Top 10 at 10 to 12: Lehman's shoe tours; Key's inflationary solution to leaky buildings; Leverage pressure on Aussie banks; Dilbert

Here are my Top 10 links from around the Internet at 10 to 11. I welcome your additions and comments below or please send suggestions for Wednesday's Top 10 at 10 to bernard.hickey@interest.co.nz We have no goats at interest.co.nz 1. Inflationary solution - Peter Cresswell at Not PC, who watches the leaky homes issue closely, has picked up on some interesting comments by John Key in a Q&A  interview last November which I (and many others) missed. Essentially Key was saying the government would lend elderly property owners government money to repair their leaky buildings and allow them to repay when they die. He also pointed out that house price inflation would help solve the problem. Cresswell makes the point that Key is relying on inflation to fix the now massive leaky building problem. Not exactly inspiring. Here's the key quote from Key.

If we can ensure that a homeowner has guaranteed access to funds, and a guaranteed ability to repay, in other words if they're older they may not have a repayment schedule, if their income is very low they may not have a repayment schedule in a hurry, we can allow inflation and we can allow rising house prices to let people fix their home and actually move on and move out of the situation.

Inflation is just like magic, unless you are a saver. Key went on to say:

GUYON So are you going to subsidise their loans, pay their interest on those loans, how will that work? JOHN There's a structure in there which I can't detail today but all I can say is the basic fundamentals are guaranteed access to funds if people want to take up that option, the ability to have the house repaired and the ability to over time work their way out of the situation, and it will depend on their income what their repayment schedule looks like. GUYON Right, so their eligibility will be based on age and income, is it true that you're looking at the elder people, people over 65, is it targeted at that? JOHN What I can tell you, in British Columbia, where they had a very similar problem that we had, they allowed older Canadians in that case to essentially capitalise their costs if you like and take it off their estate when they passed away, so there was no repayment costs. GUYON And just finally on this before I move on to coalition matters, how much public money are you going to throw at this over the next decade? JOHN Well it's hundreds and hundreds of millions of dollars, and it has to be, this is potentially as identified by Price Waterhouse Coopers, an eleven and a half billion dollar problem which comes down to about a six and a half billion dollar liability if you're looking at a ten year period.

Cresswell then makes the valid point:

Quite apart from all the damage inflation does to an economy, inflating the way out of the problem is simply a way of making savers transfer their resources to afflicted home-owners without the process being noticed. It's a coward's way to fix things.

2. This could get ugly - Also a bit behind time, but worth checking out, Andrew Laxon's series in the NZHerald on Saturday about the Leaky Homes debacle includes some ugly numbers. Is the rest of New Zealand ready to bail out property investors and homeowners in Auckland who bought leaky homes? Could this affect our sovereign debt rating?

The cost of the leaky building crisis has grown so "gianormous" that the Government has almost despaired of finding a solution, says the minister in charge. Building and Construction Minister Maurice Williamson told the Weekend Herald the official $11 billion figure - which experts believe is half the true cost - was about what the Government spent each year on health or education. "It's simply ginormous. A Government who's running very large surpluses would still struggle to find the money to help with this. "But a Government who's running deficits - and has a forecast track of deficits for many years out - has to just sit there with its head in its hands, saying, 'Well, I just don't how to do this'." Mr Williamson described the leaky building crisis as the "elephant sitting in the room" as the Government tried to finalise its numbers for the May Budget.

3. The leverage issue - Comments by Australia's banking regulator (APRA) and the Reserve Bank of Australia about leverage levels and new regulations on capital should be closely watched on this side of the Tasman for signs for what our big four banks might have to do here. Our own Reserve Bank has the final say, of course, but it would be naive to believe our system would remain disconnected or that the whims of the head offices in Melbourne or Sydney could be ignored. Reserve Bank of Australia Governor Glenn Stevens was speaking yesterday at ASIC's Summer School in Melbourne yesterday. Lucy Battersby at The Age reports that Stevens reckons a 'risk levy' on banks might be a way to stop them 'socialising losses'. He also seemed keener on the banks holding more capital and leveraging it out less in the form of more lending. All this means banks will be less keen to lend and charge more for it.

Speaking at the Australian Securities and Investments Commission's summer school, Mr Stevens said: ''It probably wouldn't hurt for there to be a little bit more capital and more attention to liquidity.'' A leverage ratio, which would require banks to set aside more funds, would not damage Australian banks if it were calibrated sensibly, he said. This was a departure from December, when he said he was ''not persuaded of the intellectual basis of the simple overall leverage ratio''. Among the local banks, ANZ now has the largest capital buffer. Its tier-1 ratio - a measure of its balance sheet strength - is at 10.5 per cent, helped by more than $4.5 billion in equity raised last year. Next is NAB with 9.28 per cent, while Commonwealth Bank's tier-1 ratio is at 9.1 per cent. Westpac is on 8.5 per cent. Before the global economic crisis, Australian banks generally operated with a tier-1 ratio of about 6.5 per cent.

