Loans and Finance

Loans and Finance

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News and information about loans, money, debt, finance and business issues.

Wednesday, October 31, 2007

Darling Does U Turn

Alistair Darling, Chancellor of The Exchequer, has done a U turn over his plans for single rate 18% capital gains tax.

Having unleashed a storm of protest from business groups (such as the CBI) who complained that the removal of tapering relief would damage entrepreneurship, Darling has agreed to give £100K in tax relief for owners of small businesses who sell up and retire.

Therefore where will Darling now find the extra money needed to meet his U turn on CGT?

What the Chancellor gives with the one hand, he takes with the other.

Tuesday, October 30, 2007

Taxpayers Can Sue HMRC

The court of appeal ruling in favour of Neil Martin a builder who lost £500K, as a result of errors made by HMRC when it processed his company's Construction Industry Scheme (CIS) application in 1999, leaves HMRC open to being sued by taxpayers for errors.

The ruling means that HMRC has a duty of care to taxpayers, and taxpayers may now sue HMRC for damages in certain circumstances.

This is particularly relevant in cases where the HMRC help taxpayers with their returns.

The result will of course mean that HMRC will no longer offer taxpayers help in completing their returns, as such the process of submitting a return will become even more tortuous and difficult to complete.

Monday, October 29, 2007

House Prices Fall

House prices in Britain fell for the first time in two years in October, according to a survey by Hometrack.

The average cost of a home in England and Wales declined 0.1% to £176,100 from September. Whilst prices in central London fell by 0.5%.

Consumers are now sitting on debt of over £1.4 trillion.

The Bank of England stated that UK banks have approved the fewest mortgages in 26 months in September. Lenders have granted 102,000 loans for house purchases, the fewest since July 2005 and down from 108,000 in August.

The Bank of England needs to wake up to the fact that, whatever its high moral principles about excess debt, there are a large number of people sitting on debt that they cannot afford to service.

Like it or not, cuts in rates are necessary to avoid the economy going into freefall.

Friday, October 26, 2007

UK Economy Vulnerable

The Bank of England has warned that the UK economy remains vulnerable to the reverberations from the global credit squeeze. The BoE makes special mention of the fact that the commercial property sector is particularly "prone to further shocks and to rises in the cost of finance".

In its financial stability review the BoE also warns that equities are vulnerable, and that the US dollar might fall sharply "if the change in investor sentiment towards US securities experienced recently were to persist".

Given this warning, it will be interesting to see if the BoE translates its words into actions such as reducing interest rates.

Wednesday, October 24, 2007

Lack of Understanding

A study by CreditExpert reveals that most people have a "worrying" lack of understanding about the financial impact of rising interest rates on mortgage payments.

An astonishing 70% of those questioned did not know the effect of a 0.5% interest rate rise on a £100,000 mortgage.

The study also revealed that 80% of five mortgage holders do not know what their Annual Percentage Rate (APR) was.

Given this appalling level of financial ignorance in the UK it is hardly surprising that the banks, credit card companies and other organisations within Britain's lousy financial services industry treat their customers with such contempt.

Tuesday, October 23, 2007

Darling Digs Heals In

Alistair Darling, the Chancellor of The Exchequer, dug his heels firmly into the ground yesterday; when he met with business leaders who were pressing him to change his plans to abolish tapering relief on capital gains, and replace it with a flat rate 18% charge.

Darling refused to be moved by their pleas.

The Director General of the CBI, Richard Lambert, put a brave face on it and said that the talks had been "positive". He claimed that the Treasury had to look at ways to encourage entrepreneurs.

The CBI, British Chambers of Commerce, Institute of Directors and Federation of Small Businesses believe that the change will negatively impact small businesses and entrepreneurs.

Mr Lambert said:

"We believe the pre-Budget proposals represent a significant step in the wrong direction for the UK economy, and we will continue to press the case for them to be changed.

As things stand, they will hold back vital investment in businesses of all sizes and send out totally the wrong message about the Government's attitude to enterprise
."

That's probably very true. However, the announcements made by Darling wrt the tax changes were not done on the basis of sound economics but out of political expediency. Gordon Brown had run scared of an election, and the Tories fox (wrt inheritance tax) needed to be shot.

