Didn't He Do Well?

Congratulations to Nick Macpherson, Permanent Secretary at the Treasury on an annual salary of £196,400 and friend of Gordon Brown, who has been knighted for his handling of the banking crisis.

One small problem, the crisis hasn't yet been solved!

Statistics

The Times reports:

"Britain's economy shrank during the third quarter of the year for the first time since 1992 and endured the worst single quarter since 1990, it was revealed today.

The Office for National Statistics (ONS) said gross domestic product (GDP) from July to September was down 0.6 per cent on the previous quarter. The contraction came at a faster rate than previously thought, and was down from last month’s initial estimate of a 0.5 per cent contraction."

Given the fact that the figures supplied by the ONS are, more often than not, unreliable and most certainly out of date the situation is presumably far worse.

Given the above, it would be best for people to try to make the most of this Christmas before things get worse.

Slow Witted

The Times reports:

"The Bank of England's Deputy Governor for Financial Stability has admitted that the central lender failed to grasp the full scale of Britain’s economic problems before the current financial crisis erupted.

In an edition of Panorama, to be screened tonight, Sir John Gieve tells the BBC that the Bank was aware that a bubble was developing in the housing market, as well as in the price of other assets, and that it was being fuelled by “crazy borrowing”.

However, it failed to comprehend how serious the problem really was and what the implications would be for the rest of the economy."

How slow witted and out of touch are those on the MPC of the Bank of England?

Sink or Swim Together

As the recession deepens, it is "heartwarming" to note that it is not just the ordinary citizens and businesses of Britain that are deeply in debt but also the government.

The Times reports that the Treasury plunged a record £16BN into the red in November. Given that the recession is still in its early stages, this does not bode well for government finances.

However, at least the government now knows the pain that the rest of the country feels.

National Lending Scheme

Alistair Darling, exasperated by the banks' refusal to resume lending, is (according to The Times) considering a national lending scheme.

Under the scheme the government would guarantee new lending to businesses, on the condition that it is genuine new lending and not an attempt by the banks to reschedule old loans/debt.

Ironically figures from the Office for National Statistics (ONS) show an unexpected rise of 1.5% in retail sales in the UK last month. Needless to say, the veracity of the figures are being called into question.

Like it or not, unless there are further pro active measures taken by the government and Bank of England, the recession will worsen significantly. Three key measures should be taken instantaneously:

1 Cut interest rates to zero.

2 Initiate a national lending scheme.

3 Initiate a policy of quantitative easing (akin to dropping money from a helicopter), whereby the Bank of England buys debt using government bonds.

These measures will draw a firm line under the rapidly failing economy, and provide the bedrock from which to grow again.

Virtual Zero

The Federal Reserve put its money where its mouth is, wrt making all efforts to kick start the economy, by cutting interest rates to between zero and 0.25% yesterday.

This puts pressure on the laggardly Bank of England to do what it should have done before, and cut rates further. Ironically it seems that the Bank of England did consider a larger rate cut, but was worried about the destabilising effects of such a cut (source The Times).

Does the MPC not realise that the recession and collapse of the banking system is in itself destabilising?

The Fed's action has made fools of the MPC.

L&G Play Ostrich

Legal & General (L&G) have been acting like an ostrich recently, as they have put off telling investors in their structured products backed by Lehman Brothers that they may lose up to 20% of their investment.

L&G finally told 2,300 individuals the "good" news last week. This is of course a tad tardy, as Lehman Brothers went into liquidation three months ago. Indeed, the delay is even more surprising given that other structured products providers such as Meteor, NDFA and Arc warned investors within weeks of Lehmans' failure that their investments were at risk.

Why would L&G put off what was clearly inevitable?

Seemingly, according to some financial advisers, L&G wanted to avoid the negative publicity around Lehman Brothers.

I can't say that has worked, if that really was the reason, given that L&G now look rather foolish to say the least.

The two L&G plans affected are the Protected Capital and Growth Plan four and the Accelerated Growth and Investment Plan two. The plans were backed by Lehman Brothers, Barclays, Yorkshire Building Society, Citigroup Funding and Dresdner Bank.

