yet meet more than their match when a complex system turns against them.

Financial markets and wars represent the most severe tests for politicians, who can probably feel pretty satisfied with themselves on a day-to-day basis that some part of the world appears (at least) to dance to their tune. But today, on BBC Radio 4′s Broadcasting House programme, veteran political journalist Michael Cockerell, in partnership with presenter Paddy O’Connell, provided some long overdue insights into those limits of power by joining the dots between the current financial crisis surrounding the Brown government/Chancellor Alastair Darling and previous occasions when proud governments have been forced through the mincer.  There are some real insights here for fans of Gordonfreude.

Cockerell has interviewed eight British prime ministers, so is fairly unusual among current working journalists.  Today’s 15-minute segment (about 32 minutes into the programme found here on iPlayer: podcast version here) is definitely worth your while clicking through to. It’s also the first time I’ve seen news media challenge the orthodoxy (apparently accepted by most journalism) that the economic problems now facing the UK are mostly a function of external events.  Cockerell observes an historical pattern.

For a long time  it has been very convenient in Labour mythology to blame the international speculators, ‘the banker’s ramp’, as it was called.

But perhaps more interesting are the personal recollections of Labour Chancellors Jim Callaghan, Denis Healey, and Tory Norman Lamont of a collapse in the pound.  This following reflection is from John Major, the then Prime Minister, on Lamont’s demeanour the day sterling was ejected from the European Exchange Rate Mechanism (ERM):-

Norman Lamont came in and he was pretty white-faced and edgy, as well he might have been, and he said ‘It hasn’t worked’ by which he meant the intervention and the two-per-cent interest rise. ‘It hasn’t worked, and they’re still selling.’

The starkest warning for politicians about that experience comes though from Kenneth Clarke, the last Tory chancellor before the current Labour government, and a cabinet member on that Black Wednesday.

We were powerless in the face of events.  I think I had always believed theoretically in the power of markets but I’d never seen such a dramatic illustration–felt such a dramatic illustration–that the Prime Minster, the Chancellor, leading members of the government were utterly out of control of events and the markets were going to devalue the pound.”

For the diligent who care to listen to the end, there’s a good line about King Canute.