The fall of the Tory party

Here’s my go at it, I’m not an economist and don’t work in finance. I’m very happy to be educated further as to what I’ve got wrong:

1) final salary pension funds hold gilts (£1 trillion! Can’t remember but I think they said 60% of the pension fund assets)

2) gilt market values react to government actions.

3) in a bizarre connection that doesn’t make much sense to me yet, pension funds need to report their obligations (as of today, how much do they owe how many lucky boomers in final salary pensions) in terms of the income available from gilts, yield.

4) this yield increases when gilt market price decreases, so in a normal world, gilts going down today means pension funds can report that they will meet their future liabilities more easily - the % yield they have to use to report in has increased. It’s good for pension funds.

5) pension funds also hold gilts, but because they intend to hold them to maturity (nb I thought some gilts didn’t ever mature?) it doesn’t matter if the market value goes down today - if the face value is £100, but the market value today is £90, the pension fund shouldn’t care because it will get back the £100 on eventual maturity, from the government.

6) But LDIs. Pension funds also borrowed on short term markets to get more bonds (the £1tn), these are collateralised, ie mortgaged, so if the face value goes down eg to £90, the pension fund still owes the bank the original £100. So suddenly the pension funds do care if the face value goes down, because the banks can call their money in, quickly.

7) the banks would repossess the gilts and sell them, and this would tank the gilt market further. £1tn is a lot, it’s not just “the gilt market” that would tank so much as the UK economy.

That takes me to the end of episode 1….

3) in a bizarre connection that doesn’t make much sense to me yet, pension funds need to report their obligations (as of today, how much do they owe how many lucky boomers in final salary pensions) in terms of the income available from gilts, yield.

I presume this regulation is to ensure they can always meet their obligation, since gilts/bonds are always the floor for any financial institution’s investments.

“Always”…

Yeah I think so. Comparing the yield now and the estimated obligations now doesn’t seem likely to be too accurate/helpful to me

Sacking the permanent secretary of the Treasury though, I don't see that as being unreasonable if a government wants to move away from their typical 'treasury-brained' ways. Reporting on it as an argument for Truss' personal failings is just another bit of Westminster psychodrama, so I'd be inclined to ignore it.

For all that the right wing press like to attack 'mandarins', the truth is they are widely respected by all the people that matter, and unlike literally any politician they have had to apply for their jobs and get to the top of the ladder by proving their skills and experience.

They also take the idea of serving the government of the day - whatever it's political flavour - very seriously, and know which side their bread is buttered.

So the only reason Truss and Kwarteng would have had problems with Tom Scholar is if they wanted to do something absolutely insane. He would have had zero problem with them just wanting a change of direction. Alongside the OBR business, it just screams - I don't even want to listen to what the grown-ups have to say -

You can be sure that if John McDonnell, for example, had got in, he would have wanted to change things up dramatically, but known the importance of not spooking people by acting like a madman. Truss was (is) lacking even the tiniest speck of self awareness

I get that civil servants are meant to be impartial, but I also get that it may not be the case in reality in such a central institution. It’s well understood that the actions of the treasury cause problems, mostly in preferring short term cost-benefit analysis rather than prioritising long-run growth projects and that its actions have political consequences outside of its remit. It’s very difficult to know where that behaviour comes from given its relative lack of transparency too.

It’s obviously been politically convenient for the Tories to blame the civil service since the alternative is to take responsibility themselves, something which is very much not in their nature. Since Labour have taken charge though there’s much the same description of institutional failure and calls for reform: https://archive.ph/v9jxb

I know very little about the man, and it’s difficult to find any information on him frankly, but I think it’s quite a jump to using it as an argument for madness. Recklessness, sure, why not. Careful reform would be better.

Like I say, it’s mostly just drama and I’d be tempted to ignore it. He’ll be fine after his £335k final payout, and there are plenty of other reasons to consider Truss full of hubris and lacking self-awareness.

You can be sure that if John McDonnell, for example, had got in, he would have wanted to change things up dramatically, but known the importance of not spooking people

Absolutely. As far as I know, McDonnell’s team were actively courting various financial institutions in preparation for office to make sure their reforms were well regarded.

I think you have a good understanding of it - I don't know any more about it than you, anyway.

I did listen to the podcast and it does clear a few things up, but as you say, there are some parts that I think they left out, particularly the link between pension funds having to report liabilities with respect to gilt yields, and how that caused the crisis. I found this government report which is very clear and detailed. Here's some extracts that I found useful:

15 Accounting standards FRS 17 and IAS 19, as introduced in the early 2000s, required pension scheme deficits to be reported on company balance sheets. They also required liabilities to be valued as a single figure using a discount rate based on the yield of bonds with at least an AA credit rating. A discount rate is a figure used to calculate the present-day costs of a future stream of payments. The future stream of payments is discounted by a rate reflecting the estimated cost of meeting them. For example, to pay £100 in ten years’ time, if you are confident that you can earn 4% interest each year, you need to invest around £67 now to do this.

16 The use of discount rates to calculate a present value of liabilities is also a feature of the valuations DB schemes are required to conduct at least every three years to check whether they are holding sufficient assets to meet their pension promises. If not, the trustees must prepare a ‘recovery plan’ (often including a schedule of contributions from the employer to reduce the deficit in the fund) and submit this to The Pensions Regulator (TPR). As part of the valuation, the trustees are required to calculate the present value of the scheme’s liabilities, using a discount rate that is chosen ‘prudently,’ taking account of the expected investment returns on the scheme’s assets and/or the yield on government or other high-quality bonds.