Investors will now only be able to recover 80% of their capital in July 2011 if, when their plans mature, the FTSE 100 is below the level set when they were launched in July 2005.

I wonder if the FSA will look into this, given that financial markets are meant to be transparent?

Were I an investor in one of these products I most certainly raise this matter with the FSA.

Barclays Warns On House Prices

John Varley, CEO of Barclays, gave a stark warning about the length and depth of the recession; by saying that house prices could fall by 30% to the end of 2009 compared with their peak, and that unemployment could top 7.5%.

He gave this warning during an interview to be broadcast on Sky News this evening. During the interview he expressed some remorse for the culpability of the banks in the ongoing collapse of the economy, noting that mortgages of 100% or more were madness.

The Times quotes him from the Sky interview:

"I think if you look at the players who were involved in what's happened to the world, I think there are quite a lot of players. They would include central banks, they would include governments — but they would certainly include the banks.

And the banks have to be prepared to have the humility to acknowledge that and accept it and to say sorry. They need to take their share of responsibility, we need to take our share of responsibility as an industry."

I aggree, now the banks and government have to work together to try to limit the damage that the recession will inflict and to kickstart the economy.

Egg Fined by FSA

Egg, the Internet bank, has been fined £721K by the FSA for serious failings in the way it sold payment protection insurance (PPI) to its credit card customers. The FSA has also ordered it to pay compensation, which could cost £10M.

The FSA found that Egg had instructed sales staff to use hard-sell techniques on those who proved reluctant buyers.

These included over-emphasising the benefits of the cover, or telling customers they could take it out for free for a limited period and then cancel. The Guardian notes that Egg, in some cases, applied the cover to a customer's credit card even when they had not agreed to buy it.

Is it any wonder people despise the banks?

PPI misselling ranks with the misselling of endowment mortgages and personal pensions as one of the major financial scandals of the last 20 years. The bottom line being that PPI is overpriced and in many cases when a claim is made useless, as the insurers do their best to wriggle out of their obligations.

The FSA said telephone sales by Egg staff of PPI failed in its standard tests in 40% of cases between January 2005 and December 2007. Egg sold more than 106,000 PPI policies at an average cost of £156 during that period.

Egg will now write to customers who bought the cover, offering them the chance to cancel their policy and get a full refund. The FSA said that if everyone claims a refund, the bank would face a charge of over £10M.

The Gloves Come off

The Times reports that Michael Coogan, director general of the Council of Mortgage Lenders, made a scathing attack on the government:

"To different degrees lenders are facing conflicting pressures to recapitalise against possible future losses, service government's preference shareholdings at 12 per cent, pay a premium to access the Bank of England Special Liquidity Scheme, show forbearance to borrowers in arrears, follow base rate moves down to help their existing borrowers, keep savings rates high to support existing savers, and provide competitive rates to new borrowers and savers to maintain economic activity in a recession.

And they are supposed to ensure their long term financial stability to help the UK economy rebuild itself when we are out of the recession.

Current policy objectives are conflicting and incoherent. The government needs to decide on its key priority. The tug of war with lenders being pulled in every direction at once needs to end."

I would normally have some sympathy for the banks, under different circumstances. However, this mess is entirely of their own making. Many banks have had to use taxpayers' money to stabilise their finances, and now are partly owned by the taxpayer.

The rules of the game have changed, banks need to face up to the fact that politics now supersedes balance sheets and bottom lines. They have become subject to the whims of politicians and the "public mood" as gauged by the media.

Good luck to them, this will get worse before it gets better.

The Trillion Dollar Plan

Good luck to President elect Obama and his trillion dollar plan.

The money may well help ease the recession, if it is carefully targeted. However, the key to kick starting economic recovery is confidence.

Fortunately Obama is starting from a very good position, as no one (at this stage) believes that he will be worse than the outgoing administration wrt competence.

Banks Refuse To Pass on Rate Cut

Unsurprisingly many banks have refused to pass on yesterday's interest rate cut of 1%. The Times reports:

"Hundreds of thousands of borrowers will be denied the full benefit of yesterday’s cut in interest rates because many banks are refusing to pass on the whole one-point cut to all mortgage customers.

