The murky past of SPVs; carbon tax likely for budget; euro-zone figures show a small pick-up in lending

The murky past of Special Purpose Vehicles

IT SOUNDS like a weapon of mass destruction from a Bond film or a science fiction robot gone off-message, but the “master SPV” unveiled by the Department of Finance during Act Three of the Nama Bill saga is simply the fancy name for the separate company that will buy and manage the toxic debts amassed by some 2,000 rogue developers.

But, given that the SPV arrangement was kept quiet until the last possible moment, couldn’t someone have thought up a tag for it that wasn’t identical to the murky off-balance sheet adventures that led to the financial crisis in the first place?

A “special purpose vehicle” must be a contender for the most dangerous euphemism in the financial services industry, and this is the industry that plays fast and loose with such terms as “discount mortgage” and no-claims “bonuses”.

SPVs were the basis – or, as the financial services industry might phrase it, the “innovative architecture” – of securitisation, the process that allowed the entire financial system to play pass the parcel with so-called liars’ loans and “Alt-A” mortgages. Special Purpose Vehicles certainly had a purpose and it largely involved outwitting snoozing regulators, foxing shareholders and comforting executives with their attractive “bankruptcy remote” qualities.

Not only that, the opaque culture facilitated by the use of SPVs meant that when the subprime debacle eventually hit, the bosses of the financial institutions that spawned the SPVs in the first place couldn’t put a number on their losses.

So on the scale of sinister financial terms that runs from “fixed-rate penalty” at one end to Goldman Sachs-style “dark pools” at the other, a “master SPV” is definitely worth a shudder or two.

The Department of Finance says the Government is not trying to “disguise” the debt by going off-balance sheet. If that’s true and the Government manages to reform the shadowy nature of SPVs as well as bust the nation’s debt problem, it will be a stunning reversal of recent global financial history.

Two jumpers for carbon tax era?

DOES THIS Government have a “two jumpers instead of one” policy on fuel poverty?

Last year, the boss of British energy giant Centrica made a mask-slipping gaffe when he advised struggling customers to lower their thermostats and endure a “two jumpers instead of one” winter.

Despite the best protestations of Ibec, a carbon tax on fuel is likely to form part of the budget’s tax-raising measures. But in order to stop it becoming a goosebump-raising measure, vulnerable households must be compensated.

When we say “vulnerable”, we’re really talking about elderly people dying of the cold. An Institute of Public Health (IPH) report from 2007 found that Ireland has one of the highest rates of excess winter mortality in Europe. Fuel poverty, the institute said, was “unacceptably high” in Ireland, with no systematic monitoring.

So far the rhetoric here has been a little more sensitive than at Centrica. For anyone though who believes the “polluter pays” principle is not always as reasonable as it sounds, there has been a disconcerting lack of specifics.

First, the Commission on Taxation said it didn’t believe phase-in rates of carbon tax would be necessary “if adequate safeguards are in place to deal with fuel poverty”.

Then, the renewed Programme for Government made noises that people “most at risk of fuel poverty” should be protected.

Yes, but how?

The best way would be to replace the inefficient heating systems that mean poor people pay more for fuel on an absolute basis and not just as a percentage of their incomes. But the quickest way is to jack up the fuel allowance. Even then, the amounts are likely to be derisory.

Last October, after a year of spiking energy bills, the Government extended the fuel allowance season by two weeks and upped the allowance by €2 a week to €20 a week. That doesn’t sound like much, but it still cost €30 million.

This year, €30 million is harder to come by and there’s always the excuse that energy prices have just dropped.

However, crude oil prices are nudging up and the possibility of a new commodities superspike next year cannot be discounted.

LSE drops the ball for something more upbeat

IT HAS been another turbulent, painful week for world equity markets and to cap it all off, the London Stock Exchange (LSE) has dropped its balls.

To be precise, the exchange has axed the more than 700 floating balls that move serenely up and down a modern sculpture called The Source, located in the eight-storey lobby of its ultra- calm but security-heavy headquarters.

When the FTSE is closed, the 729 balls are at rest. When markets open, the balls are “activated”, lottery-style.

I have seen this in action and was disappointed that the movement and colour of the balls throughout the trading day was not in tandem with the minute-by-minute direction of equities, but were simply an abstract pattern. Now the LSE wants to ditch pressing the “on” button on its sedate instalment in favour of something with a bit more pizzazz, like, for example, the New York Stock Exchange’s opening and closing bell ceremonies.

This raises the terrible spectre of allowing corporations to “sponsor” the bell ceremonies.

On Wall Street – or indeed CNBC – you can frequently see smiling publicity-soakers applauding themselves for getting their corporate logo on television as they ring the bell.It could have been a day in which trillions have been wiped from the value of the western world’s pension funds, but that will not matter a jot when it’s their happy moment in the spotlight.

Perhaps the LSE should hang on to its balls for the moment.

They are random, meaningless and have no good purpose, just like most of the financial markets.

Time for ECB to figure out its exit strategy

IRISH BANKS may still be tighter than a 12-year-old on Guitar Hero 5, but elsewhere in the euro zone, there are signs that financial institutions are loosening up.

Tuesday’s euro-zone figures showed a small pick-up in lending in September compared to August, prompting economy watchers to get excited that credit was starting to flow again. This was followed by Wednesday’s euro zone bank lending survey, a quarterly temperature gauge from the European Central Bank (ECB), which found banks expect credit standards to soon ease.

If this turns out to be the start of a growth-boosting trend, it means the ECB will have to turn its attention seriously to the small matter of how to extricate itself from the array of emergency liquidity measures it introduced reluctantly last year.

And the array is vast. First, there are the extra one-month, six-month and one-year refinancing operations (supplementing its traditional one-week and three-month facilities), which have kept the European banking system propped up since Lehmans.

Last October, the ECB also switched from its procedure of lending cash to banks at variable rates in auction-style tenders to the current free-for-all, where banks can borrow as much as they want at a flat rate as long as they have the collateral.

The ECB’s current guarantee on both of these life-support arrangements is that they will be kept in place “beyond the end of 2009” or “for as long as needed”.

There are other measures involving foreign exchange swaps and less onerous collateral rules, while in June, the ECB announced it would buy €60 billion worth of covered bonds, in a kind of toe-dipping version of quantitative easing.

The good news for householders is the ECB is expected to move to unwind these financial experiments before it gets round to increasing interest rates.