The remaining years of the Brown/Darling "partnership" will be unhappy ones for the British economy, political short-termism and fudge will replace any semblance of fiscal probity.

Monday, October 22, 2007

The Long Goodbye

The Chairman of Northern Rock, Matt Ridley, finally resigned on Friday after enduring several weeks of humiliating media articles and a grilling last week by the Treasury Select Committee that left his reputation and the reputation of the board in tatters.

During the weekend it emerged that he will not receive a pay-off from his £315,000 a year job.

The Treasury Select Committee accused him of "damaging the good name of British banking".

This is but the first head to roll, the question is will the others leave without a pay-off?

The Treasury Select Committee will now call investment banks, ratings agencies and accountants for a new series of hearings; after widening the terms of reference of its inquiry into the credit crunch.

The hearings will last until at least the end of 2008.

Friday, October 19, 2007

IMF Warning on House Prices

With the price of houses in the UK now standing at nine times the average salary, the IMF has finally decided to suggest that there is a high risk that property prices in the UK may fall.

In their view house prices are overvalued by 40%.

However, the report ignores the fundamental structural weaknesses of the UK housing market which in fact underpin the prices:

1 There is a shortage of supply

2 There is an inherent desire to own property

3 There is a large variety of readily available mortgages

4 There are large numbers of wealthy foreigners seeking property in the UK

5 City mega bonuses are distorting the London market, the ripples from which affect the rest of the UK

Only when the above 5 points have been reversed, or nullified, will the property market crash.

Thursday, October 18, 2007

Debt Funds Debt

Shelter issued the results of a poll this week, that shows that over a million householders are using credit cards to pay their mortgage or rent.

The survey, conducted by YouGov for the charity's magazine Roof, polled 2,000 households last month. It found that 6% (over 1M) of householders paying mortgage or rent reported using a credit card to make payments. This figure rose to 7.5% of younger people aged 18-24, who were trying to keep a foothold on the first rung of the housing ladder.

Adam Sampson, Shelter's chief executive, is quoted in the Guardian:

"The number of people hit by the credit crunch, interest rate hikes and unaffordable housing costs, are rapidly rising. For many people trying to keep a roof over their head, desperation is driving them to short-term, high-cost borrowing."

Mainstream credit card companies charge interest at between 15% and 18%. However, the less reputable companies charge people with poor credit ratings 40% or more.

Using short term, high interest, debt to finance a long term capital commitment is the route to disaster. However, given the dire situations that some people now find themselves in it is difficult to see what else they can do without downsizing their property or rescheduling their debt.

Wednesday, October 17, 2007

The Great Credit Card Con

Not content with their already lousy reputation, Banks and credit card companies in Britain are determined to dig a further grave for themselves and the British financial services industry.

Campaigners allege that banks are deliberately deceiving customers who try to reclaim default charges on their credit card bills. Banks have been telling courts to halt their cases, because of a separate decision affecting efforts to reclaim overdraft charges.

In April 2006, the Office of Fair Trading (OFT) said it would not challenge the legality of credit card default fees, so long as they were set at a level no higher than £12. Therefore many people are entitled to reclaim fees in excess of this amount.

Martin Lewis, of Moneysavingexpert.com, said

"Many banks are outrageously trying to apply the hold on bank charges reclaiming, to credit cards reclaiming, even though the Office of Fair Trading already sorted this out back in April 2006."

The British Bankers' Association deny this:

"This only applies to current accounts and should have no effect on credit card claims.

The Financial Services Authority is monitoring how this is working
."

A somewhat lame excuse, as it attempts to pass responsibility to the FSA.

Is it any wonder people have lost faith in the financial services industry, and loath banks and credit card companies?

Tuesday, October 16, 2007

Northern Rock's Directors Face Grilling

Top executives from Northern Rock are currently being grilled by MPs at the Treasury Select Committee. Chief executive Adam Applegarth, Chairman Matt Ridley, non-executive directors Sir Ian Gibson (who is also deputy chairman of Morrisons and chairman Trinity Media) and Sir Derek Wanless are are among those who are facing the committee.

Committee deputy chairman Michael Fallon kicked off the proceedings, setting the tone, with a cutting question as to whether the hapless directors actually "know what's happening at their own bank".