Britain's biggest mortgage bank, which received billions of pounds in taxpayers' money, failed to respond in full to the latest move by the Bank of England. Halifax cut its standard variable rate (SVR) by only 0.25 percentage points, while Nationwide will trim its rate by 0.69 points.

A borrower with a £150,000 loan paying Halifax’s SVR will see payments drop by only £25 a month.

Only Lloyds TSB, HSBC and Woolwich said that they would cut their SVR by one percentage point. However, HSBC and Woolwich failed to pass on last month’s 1.5 percentage point cut."

It seems that the banks have not yet learned that the rules of the game have changed. In the "good old" days they could more or less do as they pleased to their debtors/customers, safe in the knowledge that very few people "that mattered" would kick up a fuss.

However, two fundamental changes have occurred:

1 The banks, as a result of their greed, stupidity and ignorance, have jeopardised the financial system of the the Western world by unleashing a lending frenzy and by gambling trillions on complex financial instruments that they didn't understand. In the event that these deals unravel completely, as they may well do, the losses incurred will exceed the annual GDP of many middle to high ranking economies.

2 The UK government now owns shares in some of the major banks. It has been reluctant, thus far, to call the shots; but as time goes on it will become increasingly interventionist.

Like it or not, no matter how hard the banks may squeal that they are barely able to make a living in the current economic environment and that they must take account of the higher risks, the issue is not simply a matter of capital base and margin differentials between base rates and LIBOR.

The higher risks that the banks complain of are due to the fact that they all but ignored risk in the past, and went on a lending and gambling binge. All very well, but it is not right that the debtors/customers are made to pay for the greed and short termism of the banks.

The issue now is one of politics, culpability and people's livelihoods/homes. The fact that the banks have yet to grasp that point indicates that they are still in denial.

My advice to the banks is wake up now, the rules of the game have changed, or you will soon be on the receiving end of a very nasty wake up call.

Bank Cuts Rates

Banks across the world have made a series of co-ordinated interest rate cuts today (eg Sweden's Riksbank cut rates by 1.75% to 2%)in an attempt to ease the pain of the recession and to restart the engine of liquidity.

The Bank of England also cut rates by 1% to 2%, they are now at 1951 levels.

As already noted, we are heading towards zero rates.

The question is, will the banks willingly pass on these cuts and start lending again or are more drastic measures required?

Bonds

Question - When is a bond not a bond?

Answer - When it is a "Guaranteed Equity Bond".

The definition of a bond (as per Wikipedia) is "a debt security, in which the authorised issuer owes the holder's a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity".

How strange then that various "respected" financial organisations in the UK are marketing "Guaranteed Equity Bonds" which do not pay any interest, but merely guarantee to underpin the capital invested and offer the chance of a modest capital appreciation in the event that the stock market rises over a set period of time.

Surely these cannot be termed bonds?

Are these companies not breaching various FSA and Advertising Standards Authority rules by describing these financial products as bonds?

Halifax Collar Unenforceable

The Times reports that the 3% mortgage "collar" imposed by Halifax on over 500,000 of their tracker mortgage customers, which allows Halifax to evade passing on rate cuts below 3%, may in fact be unenforceable.

Jon Pain, the FSA's retail market manager, said that collars should be included in a lender's key facts illustration (KFI). Halifax, rather oddly, removed the details of its collar from its key facts in 2005.

Mr Pain told the Council of Mortgage Lenders (CML):

"If it is not [included] you run the real risk of both breaching our disclosure requirements and having an unfair contract term you cannot enforce."

The question is will the FSA follow their warning through, if Halifax and others ignore it?

Rates Heading To Zero

Ben Bernanke, the Chairman of the Federal Reserve, gave a clear signal to the markets that rates are moving towards 0%.

Mr Bernanke is quoted in The Times:

"Although conventional interest-rate policy is constrained by the fact that nominal rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver, the provision of liquidity remains effective.

Secondly, the Federal Reserve can backstop liquidity not only to financial institutions but also directly to financial markets, as we have recently done for the commercial paper market."

