Wednesday, October 29, 2008

The £5,000bn bailout

Robert Peston

If I were you, I wouldn't get too worked up by the Bank of England's estimate that credit-crunch losses now total £1,800bn on an assortment of financial assets, such as mortgage-backed securities and corporate bonds.

Bank of EnglandOf course it's a big number - rather bigger than the annual economic output of the UK.

But it's peanuts compared with the losses suffered over just the past month by pension funds, insurance companies, banks and all of us from the slump of more than 25% in the average value of shares listed on global stock markets (just this morning Aviva, our biggest insurer, announced that its capital surplus has fallen by £600m or 32% in less than a month).

Which is to say that the collapse in price of collateralised debt obligations - and all the investment doo-doo created by brilliant bankers that put us in our current hairy predicament - is yesterday's story.

Today's tale is that we're careering into what looks like a pretty nasty global recession, which is causing capital to be withdrawn from all but the least risky economies, markets and business - and is mullering our wealth.

The number that stood out for me in the Bank of England's latest Financial Stability Report, which I would not recommend to those of a nervous disposition, is its estimate that £5,000bn has implicitly or explicitly been made available by central banks and governments since April 2008 to support wholesale funding by banks.

That is a genuinely big number. It's equivalent to about a sixth of the total annual economic output of the whole world.

So to put it another way, we as the taxpayers of the world are funding our banks to the tune of one-sixth of everything we produce.

Blimey, if I may be so bold.

It's the measure of the extent to which the private-sector banking industry has rather let us all down.

It also tells us something about the scale of the economic downturn we're facing.

Unless we're moving into a world - heaven forefend - of semi-permanent nationalisation of our banks, the banks have to be weaned off all that taxpayer support.

That will take years, of course.

But right now, when money's tight, the best way the banks can think of reducing their dependence on taxpayers and the state is to lend less to all of us.

The less they lend to us, the less they need to borrow from elsewhere - either from taxpayers or from more conventional depositors and lenders.

Here's the catch: the less the banks lend, the less money will be available to fund companies' investment and working capital and to finance consumers' purchases of goods and houses.

Which means that the economic downturn will be all the steeper.

What does this mean for the UK?

Well forecasting the path of bank lending is more craft than science.

But the Bank of England provides some useful charts and statistics, which point in an unpleasant direction.

The one bit of good news is that the Bank of England thinks - quite rightly - that bank lending would have fallen off a cliff without the government's recently announced £400bn rescue package for British banks.

Here's the less good news. Credit from the banks is still going to be much harder to obtain for two or three years.


Well, our banks were dependent on flighty wholesale funding to the tune of £740bn at the end of June 2008, up from zero in 2001.

Most of these creditors want their money back now or in the coming two or three years - which is why the Treasury and the Bank of England on behalf of all us as taxpayers is promising to lend more than £500bn to replace the lost funds.

However, to repeat the point I've been banging on about for months, all of this will have to be repaid at some point.

Which, as I've said, puts pressure on our banks to lend less, or at least to massively reduce the rate of growth of lending.

And there's another way of looking at this very powerful force which is shrinking how much banks lend.

From the late 1990's to today, our banks increased the multiple of what they lend compared to their capital resources from 23ish to 33ish.

Or to put it another way, they thought the world was becoming a less risky place and increased by more than 40% their lending relative to the capital they hold to cover potential losses on such lending.

To state the bloomin' obvious, our banks now see the world as a pretty risky place, so they're prepared to lend much less relative to their capital.

The Bank of England thinks this could force them to reduce their assets - by cutting back on lending and dumping investments - by a sixth.

Which may seem a lot, but the Bank of England is doing its best, in trying circumstances, to look on the bright side.

It is projecting a massively reduced rate of growth for UK bank lending to customers, but it is forecasting growth (albeit of the anaemic variety).

How confident is the Bank that there'll be such growth?


It highlights a chart showing what happened to bank lending in Sweden, Norway, and Japan after comparable shocks.

In each case, the rate of bank lending didn't just slow - the overall stock of loans or credit in the system actually shank for two or three years.

If that were to happen here or globally - and it's not what the Bank of England is forecasting - we'd be coping with a very serious recession.

UPDATE, 11:58AM: It turns out I have identified an error in the Bank's Financial Stability Report. It said, on page 38, that as much as £5,000bn had been made available by governments and central banks since April to support wholesale funding of the world's banks. However the Bank now tells me it meant to say $5,000bn (dollars not pounds) - which is quite a chunky difference (as of today's exchange rate, about a third less).