Seemingly the directors are employing the tactic of blaming "unexpected events". Maybe they should have taken Prime Minister Macmillan's comments many years ago, as to what knocks governments off course ("events dear boy"), to heart.

On being pressed by Fallon as to why no one has resigned, Ridley said that his resignation is there if the board wants it.

Well, what's stopping them accepting it?

It is going to be a long day for these hapless directors!

Monday, October 15, 2007

Virgin Takes a Punt on Northern Rock

Sir Richard Branson's Virgin group is trying to take a punt on the corpse of Northern Rock. Virgin has put together a consortium to take control of Northern Rock.

It is in the public domain that there are two other bidders for the Rock, private equity firm JC Flowers and hedge fund Cerberus.

Virgin's consortium includes AIG, the insurance company, and the London hedge fund Toscafund which is headed by the former Royal Bank of Scotland chairman Sir George Mathewson.

In order to boost its credibility, wrt being able to pull off the bid, the consortium are looking for a well respected banking veteran who could take control of the Northern Rock board and reassure regulators, politicians and the financial markets.

The Virgin wishlist, according to the Guardian, includes Sir Brian Pitman and Sir Peter Ellwood ex ceos of Lloyds TSB, former Bank of Scotland chief Sir Peter Burt and HBOS chief executive James Crosby.

The Virgin consortium says that it will inject around £1BN in cash into Northern Rock, together with the Virgin Money business (estimated to be worth £200M).

The consortium would be issued new shares, at a deep discount to the current price, giving it around 50% of the bank. The Northern Rock name would be killed off and the new bank would be called Virgin Money.

JC Flowers and Cerberus have made it clear that current shareholders would receive very little in the event of a takeover.

Given the public offers on the table, and the fact that the sharehodlers are clearly not going to receive very much, it is very surprising to see how the shares have rallied last week. This morning they have fallen by 27% to 199p.

However, anyone currently holding shares in this company must face the reality that the current price may now be incredibly volatile and not necessarily reflect the true "value" of the company; as Northern Rock is now the plaything of the speculators.

As I have already noted several times before, this share now strongly resembles the dying days of Marconi's listing on the FTSE.

Friday, October 12, 2007

Early Warning System

Alistair Darling, the Chancellor of The Exchequer, is going to propose the introduction of an international early warning system of potential financial market turbulence at the G7 meeting in Washington this month.

Darling believes that an alert system would strengthen surveillance of the financial sector.

Quote:

"I will urge faster, rapid implementation of international agreements on solvency, accelerated work on international standards for regulating liquidity, more transparent information on credit ratings and action to improve the transparency of off-balance sheet vehicles."

The danger of an early warning system is that, if it too sensitive, it may just spark the panic and meltdown that it was trying to avoid (such as the case with automatic share trading systems, that sell shares when their price moves beyond certain preprogrammed parameters).

Thursday, October 11, 2007

House Prices Fall

The Royal Institution of Chartered Surveyors (RICS) report that house prices across the UK fell last month, at the fastest rate for two years.

RICS stated that in September, 14.6% more surveyors reported a fall in prices rather than a rise. In August 3.3% more surveyors that reported a fall over a price rises.

In another indication that the property boom is over, new buyer enquiries fell for the tenth consecutive month.

Jeremy Leaf, a spokesman for RICS, is quoted in the Guardian as saying:

"The combination of rising interest rates, the introduction of home information packs and volatility in the financial markets resulting in tightening of lending criteria, has certainly affected the confidence of buyers and sellers.

As a result, some would-be buyers are turning to the rental market
."

Mr Leaf is of the view that the housing market is in for a soft landing, rather than total collapse, on the assumption that there are no other shocks to the economy.

London, as ever, showed a small rise in prices; as the market there is boosted by wealthy foreigners and those on multi digit bonuses.

Wednesday, October 10, 2007

The Safest Bank in The Country

Congratulations to Northern Rock for achieving something of a miraculous volte face. Instead of remaining the pariah of the banking world, unloved and untrusted by any of its depositors, it is now the safest bank in the UK for depositors to place their money.

How did Northern Rock achieve this 180 degree turn around in its fortunes?

Suffice to say, it has nothing to do with the actions of the board!