That is a very clear assurance to markets that rates will fall to zero, and that other tools over and above rates will also be used.

The pressure is now on the dithering and laggardly Bank of England to wake up and cut rates further, as they should have done much earlier in this recession. The MPC will meet this week, and are expected to announce a further cut in rates of 1% to 2%.

Behind the curve as usual!

London Scottish Fails

London Scottish Bank (LSB) went into administration this morning.

LSB specialises in offering fixed rate savings accounts and loans to customers with poor credit histories.

Its structure was somewhat top heavy, it had only 10,000 savers, £250M in deposits but employed 700 people.

In the six months to April 2008, it made a loss of £7.4M.

The Treasury issued a statement guaranteeing all deposits (even those above the FSCS £50K limit):

"The Chancellor has put in place arrangements to ensure that all eligible retail depositors in London Scottish Bank will receive their money in full, including those with balances above the current 50,000 pound FSCS limit."

Shares were suspended at 2.62p.

No Confidence

A Populus poll for The Times shows that two thirds of voters think that the Government's measures to boost the economy will make no positive difference in either the short or long term.

This will become a self fulfilling prophecy; because if people don't have confidence in the future they won't spend any money, and Britain's consumer based economy will remain stuck in recession.

Woolworths In Administration

As expected, Woolworths is now in administration. Deloittes, who are acting as administrators will keep the stores open and pay staff in the period up to Christmas; there are expressions of interest in the company.

However, this sorry state of affairs could have been avoided if certain lenders had not blocked the company's plans for selling the retail unit to Hilco.

The lenders who blocked the plans included Barclays, and Bank of Ireland subsidiary Burdale Financial.

Woolies Suspended

The Times reports that shares in Woolworths have been suspended at 1.22p this morning, as the company attempts to conclude talks to sell its 840 store retail business.

Hilco are understood to be prepared to buy the retail division for £1. However, the banks that Woolies owes money to are less than happy with the possible losses arising on such a deal.

Added to the problems that Woolies faces, in trying to secure a deal, is funding the wage bill and continuing to trade "solvently". The directors are under a legal obligation to trade solvently, in the event that Woolies becomes "insolvent" (ie the banks refuse to provide any more working capital) then the company will be forced into administration thus threatening 30,000 jobs.

In the "good old days" of "privately" owned banks (ie before the banks went cap in hand to the government for a bailout) the banks would have only themselves and their "consciences" to answer to wrt pushing a company in administration.

However, now that they are semi nationalised, for them to force 30,000 people onto the dole queue in this manner would be a tad "politically unwise" to say the least.

That being said the banks are very capable of making a very foolish decision and consigning Woolies to the dustbin of history, were they to do so they would be signing their own death warrants.

Rearranging The Deckchairs on The Titanic

Alistair Darling delivered his pre budget report yesterday, which in theory was designed to ease the pain of the recession.

However, at best it can only be described as tinkering with palliatives in the short term with painful costs in the medium/long term.

A cut in VAT from 17.5% to 15% will have little effect on demand, as stores etc are already offering 20% discounts; indeed it is considered likely to cause more administrative hassle than it is worth. Darling needed to cut VAT by more than this, were it to have any significant effect; regrettably the EU has placed a lower limit on VAT of 15%.

Darling made a number of predictions about growth, or rather "shrinkage", he estimated that it would be at worst - 1.25% next year and forecast that the economy would recover in 2010, with growth of 1.5% to 2.0%.

Given the Treasury's wildly inaccurate growth forecasts in the past, quite why anyone would believe these now is beyond me.

Darling offered a number of fiscal stimuli, mainly related to bringing forward government spending on roads etc and putting off planned tax rises until later.

None of these will "stimulate" the economy much, and given the fact that everyone has had due notice that taxes will rise (eg national insurance) they will not loosen their purse strings.

All in all these palliatives will have little real positive effect, and most likely will be more trouble than they are worth as Darling has added more complexity to an already complex tax system.