4. More liquidity - Adele Ferguson at the Sydney Morning Herald also warns the Aussie banks will need to be more liquid, put aside more capital and leverage less. Again, this all means higher rates and less lending growth. Any property investors listening? Glenn Stevens's suggestion that banks pay more attention to liquidity and increase the capital on their balance sheets is the boldest warning yet that banks should pull their heads in when it comes to whingeing about proposed international regulation. For months there have been complaints that proposed new liquidity rules would lift the cost of funding. The argument peddled by some banks is that Australia's system was more robust than the rest of the world and so imposing draconian international regulatory rules would be unfair, unnecessary and costly. 5. Australian tweaks - David Uren at The Australian reckons the RBA wants APRA to use a 'lighter touch' in Australia when applying new rules on liquidity, particularly around having to hold government bonds.

Mr Stevens said Australia's priority was to make sure principles that would work locally were established. "A sensibly applied leverage ratio is likely -- I don't think we need it, but it won't do any harm provided it is calibrated sensibly," he said. Mr Stevens said liquidity was a problem for Australian banks and suggested the international approach reflected in APRA draft guidelines was misguided. The draft guidelines suggest banks should be required to hold highly liquid securities such as government bonds. "Liquidity is going to be an issue, but we need the ability to tailor a set of principles that works in Australia," he said. "Everyone knows there is not enough government debt to hold, which the draft principles would require. We're going to have to have a solution that works on some other set of devices, unless we want government to run large deficits and get the debt up."

6. Just relax - Meanwhile former AFR Chanticleer columnist John Durie at The Australianreckons the Australian banks can relax a bit, although they may have to get used to having 'living wills'. I wonder if the RBNZ has anything similar planned. An interesting little footnote from Durie is that "New Zealand Super's Aaron Drew confided his fund had started unwinding its hedge on the New Zealand dollar, which presumably means it agrees with some that the currency is overvalued." This would be quite some change in policy, if true.

Liquidity and leverage ratios will be reintroduced, along with the existing tier-one ratios laid down by the Basel Committee. The trick will be to do it in a way that will not disadvantage the Australian banks, but still act as another safety net. The RBA's Stevens also supported the concept of a "living will" for key Australian financial firms, along the lines suggested by British regulators last year. The idea is for, say, APRA to run a weekend exercise in which it calls the banks and says it is closing them down -- and it needs a full list of counterparties, investments and other links.

7. US lending collapse - Mish at Global Economic Trend analysis highlights some useful charts on just what is happening to US lending. It is a collapse. There's no other way to describe it.

8. Lehman shoe tours - HuffPo reports from a new book on Lehman Bros by Vicky Ward called 'The Devil's Casino' that the wife of one of the key executives spent so much on shoes that she used to arrange tours for other wives of executives of her shoe collections.

Gregory, wife of Lehman president Joe Gregory, was reportedly known for taking trips to Los Angeles just to shop, and had such a huge shoe collection that she'd give tours of it to other Lehman wives. According to Ward, the Gregorys were viewed by colleagues as people who needed to show off their wealth. No one else flashed cash quite like Joe, and he couldn't help but tell all the other senior executives that his personal annual spending budget was $15 million. Joe also had both a seaplane and a helicopter ready for his daily commute.

9. 'The new Greek cycle - Peter Boone and Simon Johnson at Baseline Scenario have a sobering view on how the Greek debt mess will sort itself out. They seem to be saying the latest plan is a clever way for private European banks to shift dodgy debt to European governments, and Germany in particular. It's another game of pass the parcel and hope...

Greece needs 30-35bn euros to cover its funding needs for the rest of this year.  But under their current fiscal plan, we are looking at something like 60bn euros in refinancing per year over the next several years "“ taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework. A fully credible package would need around 200bn euros, to cover three years.  But the moral hazard involved in such a deal would be immense "“ there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation). Alternatively, of course, the Greeks could make much more dramatic cuts to their primary deficit "“ the government budget balance if you take out interest payments "“ in order to stabilize their debt-GDP ratio. But with no significant resurgence of growth in the eurozone coming for a long time, that would really mean moving from last year's 7.7% GDP primary deficit  to around a 6% GDP primary surplus (assuming they face a real interest rate of 5%, i.e., below what they are paying today). The government won't (or can't?) do that.  In 2009 Greek wages and pensions rose by 10.5% "“ an amazing spending spree.  In the 2010 budget they are forecast to rise by 0.3%.  Where is the austerity?  No wonder the prime minister is popular "“ they aren't really cutting much. The bailout package is really just an opportunity for European banks to get out of Greek debt.  The Greeks can't really collapse until they lose access to funding, so the hope is that this prevents the problems from spreading "“ and the prospects of such a "rescue" will keep bond yields down for Portugal, Spain, and others. Our baseline view is that Greece enters into quite a bad recession this year, their banks and corporates continue to have trouble raising financing "“ thus causing broader liquidity issues, and it all comes to a head again as we near the time the government needs to take ever harsher measures next year, when there is again no bilateral funding in place.

10. Totally irrelevant video - This is called cutting it (very) fine. My favourite line from the air traffic controller filming this is "We have Smirnoff...you can lift it off any time you'd like...Jesus Christ....shit...gee I hope enough film for the crash..." I've taken off from that runway in Canberra. It's plenty long so this must have been a close run thing.