As far as the financial markets are concerned, you discover new risks every day. At the time of the financial crisis of 2007-2008, the country had to deal with subprime mortgages, debt guarantee bonds and all kinds of complex instruments loaded on the balance sheets of our banks and building societies by casino investment banks.
That’s why we should be grateful that consumer banks have been isolated from their all-too-smart business arms for nearly a decade.
Now we learn of a new horror at the heart of the UK’s fixed-earnings pension system. If you thought your money was safely locked away in gilts, listed stocks and other tangible assets, that’s not quite true.
Pension funds use “liability-driven investing” to maximize returns by leveraging or borrowing against the assets of these funds
With the current turmoil in the UK bond market, widely regarded as the safest asset one can own due to Her Majesty’s Government Guarantee, think again.
Rather than let the working people sit around doing nothing, the people who run our pension funds, all around £2.5trillion, are making them sweat.
I’ve long wondered why it’s worth big insurers and pension funds lending stocks (for a fee) to activists and hedge funds with schemes to get a quick ride, often at the ultimate expense of retail investors. ordinary and national interest.
It is the search for these elusive returns.
It should therefore perhaps come as no surprise that a new giant bubble, Liability Driven Investments (LDI), has burst at the heart of the financial system.
What is most frightening is that it is hard-earned money, saved by workers throughout their lives, that will potentially be at stake.
Pension funds use LDIs to maximize returns by leveraging the assets of these funds or by borrowing against them.
If you thought that the precarious element of these funds are stocks, on which health warnings are written, you were wrong.
The soft underbelly is the trillion pounds tied up in government bonds and borrowed to the end.
So when bond prices fell after Liz Truss’ government did everything possible to save growth, it set off a chain reaction. The collateral, the bonds, was no longer worth anything like the loans made against them.
The loans risked going bad, creating a potential catastrophe for both pension funds and banks.
Fears of a collapse were looming and this triggered a financial crisis-like intervention by the Bank of England after receiving compensation from the Chancellor. It seems that the Bank of England’s Financial Stability Committee had its eyes on LDIs in 2018.
But anyone who has ever read any of his reports will know that he was also monitoring other, more glamorous consumer and market risks, ranging from cryptocurrency to credit card debt.
Something as technical as LDIs would normally never get a second look. Now they’ve exploded in everyone’s face, with a potential taxpayer bill.
Someone, somewhere – be it the Bank of England or the pension regulator – must take responsibility for an appalling debacle in an industry where safety must always be the watchword.
As someone who has followed the activities of the International Monetary Fund (IMF) for longer than I can remember, one can only be disheartened by its knee-jerk response to the economic measures introduced by Liz Truss.
The Washington-based fund is renowned for its economic integrity and provides the yardstick by which other forecasters are judged.
Its annual “Article 4” inspections of national economies are based on in-depth studies of the books and interviews with senior elected officials and others over several weeks.
It is therefore incomprehensible that this august body thinks it is necessary to slap the UK on the knuckles over the Kwasi Kwarteng tax package.
It did not prove ideal that the package was unveiled without a longer-term plan to put Britain’s public finances in order. But that’s no excuse for hostile comments from the IMF.
It is worth recalling how Kristalina Georgieva, its managing director, allegedly favored China in her previous job at the World Bank, sparking US hostility towards its management.
Watch out for stone throwing.
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