Paulson Rescues Citigroup

The US government, in the shape of Hank Paulson (the hapless and hopeless US Treasury Secretary), has come to the rescue of Citigroup which has seen its shareprice collapse over the last week.

Paulson has come up with a package, including guarantees against losses on assets, worth $306BN together with a $20BN.

There is irony here.

Those of you with a reasonable memory may recall that when Lehman Brothers faced a similar crisis, Paulson was happy to let it go to the wall. The result being the current banking crisis and the world's worst recession since the 1930's.

The question that the shareholders and employees of Lehman Brothers doubtless wish to ask Paulson is this:

"Why do you consider Citigroup worth saving, but not Lehman Brothers?"

Paulson doubtless must now be wishing that he had rescued Lehman Brothers, thus saving the world from his self inflicted recession and banking crisis.

Bush and his team most assuredly are leaving behind them quite a legacy, whether this is the legacy that they would wish is of course another matter.

Start Lending!

John McFall, the chairman of the Treasury select committee issued a blunt warning to banks last night.

"The banks appear reluctant to launch their recapitalisation lifeboat and start lending again to households and businesses.

They are navel gazing and looking warily at each other instead of concentrating on their customers, many of whom are still in peril on a sea of uncertainty."

To add to the pressure on the banks, heads of the main high street banks have been summoned to the Treasury today for a final warning.

The cosy world of banking has been turned upside down, yet the bankers don't seem to have grasped that yet.

The Ultimate Pound Store

Woolworth's has the dubious distinction of turning itself into the ultimate pound store, as it puts its 815 retail stores up for sale for £1.

Woolworths has about £295 million worth of debts, and has entered takeover talks which could see its retail division sold to Hilco.

Timid

It seems that the Bank of England's recent 1.5% cut in rates was not as bold as some commentators had first believed.

According to minutes of the Monetary Policy Committee (MPC), members had wanted to cut rates by 2%. However, they were afraid that such a cut would be too much of a shock for the financial markets.

We are facing the worst recession in decades, under these circumstances assertive bold leadership is required; yet the Bank continues to dither.

The upside to the dithering is that clearly another rate cut is on the way.

Inflation Falls More Than Expected

The Consumer Price Index has fallen by more than expected, from 5.2% to 4.5%.

The fall in inflation is being attributed to the reduction the price of fuel, food and utility bills.

This is the first fall since July 2007, and opens the way for the Bank of England to cut rates further and faster.

The question remains as to whether the Bank of England will act with courage, and cut rates aggressively in order to stave off the worst effects of the recession.

Icleand Deal Agreed

Some good news for some of the hapless individuals who placed their life savings offshore in an unprotected environment.

Iceland's prime minister, Geir Haarde, said that an agreement had been reached (a 'common understanding') with EU member states that will see it cover savers' deposits in return for financial assistance, including agreeing on a stabilisation package from the International Monetary Fund (IMF).

The government of Iceland will "cover deposits of insured depositors in the Icesave accounts in accordance with EEA law."

I would express some words of caution here, before people start to pop open the champagne, until the money is back in a UK bank account don't bank on this happening.

As per the PM's website:

"talks between Iceland and several other EU member states, led to a common understanding that will form the basis for further negotiations".

This is not a done deal by any means.

The PPI Rip Off

The Competition Commission is finally looking to get its teeth into the con trick of payment protection insurance (PPI), as it issued a statement yesterday calling for a ban on sales of the policies when people take out loans and credit cards.

The Commission wants banks to wait for 14 days before approaching borrowers to sell PPI, and wants to ban financial providers increasing interest paid by charging for the entire cost of a policy at the start of a loan.

Martin Lewis, the personal finance campaigner, estimates that half of the policies in force may have been mis-sold (estimated to be worth £10BN).

Needless to say the Association of British Insurers isn't best pleased, and claimed that the Commission would "kill the PPI market".

So what?

The policies rarely pay out (the Competition Commission said only 14% of premiums are returned to policyholders, compared with 54% for home insurance and 78% for car insurance) so what is the point of them?

Halifax Profiteers Out Crisis

Halifax decided to ignore government pleas to pass on rate cuts, and instead chose to double the margins on some of its most popular mortgages last night.