The Treasury has stepped in, and guaranteed all deposits until financial markets become less volatile. This means that money deposited after September 19th will now be covered by the Bank of England, the Treasury and the Financial Services Authority. The authorities previously only protected deposits made before then.

This news, whilst cheering for the depositors, also gave the long suffering shareholders some respite as well. Shares rose yesterday by 20% to 206p, as the news gave Northern Rock (irreparably holed below the water line) more time to sell itself to third parties.

The talks with third parties are likely to drag on for a few more months.

Needless to say, this debacle should never have occurred in the first place. Had Northern Rock's directors operated a more sensible business model, and the FSA actually done their job of monitoring the situation, much heartache and financial loss would have been avoided.

As if by chance, the Financial Services Authority (FSA) Chairman Callum McCarthy found himself being grilled on this very subject by the Treasury Select Committee yesterday.

Discussing the ability, or rather lack of ability, to predict the closure of the markets both for securitisation and for short-term repurchase agreements, he said:

"We didn't identify the probability of that happening.

No regulator anywhere around the world succeeded in predicting that
."

Not everyone was particularly impressed with his performance. Sion Simon, a Labour Party member of the committee, said that he had heard that relations between the FSA and the Bank of England were "poisonous" and compared McCarthy to a boxer.

Quote:

"You are the Sugar Ray Leonard of the financial-services sector. You are a world-class ducker and diver.

There was a run on the bank, the nation was a global laughing stock, and you say the provisions worked
?"

The first run on a British bank in 140 years, quite a success in the FSA's narrow view of the world! A shambles and an embarrassment by anyone else's standards.

It is clear the the tripartite market monitoring system introduced in 1997, whereby the Treasury, Bank of England and FSA, share an uneasy responsibility for watching over the financial services industry, is not working.

One of these bodies will have to be placed in charge over the other two, and made responsible for monitoring and regulating the markets.

Unfortunately, given the nature of the parties involved, there is likely to be a protracted turf war for which body takes on that role. In the meantime, the UK financial services industry and the UK economy will be left exposed to further shocks and scandals.

A very shoddy state of affairs indeed.

Tuesday, October 09, 2007

The FSA's Light Touch

The BBC's Panorama programme last night exposed the precarious foundations of Britain's housing price bubble and credit boom, as it highlighted a number of "criminally" negligent cases of mortgages being provided to people who had no hope of ever affording them.

One such case being that of Emmanuel Blango, a psychiatric nurse who earns around £25K per annum. He was awarded a a sub-prime mortgage from the Alliance and Leicester for £300K, and another mortgage for £200K from Platform which is part of the Britannia Building Society.

Unsurprisingly Mr Blango is having trouble paying the interest, and has had his second flat repossessed.

Panorama noted that around 70% of the 7000 repossessions over the last 3 months are down to sub prime lending.

The reasons for this boom in "risky" (for want of a better word) lending are as follows:
  • The commissions earned by the mortgage salesmen, who target the financially naive, are distorting their "ethical" principles when they advise their clients.


  • The lax checks performed by banks and building societies on mortgage applications.


  • The bundling of the debt by City institutions for immediate resale, thus paying off the first lender and eliminating the original lender's risk.


  • The light touch of the FSA in regulating the market and enforcing its rules.
The extent of sub prime mis-selling is reminiscent of the endowment scandal of the 1980's.

It is regrettable that despite the lessons that the FSA should have learned over the endowment mis-selling scandal, it appears not to have taken them on board in its regulation of the sub prime mortgage market.

The UK faces the very real threat of a housing price collapse, and economic chaos, as the number of defaulting sub prime mortgages increases.

Why has the FSA allowed this to happen?

Clearly the FSA, in its current form, is not fit for purpose.

Monday, October 08, 2007

The Failings of The FSA

The Commons Treasury Select Committee will haul The Financial Services Authority (FSA) over the coals tomorrow, for its failure to adequately supervise Northern Rock.

The committee will question Sir Callum McCarthy, the FSA chairman, and Hector Sants, the chief executive, about Northern Rock's growth and "risky" business model.

Seemingly Northern Rock may have just saved itself from extinction, in the short term, by agreeing a £10BN loan from Citigroup. This will help fund its ongoing operations and reduce its dependency on more expensive Bank of England funds, while it continues negotiations with possible buyers.