...

20 The LDI model does not necessarily involve leverage: it is a way of managing assets and liabilities. However, the way it is used has become more leveraged over time. The reason is that between March 2006 and February 2021, most schemes were in deficit. If a scheme was fully funded (i.e. its assets equalled the present value of its liabilities) it could simply invest fully in gilts to match the interest rate sensitivity of its liabilities. However, this is expensive.

21 A scheme in deficit can use leveraged LDI to do this in a more capital efficient way, freeing up capital to invest in return-seeking assets. The following, over-simplified example, is an attempt to illustrate this: a scheme with liabilities of £100 and £90 in assets, could invest £90 in gilts. However, this would leave the remaining £10 in liabilities exposed to movements in interest rates and the fixed (and relatively low) rate of return on gilts would allow little progress in closing its deficit. By investing £50 in an LDI fund with two times leverage, the pension scheme could ‘hedge’ the interest rate risk of the full amount of its liabilities and invest its remaining £40 in ‘growth’ assets to close its deficit over time.

So that explains the link reporting to deficit in terms of bonds to the pension regulator, and the use of leveraged LDIs; the pension funds had a requirement to get out of deficit, which sounds somewhat sensible on the surface level - pension funds should be able to pay out - but led to systemic risk through pushing them towards leveraged LDIs. That leverage is the reason that collatoral needs to be posted, which caused the downward spiral in gilt prices.

Thank you! Interesting link & except.

So Truss & Kwarteng appear to have known nothing about this, which amplified their stupid decisions. They didn’t ask the obr, to avoid scrutiny, I don’t know if the obr would have explained it to them. It sounds like, from peston, that (in contrast with what I said earlier “no one knew”) various people did know but it looks like the boe and treasury were taken by surprise too.

I still have Truss as main culprit but I think others contributed

I was always puzzled by Truss. She must, at least one time, have possessed some academic ability having attended Oxbridge. What on earth did she learn there? Surely one of the key points of a prestigious education is the ability to question alleged 'certainties' whether in personal or public life. I was puzzled and confused by her entire program and repelled by her ideological blinkered determination to persist with practices which commanded no intellectual support or validation. I wonder at the intellectual capacity and tortuous thought processes of someone who views herself (as a Conservative Prime Minister) as a guerrilla ideologist operating behind the rear lines of the establishment! Truly, a modern conservative politician is a strange beast to behold.

Could it be meth?

There are mediocre students at Oxbridge just as there are at any other academic institution. Truss owes her 'rise' largely to being an agent of Putin's interests (like so many others in the subverted Tory party) rather than ability. These people are not actually about ideology, and it's a mistake to concentrate on that. They are just there to weaken governments and discredit them, pushing private interests, etc. Truss was only up against another extremely weak 'leadership' candidate. There's really not much more to it.

She must, at least one time, have possessed some academic ability having attended Oxbridge.

Academic ability, marginally, in my experience. Critical reasoning, absolutely no guarantee of that. There were plenty of people at Cambridge who got good results by memorising a lot of stuff, and then regurgitating it on demand during exams.

guerrilla ideologist

Very recent trend born with Trump's drain the swamp. Lots of other people doing it Braverman etc. Truss appears as a simpleton outwitted by a lettuce on now multiple occasions.

What on earth did she learn there?

Self confidence with a healthy smattering of arrogance.

Whatever her actual academic ability or intellect, ideology and personality (not entirely sure those are separate things) can render it useless. Intelligent people can do stupid things because their personality just shuts down their reasoning ability in some contexts - often the practical contexts where it's really important, unfortunately.

In politics, people like that are often underestimated by their opponents, who think they're so obviously complete idiots that it surprises them when the idiot does turn their brain on when career preservation or brutal political manoeuvring is required. Truss failed badly there, mind you.

I like the way Stephen Collins draws ol’ Liz, the way he captures her absence of gorm.

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Working in the civil service, I was treated to a permanent secretary describing the new PM as "very across the detail". I've since heard via other sources this means Truss tended to fixate on one very small point whilst failing to comprehend the wider situation.

Couldn't see the lettuce for the leaves?

Speaking as part of The Political Party show with Matt Forde on Sunday, Rees-Mogg said he did not think the Tories could have “overcome a 20% deficit in the opinion polls”, adding: “I wrote to my children at boarding school before the election to say ‘Look, I will probably lose.’ I tried my best to warn them that I was going to lose my seat.

I wrote to my children at boarding school before the election

I absolutely believe that he wrote to his children rather than send them a text. Probably on vellum.

Of course he wrote to them, enclosing modest postal orders for them to spend at the tuck shop.

I smell a burning Bershire brat!

Is anyone asking the leadership candidates (or Sunak if they can find him) where all the money went?

14 years, record levels of taxation by the end but prisons, schools, hospitals, Social Care, roads, public services in general etc. all in a shocking state.

Where did all the money go, you spivs.

Obviously re-routed into private pockets, through corrupt privatisation, dodgy procurement ('the New Routemaster', etc.), consultancies, large accounting firms, all sorts of bad government contracts (large IT projects being a favourite), siphoning off 'dividends', road-building, etc.

There are two methods to govern finance unjustly--one, lower taxes for wealthy people, two, make sure that what is taken in taxes doesn't get used for the public benefit.

Absolutely, my question was mainly rhetorical as I realise no Tory candidate or supporter would answer honestly or recognise the hypocrisy of their moronic “running out of other peoples money” shit

I believe they are all currently 'uniting' in fantasy world where only Labour are to blame for old people being too cold this winter.

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