Halifax reintroduced two year tracker deals for borrowers with a 25% deposit at a rate of 5.14% (2.14% above base, Halifax's best tracker a month ago was 1.04% above base).

Halifax's five year tracker for borrowers with a 25% now has a rate of 5.39% (2.39%, a month ago Halifax was offering five year trackers at 1.25% above base).

Shades of profiteering?

Halifax, needless to say, blame Libor.

Oddly enough Libor is at it lowest point in four years.

Maybe someone should tell Halifax that?

Back on Track

Three mainstream mortgage lenders have relaunched their tracker mortgages, since last week's mass exodus following the 1.5% cut in interest rates.

- Abbey has introduced a two year tracker at 4.99% (1.99% above base, being 0.7% higher above base than its previous tracker)

- Lloyds TSB has introduced a tracker at 4.79% (1.99% above base, being 0.7% higher above base than its previous tracker)

- Alliance & Leicester has introduced a new tracker at 4.89% with a 1% fee.

Strange that they increase their margins, when the rates are falling. However, borrowers should be grateful for small mercies that they are at least offering trackers.

Meanwhile a survey of more than 200 cards by Defaqto, a banking research group, found that the cost of borrowing on credit cards rose to 17.6% cent and rates on store cards rose to 25%, with some companies increasing rates by up to 10% overnight.

How strange!

Surely the credit card companies are not trying to profiteer from this crisis?

Sales Collapse To 1978 Levels

The Royal Institution of Chartered Surveyors (RICS) latest survey shows that estate agents in England and Wales have sold an average of 10.9 properties per firm in the 12 weeks to the beginning of November.

That is the lowest level of sales since the survey began in 1978.

The Times reports that, in response to the recession, Gordon Brown is to use this weekend's financial summit in Washington to call for co-ordinated tax cuts across the world's major economies to help reduce the depth of the global downturn.

The most effective for of tax cut will be that of cutting VAT, thus providing a direct stimulus to the consumer based economy. Cutting mainstream taxes will not achieve the same effect, as people will save part or all of the cut.

Bankers' Blacklist

Be warned, according to The Times, bankers are drawing up secret black lists to ban businesses from overnight borrowing.

Seemingly hundreds of clients have been included on the lists, which include international trading and commodities companies that supply the small-to-medium-sized business sector.

Were the banks still private companies, this would be a matter between them and their borrowers. However, now that the government has effective control over a number of them, this is now a matter that directly affects government policy and credibility wrt its attempts to limit the impact of the recession.

The banks will find that, unless they modify their behaviour, Brown and Darling will become very hands on "directors".

Called To See The Headmaster

As predicted, despite the 1.5% cut in rates yesterday, the high street banks have been a tad tardy in passing on the cuts to their hard pressed borrowers.

Needless to say, the government is not best pleased as it will be blamed by the voters for this (not least because it now has effective control of a number of these banks).

Alistair Darling therefore summoned the CEOs of HSBC, Barclays, Lloyds TSB, HBOS and Abbey to Downing Street this morning to demand that they immediately pass on the rate cut to their customers.

Bradford & Bingley (B&B), Lloyds TSB and Abbey have now passed on the rate reduction.

I suspect that before the day is out, we will hear from the other banks that the rate cuts will be passed on.

Bank Finally Acts

The Bank of England has finally taken bold action to try to ease the pain of the recession, it has cut interest rates by 1.5% to 3%.

Here is the announcement in full: Bank of England

The question is will banks and building societies pass this rate cut on to their borrowers, or merely cut their savings rates?

Change

Congratulations and good luck to President elect Obama.

He has one hell of a task on his hands wrt the economy (US and world economy). He at least will hit the ground running, by announcing his treasury team in the next few days, and will not wait until January before implementing a number of initiatives.

This may be the turning point, if other countries and their central banks also do their bit.

Mandy Piles on The Pressure

Lord Mandelson, Business Secretary, has put pressure on the banks today, by warning them that their customers will not be best pleased if the interest rate cuts are not passed on.

