Peston's Picks

Made off with $50bn

• Robert Peston
• 12 Dec 08, 05:19 PM

I am told that "Madoff" is pronounced "made off" - as in "he made off with the money".

That's the end of the jokes.

The supposed $50bn swindle by Bernard Madoff at his hedge-fund and securities trading business is serious stuff.

It's possible that Mr Madoff's $50bn estimate of how much he's evaporated is an overstatement. But there will be losses for investors in his funds, such as clients of Nicola Horlick's Bramdean.

Perhaps more troubling are the implications for the multi-trillion dollar hedge fund industry in general.

This industry is rapidly contracting, as the likes of Morgan Stanley and Goldman Sachs reduce the credit they provide to funds.

And the collapse of Madoff is likely to to accelerate the disappearance of funds - in that it may persuade many investors to demand their money back from even high qualiity funds and funds of funds.

Investors will note that regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud.

Which will make investors fear - however irrationally - that no hedge fund can be deemed wholly safe.

If investors demand their money back, there would be wholesale dumping of assets by hedge funds.

And that would compound losses for them, as the price of assets would fall - and it would prompt demands by creditors for hedge funds to put up more collateral (margin calls), which would lead to further asset sales.

All of which would mean that the moment when share prices, property prices or any other asset prices find that elusive floor would be deferred yet again. Which matters to anyone saving for a pension and for banks' ability to turn on the credit tap again.

Which is why, as I said, it would be unwise to chuckle at Madoff's mad mess.

• Permalink
• Comments (0)

Another Black Friday

• Robert Peston
• 12 Dec 08, 08:58 AM

There's a great deal of grim news around this morning.

I'm hearing very bleak reports about prospects for Entertainment UK, the wholesaler of music, electronic games, DVDs and books, that's owned by troubled Woolies.

A significant slimming down of Entertainment UK now looks likely, I am told - which would be bleak indeed for its employees, who number well over 1000.

Also, HBOS - owner of the Halifax - has reported a significant increase in the charges it takes for bad debts.

If you add together HBOS's investment losses and securities losses with an incremental impairment charges on mortgages, personal loans and corporate loans, there has been a £3bn rise over just the last two months in all these categories of loss.

So that's £3bn of additional loss incurred by HBOS, owner of the Halifax, since 30 September.

Not nice.

The most horrible trend is in lending to big companies. For the first 11 months of the year, the impairment charge on corporate loans is £3.3bn, an increase of 560% since 30 June.

That says a great deal about how the economy has deteriorated since the summer. But it also implies that HBOS's corporate lending department was taking excessive risks.

For the year as a whole, HBOS is also going to suffer a loss on unsecured lending to consumers in excess of £1bn.

As for the impairment charge on mortgages, that's £700m for the first 11 months of 2008 - but rising very fast indeed.

Finally, there's the rejection by the US Senate of the proposed $14bn bail-out of the giant American car manufacturers.

That's causing massive anxiety in the British car industry - and is particularly alarming for Vauxhall, the British subsidiary of General Motors.

Vauxhall employs 5,000 directly and countless others indirectly at suppliers and distributors.

My understanding is that the Business Department views Vauxhall as "viable" - which is its test for whether it should receive state support, if the worst were to come to the worst and General Motors itself were to collapse.

So the moment when we as taxpayers start providing financial help to individual motor manufacturers, to keep them alive through the acute phase of our economic contraction, is fast approaching.

UPDATE 1300 GMT:: The administrators to Entertainment UK have announced that they are "scaling down" efforts to find a buyer for the wholesaler and are making 750 employees redundant. It looks very unlikely that this supplier to the big supermarkets will survive.

There will be pain for book publishers, electronic games creators, DVD publishers and music businesses. And there will also be disruption to retailers, notably Zavvi, the chain of music stores.

• Permalink
• Comments (0)