ECB's mind-numbing cash injection is no cure


By Tom Stevenson

Last Updated: 12:40am GMT 20/12/2007
 

 

Just when you thought the credit crunch could get no more incomprehensible, along comes another mind-numbing figure.

Yesterday's $500bn cash injection by the European Central Bank is so far beyond most people's reckoning that they could be forgiven for seeing it all as Monopoly money and so not worth worrying about.

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    That's not such an irrational response because you don't want to think too hard about what the ECB has done.

    By offering to lend an unlimited amount of cash at 70 basis points less than the commercial cost of short-term money, it sent out a clear message that things are so grim in the money markets that it would do anything to unblock the system. Once you've gone nuclear, no one pays much attention to your conventional forces.

    On the face of it, the ECB's monetary blitzkrieg was a success.

    As banks snapped up cash at a quarter point above the base rate, interbank rates tumbled. By contrast, hardly anyone showed up to the UK's 10bn auction - probably because they were gorging themselves at Frankfurt's Christmas money market - and the rate at which banks lend to each other here hardly moved.

    The implication is that the freezing of the three-month money markets is more about credit worries than liquidity. The ECB hasn't found a magic cure for the crisis even if it has tided the markets over the holiday period.

    It was not just the banks who had reason to be grateful for the ECB's seasonal generosity.

    It provided useful cover for the Chancellor too as it emerged that the taxpayer's exposure to Northern Wreck might have soared to 100bn after the Government stepped in to underwrite pretty much the whole of the bank's balance sheet.

    The move was designed to increase the chances of a private-sector deal being thrashed out in January, but in the increasingly Alice in Wonderland world of Britain's financial system it looks bizarrely like state ownership to avoid nationalisation.

    Are hedge funds selling their investors short?

    The point of hedge funds, lest we forget, is to protect their investors' capital. The industry's November performance statistics will, therefore, make depressing reading in the well-appointed town houses of Mayfair and St James's, for only one strategy - selling shares short - made any money at all.

     

  • 'Short-sellers' make huge profits from chaos

    Selling the shares of financial stocks in the hope of buying them back at a lower price was like shooting fish in a barrel last month, making almost 7pc. Elsewhere, it was harder work, with the year's star performer, emerging markets, going sharply into reverse.

    Anyone could be forgiven for struggling last month as markets lurched around in a crazy echo of the summer's gyrations.

    What is harder to explain is the indifferent performance of hedge funds over the whole of the past year, when nine out of 13 strategies failed even to achieve a double-digit return.

    As local authorities, pension funds and charities line up to diversify their portfolios into so-called alternative assets, they should compare the latest statistics with those of bog-standard "long only" unit trusts.

    Even the relatively strong emerging markets hedge funds have been outperformed by around 130 traditional funds. Convertible arbitrage, the worst-performing strategy this year despite the volatility it might have been expected to exploit, would slot in at around 700 in the mutual fund rankings.

    No one minds paying the 2pc annual charge and 20pc profit share that hedge funds typically levy if they generate top-notch performance. But as the hedge fund universe has ballooned, a diluted talent pool makes the charges more and more difficult to justify.

    Someone's capital is being protected but it's not the investors'.

    British keep their bonus pools to themselves

    Goldman Sachs's $20.1bn bonus pool, three-quarters of a million dollars for each of its 26,000 employees, provided the perfect backdrop for the Policy Exchange think tank's call for a new philanthropy.

     

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  • Greed gets in the way of City giving

    With a few exceptions, the City has forgotten the legacy of Andrew Carnegie, the Scottish-American steel magnate whose 2,500 libraries were one of the great gifts of the early 20th century.

    As a nation we are generous. Four out of five of us have given to charity in the past month. But a pound in the tin is not the answer. We need a culture of systematic giving among those on whom the financial gods have smiled.

    The City's share of GDP has risen from 5.3pc to 9.4pc in only six years. It is the most important contributor to the UK's wealth, but there remains a nagging feeling that the gap between the rich and the rest is too wide.

    In the US, giving is an accepted part of the deal when your number comes up in life's lottery. Philanthropy represents 1.7pc of America's giant economy, more than twice the UK's 0.7pc.

    In Britain, we still associate philanthropy with men sporting big whiskers and tall hats. With the City's bonus pool five times greater than it was 10 years ago, giving must become routine for Britain's lucky few.

    tom.stevenson@telegraph.co.uk