This warning comes after David Hodgkinson, chief operating officer of HSBC (who travelled with Gordon Brown to the Gulf), warned consumers they might not see any benefits if the Bank of England cuts interest rates this week.

Lord Mandelson, who is also in the Gulf, is quoted in The Times:

"I have to say when official rates are being cut it's not unreasonable for the customers to expect to see some benefits.

People want to feel the benefits of that action. And if it appears the banks are standing in the way of what the government is doing then I think many banking customers are going to be asking difficult questions of the banks.

I must say one of the things that has struck me going round the Gulf is the extent to which our own British PM is now being looked to as someone who will lead the rest of the world out of this mess.

If we can't even have a response in our own country to his moves, to his decisiveness, that will come as a surprise to many."

When Libor comes down so will interest rates charged by banks to customers, that is the key.

Silly Money

The Sub Prime Pyramid Scheme Explained

House Sales Fall

The Times reports that the number of homes sold during 2008 has fallen to the lowest level since 1974, this despite a record 14.6% fall in annual house prices during October.

The pressure is on the Bank of England to stop dithering and cut interest rates aggressively, so called "experts" predict that rates will fall from 4.5% to 2.5%.

In the midst of this, Gordon Brown and the Labour party are enjoying the "high" from their "nationalisation" of the banks.

My advice to Brown and Labour is simple, enjoy it whilst it lasts.

Bankers, banks and money lenders are the least favoured strata of society, by becoming bankers the government will find itself blamed for every repossession and foreclosure in the country.

Labour may be low in the polls now but, once the repossessions kick in, it hasn't seen anything yet!

Signs of a Heartbeat?

Despite the best attempts by the politicians and media to talk the UK economy into a slump, the mortgage market has refused to lay down and die.

The Bank of England reports that mortgage approvals for house purchases rose in September, for the first time in over a year.

Mortgage approvals rose to 33,000 in September, up from a record low in August of 32,000.

Net mortgage lending rose by £2.2BN in September, in August it fell by £691M.

Notwithstanding the faint signs of a heartbeat in the mortgage market, the pressure is still on the Bank of England to stop dithering and cut rates.

The Bankers Strike Back

The major high street banks, never fearful of damaging their already trashed reputations, will go to the Court of Appeal today in a bid to overturn the High Court ruling that unauthorised overdraft charges are unlawful.

The banks lodging the appeal include; Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Nationwide and the Royal Bank of Scotland.

Whatever the outcome, not expected to be decided for quite some time, the banks will ensure that they make money out of their customers one way or another. In the event they lose the appeal, they will simply abolish free current accounts.

It's as simple as that!

Sterling Falls

The Pound continued to fall this morning, below $1.55 in early trade, as traders take account of Britain's parlous financial state.

However, those who believe that a country's machismo can best be displayed by a strong currency are seriously misguided. A falling pound, under the current circumstances, will be of great benefit to Britain's exporters.

That said, the Bank of England has a duty to cut interest rates swiftly and aggressively in order to lessen the effects of the recession.

The longer the Bank dithers, the worse it will become.

Down Down Down

The FTSE fell 8% this morning, as the UK entered its first recession in 16 years.

Alistair Darling told BBC News:

"It's obvious now that our economy, other economies across the world, are moving into recession.

Yes, it's going to be difficult, yes it's going to be tough, but we can get through it."

Therefore why is the Bank of England still sitting on its hands, and not cutting interest rates more aggressively?

How The City Works

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for £10 each.

The villagers, seeing that there were many monkeys around, went into the forest and started catching them.

The man bought thousands at £10 and, as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy monkeys at £20 for each.

This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to £25 each, and the supply of monkeys became so small that it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at £50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at £35, and when the man returns from the city, you can sell them to him for £50 each."

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again, only monkeys everywhere!

Now you have a better understanding of how the City works.

Tax and Spend

Old style Labour is rearing its ugly head in terms of its fiscal "management".

Figures from the Office of National Statistics (ONS) show that net debt (£645.3BN), expressed as a percentage of GDP had risen to 43.3% at the end of September, up from 36.2% a year ago.