That said, total taxpayer support for the global banking system isn't far off £5,000bn (yes we're back in sterling), if capital injections and toxic-asset purchases are included, together with guarantees provided in Asia and Australasia (ignored by the Bank for reasons that elude me).

So I think we can stick with £5,000bn as the total value to date of the global banking rescue, though I'm going to brand this as my estimate rather than the Bank of England's.

PS. The Bank of England is, as we speak, modifying the electronic version of its report.

Original here

Most Expensive Colleges for 2008-2009

Sarah Lawrence College
Sarah Lawrence College

As expected, college tuition seems to go up just about every year now. Sure, part of the reason may be inflation, but still the increases in tuition seem to outpace inflation by two to three times its rate.

You would think the weak economy would have an effect on tuition prices, and maybe it does. Perhaps alumni donors are unable to give as much as they have in the past. States are cutting their funding for higher education, which is huge considering most colleges get the majority of their funds from two sources: the State and tuition. One thing is for certain though, regardless of the state of our economy, the demand for higher education will always be there.

We are reaching a point where the cost of one year of college education at some colleges is surpassing $50,000. Unless your parents are loaded, you can expect to have a HUGE amount of college debt after graduation. Even those that graduated five years ago will not feel the pain that today’s students will feel after they graduate and have to start paying back on their student loans. It is almost as if the current state and price of today’s education is forcing many students to go to a local community college for two years and then move on to complete their degree at a 4-year in-state school. One would think that those that do choose to go on to a more expensive prestigious college and graduate should have no problem obtaining a decent paying job to pay the bills (and student loans). But, as a student with little money, it can be hard just knowing how much debt you are about to get yourself into. Even debts over $50,000 sound overwhelming. One thing is for sure: make sure you know how you are going to pay for college before you actually go.

Just because these schools have high tuition, doesn’t mean you will actually be paying that amount. Many of these colleges provide excellent financial aid packages. A lot of these schools offer scholarships that often cover most of the financial burden of attending the college. For example, Princeton University has always been known to offer its students some of the best financial aid packages, keeping its graduates debts at a relatively low level. Schools like Cooper Union, with a tuition of $33,000 per year, give every student a full tuition scholarship ensuring no student is responsible for tuition-related costs.

Most of the colleges on this list of expensive colleges are private liberal arts schools located in the northeast that boast low student-to-teacher ratios.

Highest Tuition 2008-2009

1. Bates College$43,950
2. Middlebury College$42,910
3. Colby College$42,730
4. Union College (NY)$40,953
5. Connecticut College$40,900
6. George Washington University$40,392
7. Vassar College$39,635
8. Sarah Lawrence College$39,450
9. Bucknell University$39,434
10. Colgate University$39,275
11. Carnegie Mellon$39,150
12. Kenyon College$39,080
13. Skidmore College$38,888
14. St. Johns College$38,854
15. University of Richmond$38,850
16. Tulane University$38,664
17. Wheaton College (MA)$38,585
18. Franklin & Marshall College$38,580
19. Wesleyan University$38,364
20. Hamilton College$38,220
21. Oberlin College$38,012
22. Reed College$37,960
23. Tufts University$37,952
24. Dickinson College$37,900
25. Bard College at Simon's Rock$37,860
More: See the Top 100

Of course tuition is just one of the many costs associated with going to college. The other big expense is room and board. Some colleges also charge outrageous prices for student housing. The following list shows the most expensive colleges based on the total cost of tuition plus room and board.

Highest Total Cost 2008-2009

CollegeTotal Cost
1. Sarah Lawrence College$53,166
2. George Washington University$50,312
3. New York University$50,182
4. Georgetown University$49,689
5. Connecticut College$49,385
6. Bates College$49,350
7. Johns Hopkins University$49,278
8. Skidmore College$49,266
9. Scripps College$49,236
10. Middlebury College$49,210
11. Carnegie Mellon University$49,200
12. Boston College$49,020
13. Wesleyan University$49,000
14. Colgate University$48,900
15. Claremont McKenna College$48,755
16. Vassar College$48,675
17. Haverford College$48,625
18. University of Chicago$48,588
19. Union College (NY)$48,552
20. Colby College$48,520
21. Mount Holyoke College$48,500
22. Tufts University$48,470
23. Bard College at Simon's Rock$48,460
24. Franklin & Marshall College$48,450
25. Bard College$48,438 Original here

How Outsourced Call Centers Are Costing Millions In Identity Theft

By Ben Popken
A former Chase call center rep tells the story about this one thief who was able to rip off one customer for over $40,000, thanks to his constant outwitting out the internationally out-sourced security department. It wasn't that hard. Over and over again, he was able to commit credit card fraud just knowing the guy's name, social, and mother's maiden name.