An FSA spokesman is quoted in The Times:

"We don't object to securitisation per se. There are some benefits in terms of spreading risk, but it has to be done sensibly."

A child of ten could see that the Rock's model was hardly "sensible", the question therefore remains "was the FSA asleep at the wheel?"

Rock's shares rose to 171p this morning, as speculators gave it is some breathing room. However, a bank so heavily indebted can hardly be said to have a rosy long term future. Those who hold shares in this company are in for quite a few sleepless nights.

Friday, October 05, 2007

The Cost of Houses

The average house price in London has risen above £300K for the first time ever.

Figures released by Nationwide and Halifax building societies show London house prices have gone up from £260,644 to £302,486, and for first time buyers they rose to more than £260,000.

Yesterday the Bank of England chose to keep interest rates on hold.

Thursday, October 04, 2007

Post Office To Offer Mortgages

The Post Office is launching a new mortgages product in the North of England. Despite denying it, the timing and area of the product launch coincides nicely (for the Post Office) with the Northern Rock debacle.

The three new products, offered in conjunction with Bristol & West, include a fixed-rate mortgage and a buy-to-let deal; they will be promoted in 100 Post Offices across the region.

If the trial run is successful, the mortgages will be rolled out in the Post Office's 1,600 branches across the rest of the country at the beginning of next year.

The Post Office mortgages consist of a three-year fixed rate at 6.09%, a three-year variable-rate at 0.8% below the Post Office's standard variable rate, currently charging 6.44%, and a buy to-let loan, fixed at 6.35% for three years.

These rates are not the best on the market, and potential borrowers would be well advised to shop around.

Whilst the Post Office dabbles in activities not normally associated with its core brand, it faces rather serious issues in its mainstream business.

The announcement that it will close 180 post offices has not gone down well, and the postal strike that will last this week and part of next week will not help secure its future. Customers will inevitably seek other, more reliable, service providers.

Wednesday, October 03, 2007

Northern Rock

The FT reports that Northern Rock will hold talks with a US private equity firm JC Flowers, these talks may lead to a takeover bid.

The shares in Northern Rock rose a meagre 9% on the news, to around 146p (they have been trading at over £12 less than 12 months ago).

In other fallout from the Northern Rock debacle, the Bank of England's offer of £10BN of emergency liquidity remains unwanted, untouched and unloved.

Banks are instead flocking to the European Central Bank (ECB), which is offering far better terms and the guarantee of anonymity.

The "Old Lady of Threadneedle Street" appears to be somewhat out of touch with the markets these days, that should be a matter of concern to us all.

Tuesday, October 02, 2007

Ninja Mortgages

According to The Guardian there is evidence of an abundance of, what Americans call, Ninja mortgages (No Income, No Job or Assets) having been sold in the UK.

These mortgages and debts are, when looked at in the cold light of day, unaffordable by many of the people who are sold them. However, that doesn't seem to have stopped brokers and banks foisting them on the unwary.

The reason for this wanton disregard for financial probity is simple, commission. Brokers are paid a nice fat commission for selling these products, and therefore have a vested interest in selling as many as possible.

Which? claim that the rot set in during the 1980's with endowment mortgages.

Since then, the financial services industry in Britain has been happily destroying its reputation and most probably the economy.

Monday, October 01, 2007

Northern Rock

It looks like Northern Rock will be broken up, in a hastily arranged fire sale. The BBC reports that Cerberus and JC Flowers, two US investment funds, are interested in buying its home loan book.

The Treasury, now effectively in charge of Northern Rock, have given the two funds permission to engage the Northern Rock board.

This of course is bad news for the shareholders of Northern Rock who have seen their shares fall in value from over £12, to less than £1.80. As I have noted before, this story bears more than a passing resemblance to the decline of Marconi.

The UK Shareholders' Association have called on the Treasury to support the bank's shareholders, arguing that they should be protected against further losses by the government.

I would say that there is zero chance of that happening. Quite what the "take out" price for the bits and pieces of Northern Rock will be, is anyone's guess. However, Marconi was all but effectively wiped out,as it was gradually sold off.

Those that ignore the past, are destined to relive it.