Keeping an eye on things
Retriever writes
But isn’t the point that hedge funds tend to have fairly short time horizons, and that bonds close to redemption will be trading close to par – leading to limited scope for making money in the way you suggest? I’d have thought that what you suggest only works if you can hold the bonds for a long time – so it might work for life insurers even if it doesn’t work for hedge funds?
Golden Retriever (golden.retriever@dogs.k9.gov) sent us a long email about the previous post. This reminds me I haven’t replied to his previous mail about whether actuaries should be regulated. I didn’t reply because I didn’t know the answer, but UKSA is currently preparing its submission to the BEIS consultation so I may have an answer soon.
In the previous post I wrote
It necessarily follows that there is some cast iron guaranteed way of making money by buying into dips in the credit market. As bond prices fall, buy more bonds in the certainty that they will rise again.
Retriever objects:
If a bond is currently trading below par, then would I not expect to make money by purchasing the bond and redeeming it at par? Not a cast iron guarantee perhaps, but pretty likely surely, since investment grade corporate bonds don’t seem to default very often.
Charlotte Gerken (executive director of Life Insurance at the PRA) spoke to the 18th Conference on Bulk Annuities last Thursday (29 April) on the supervision of UK annuity firms in the UK, and in particular on the matching adjustment (MA).
Sharon Bowles has attacked the UK’s accounting standards Endorsement Board (UKEB), saying anyone who endorses the upcoming IFRS 17 insurance contracts standard is probably in the pay of the insurance industry.
Strong words from Sharon Bowles at the Lords yesterday, about whether the Secretary of State should delegate responsibility to the UK Endorsement Board.
With the proposed new insurance standard, IFRS 17, the issues go further than unrealised profits, and credit is given to reduce liabilities, not merely for unrealised gains, but for anticipated future income, giving the appearance of capital.1 This cannot be proper accounting. These unrealised gains, and anticipated income can neither be used to service debt, pay down debt or invest in other assets, nor have any value as collateral. No way is it true and fair, and anyone endorsing it would surely have to be nobbled, which seems to aptly describe the UK endorsement board.
Three have been members of the former Accounting Standards Board, which has approved defective accounting standards in the past. Several were partners in accounting firms at the time banks were collapsing. Mr Ashley, former ASB member, was also a career KPMG partner, which the UK Endorsement Board website fails to note, and of course KPMG were the auditors of Carillion and HBOS.
In the case of former ASB member Mrs Wallace, at least the website references her connection to PwC, the auditors of Northern Rock, but it is silent about her time at Arthur Andersen. The Board includes another recent PwC partner, and a partner from Grant Thornton, which is currently defending itself, given the problems in auditing collapsed Patisserie Valerie. There is no mention that Board member Kathryn Cearns has worked for the ASB, and then for the law firm Herbert Smith Freehills, which as well as providing defence advice to PwC and KPMG, also instructed the ICAEW’s counsel to give the dubious ‘true and fair’ legal opinions for the FRC, from which the Government eventually distanced itself, as I discovered in FOIs.
Liz Murrell, an employee of the Investment Association, and Paul Lee, a consultant to the Investment Forum, are also on the Endorsement Board, and both those organisations are dominated by insurance companies whose accounts will benefit from using IFRS 17.
Who is there to represent the public interest, and act on the known lie that Brydon, and indeed the Government’s consultation acknowledge, that accounting standards alone cannot be true and fair. Who is there to represent the policyholders of insurance companies who, barring more Government bailouts will be the victims [when] accounting standards cause them loss. One could hardly wish for worse in terms of an unbiased view.
And no wonder they need protection from liability. Today is a bad SI. This is a bad SI, and we don’t need this Endorsement Board.
It is difficult to improve on that. (I stepped down from the Technical Advisory Group in February for reasons I made clear in a letter to Pauline Wallace, chair of the Board). This one will not go away.
[EDIT] The full transcript, including some equally fruity stuff from Lord Sikka, is here.
Our written evidence for the Economic Affairs Committee has just been published here. What we say will be familiar ground for Eumaeus followers, so I won’t repeat it.
Note that one Rothesay Life publishes its SFCR in May, we will have an updated chart of the ‘real’ versus ‘not so real’ capital coverage ratios. The indication so far is that the gap continues to widen, i.e. more ‘not real’ less ‘real’. At some point the capital created by MA and other machinery may reach the size of the balance sheet itself, which will be the next wonder of the world and a triumph of science.
The Mail on Sunday worries about the high rates paid by some customers on older mortgages. Age Partnership, a broker, has ‘pledged’ to look at existing equity release loans “to see whether borrowers can be switched to a better deal”.
Steve Baker is the Conservative MP for Wycombe and sits on the influential Treasury Select Committee. He says it is time the equity release industry tackled these toxic loans.
‘This is a welcome step that could bring peace of mind to many elderly individuals who have found themselves, through no fault of their own, as equity release mortgage prisoners in this ultra-low interest rate environment,’ he says.
Kevin Dowd is also quoted.
The article mentions a couple who took out a loan at 6.45% four years ago. However rates have plunged so far that “it became worth paying the exit charges and switching to a lower rate”, and the couple switched to a 3.04 per cent deal.
That leaves a few questions in our minds.
UK Shareholders write to Andrew Bailey.
What has Archegos’ blight on Credit Suisse and five other non-UK banks got to do with UK shareholders? If the same activity along with the same lack of transparency exists in the UK, UK banks could be greatly exposed without their shareholders and customers being any the wiser.
Article in the Financial Times, the usual stuff, Britons have amassed an £180bn in their bank accounts, will they spend it or not.
True, Eumaeus has saved a bit of pocket money over the last year, and it is idling in the bank account. Thought experiment: the Government/Bank prints £1,000 for each person in the country to spend as they will, but on the condition that they repay the same sum tomorrow to HMRC. Will Britons spend the £1,000 or not? Tricky question.
Does it make any difference if HMRC collects the money at the end of the tax year? Will Britons spend the money or not? In general, if everyone expects that the value of extra helicopter money given to them will exactly offset the present value of extra tax payments at some point in the future, will Britons spend the money or not? Also a tricky question.
The great American jurist Louis Brandeis once wrote:
‘Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust.’
Which reminds me of the delicate subject of actuarial standards. Here is our take.