The Americans would beg and plead with the Filipinos to not unblock the account, and over and over again they would. Says our insider, "if US security had been able to intervene from the get-go, he would never have been able to do so much financial damage. For the rest of his life, the true owner of that account will be dealing with the effects of this crime." It's not the outsourced place's fault, though. They're just following orders. It's whoever designed the laminated binder they were blindly following that should really be held accountable. Read the whole messed-up story below.

Our insider writes:

A guy calls up on the direct number, his voice is distinctive: deep, but nasal, like he has a cold. I ask for his name and account number. He tells me his name but says he doesn't have his card with him. Step two: I ask for his social security number. He "ums" and "uhs" for a second and I'm certain I hear a faint rustling of papers in the background. The number he gives me isn't linked to any account on file. As soon as I tell him this, he hangs up. It was odd, but I wrote it off. Calls came at a snails pace and it wasn't unusual to have 20 minutes in between them. So when a couple of minutes later I got another one, it was strange. Once again it was a call from the direct number. I ask for name and number and the voice is strikingly similar. The name he gives is different but again he has no number. I ask for the SSN and again I can hear papers rustling while he stalls. This time an account pops up. He fails verification of the mother's maiden name and immediately hangs up. By this point I'm laughing about it with my co-workers because he seems such an inept thief. As the nights go on, we start to get more calls from him. I say "we" because this was the only call center that the phone number goes to and there were only about 15 of us on staff at any given time. He had the same mannerisms for every interaction and it became such that as soon as any of us got one of these calls we immediately put him on hold (usually making up some innocent sounding excuse) and tried to put him through to security. The problem with the Philippine security department quickly became apparent.

The US security department had access to LexisNexis. If you're not familiar with it, it's basically a encyclopedia of everybody's life. Previous addresses, family member's names, jobs, schools, anything and everything that could be linked to your name and/or social security number. As an example of how incredibly (and frighteningly) thorough it is, when my now 30 year old brother was a tot, he liked to respond to junk mail with a fake name; this fake name came up as a former occupant of my parent's address when I got a chance once to do a search on myself (we had it in collections). Chase didn't trust the Philippine department to have it though. In fact, the only information they had the ability to verify was what was on the account: name, social security number, mother's maiden name, and recent purchases if they felt like being that diligent.

Here's the part of the story where some poor guy's account get's completely f-ed. This thief had been bounced to the out-sourced to security so often that he must have made a check list of any possible questions they would ask him. Through whatever means, he managed to get the answers to these questions. Now when he called, he could give us the information we were asking for, but by this point we knew his voice so well that we still tried to get him to security. It worked like this: We put him on hold and dial the extension for security. We get a security rep and start to explain the situation; we tell them he was able to give the right information, but that we know is the same guy that's been calling for weeks and we are certain he is not the account holder. They begrudgingly take the call. Minutes later another one of us gets a call from a security rep saying they are giving us a customer who has been cleared by them. And here the thief was back in our department. For those of us who had come to know him, the fight waged on night after night.

Chase is a revolving door. If you work there longer than a year, you're considered to have seniority. The few of us who knew this account was being raped could do nothing to protect it. Some newbie wouldn't know about the situation and would let the thief have his way with the account. The US security department became aware of the issue and put blocks on the account as well as incredibly long notes that explicitly said to not remove the block for any reason at any time. But sure enough, over and over, the guy would call in overnight, talk to the out-sourced security, and the block would be removed. Again, they were only able to verify with him with information that he was already known to have, yet that never seemed to deter them from clearing him.

Things got quiet for a while, and we thought maybe he'd finally been stopped from unblocking the account. Turns out that he'd actually been caught, but only after more than $40,000 in fraudulent charges on this one account. I cannot stress enough that if US security had been able to intervene from the get-go, he would never have been able to do so much financial damage. For the rest of his life, the true owner of that account will be dealing with the effects of this crime.

I wish I could this was the only time I saw the security department failing at securing an account. There was a consistent problem with the overt cultural difference. A man calls in and says he's the cardholder "Angela" and you find yourself trying to explain to security that Angela isn't a man's name and the odds of it really being his name are slim. And they just see it as cut and dry: He says he's Angela, so he must be.

To be fairer than Chase deserves, I'll note that I've been out of there for almost two years, so it's quite possible that it's all ponies and rainbows now. I'm gonna go ahead and assume though that it's run as poorly as ever.

Original here