This rise in public spending, which of course will have to be financed by tax rises, will not save the country from recession nor indeed provide much of a soft landing.

The key to "managing" the recession is that of cutting interest rates, not just in the UK but in the other major economies of the world.

Lamentably, the Bank of England has been remarkably slow to grasp that point so far.

Rate Cuts

Despite the "bailouts" being promised by various governments, the markets are currently in freefall as the fact that the world's economies are heading for recession strikes home.

Poor retail figures from the US, and lousy employment figures in the UK have added to the misery.

It is clear that the "bailouts" need to be augmented by serious interest rate cuts by the central banks of the G7, failure to grasp that nettle will see the world stuck in a recession that may turn to slump.

The Bank Run

Injecting capital (nationalising) into banks is all very well. However, there are two further steps that governments need to take:

1 Guarantee all deposits (deposits are the bedrock of the banking system, without a guarantee depositors will continue to withdraw their money)

2 Cut interest rates by at least another 1% in all major economies

Do the above and the run on banks will be halted, fail to do the above and the run will continue.

Interest Rate Cut

Yesterday's 0.5% reduction in interest rates by the Bank of England was not enough to stave off recession, another 0.5% at least is required now.

Worthless Guarantee

As I predicted earlier this week, the guarantee by the Icelandic authorities re bank deposits was not worth the newspapers it was printed in.

Icesave, the online British arm of Iceland's second biggest bank Landsbanki, announced yesterday that its customers could no longer withdraw or deposit money, as Landsbanki was taken into receivership.

The Icelandic government then reneged on their pledge to guarantee deposits.

Alistair Darling told the BBC:

"The Icelandic government have told me, believe it or not, they have no intention of honouring their obligations there."

The Icelandic authorities, by reneging on their pledge, have signed the death warrant of their economy.

Gordon Brown is threatening to sue the Icelandic authorities.

Brown has also set out a radical £500BN package today to save the British banking sector from collapse and break the damaging logjam in credit markets.

At last, some much needed action!

The Disunited States of Europe

True to form the governments of Europe have shown their true colours and acted in their own self interests, wrt the ongoing banking crisis, rather than in a unified Europe wide manner.

Ireland, Germany and Denmark have guaranteed bank deposits and others (such as Spain and Greece) look likely to follow.

Had the EU acted in unison, it may have lessened the panic. Unfortunately the scramble to protect self interest has done nothing to assuage the market.

The UK now needs to take the following actions, without any further dithering:

1 Guarantee all bank deposits

2 Cut interest rates aggressively

Failure to do so will worsen this crisis.

Now is the time for our political masters to show leadership and courage; dithering and "moral hazard" are no longer acceptable excuses.

The House of Cards Comes Tumbling Down

The FTSE fell by 6% this morning, despite the fact that congress approved the bailout.

The Times reports that Alistair Darling will make a statement later today on whether he will bail out the UK's banks.

On Saturday Angela Merkel, the German leader, criticised the Irish decision to guarantee all deposits in their leading banks without consulting other European countries. One day later Ms Merkel was forced to take almost the same action.

All very well.

However, the uncomfortable truth, that governments dare not speak of is that if there were to be a serious run on the banks the governments that have guaranteed the deposits (Iceland, Ireland and Germany) would not be able to honour their guarantees.

What we will now see is a re run (albeit on a much larger sale) of the day when Britain was forced out of the ERM by market forces. This time market forces will show that a country's guarantees are worthless, and are in effect a house of cards.

The market will win, but at a terrible cost.

Iceland will be the first to go. It is clear that the governments, and political systems, of the world are not able to keep pace with events.

The long term result will be that banks across the world will end up being nationalised, and every citizen of the world will end up being in debt for the rest of their lives.

Madness

Yesterday I wrote that "Bush has done to the US economy what no terrorist or hostile country could ever do, that's quite a legacy!"

I was wrong, Bush merely loaded the gun; Congress, in an act of collective madness, has in effect destroyed the US economy by voting against the bailout plan.

Given that the plan was the only one on the table, one might ask why they jettisoned their only hope. Regrettably partisan politics outweighed commonsense and selflessness, as the Republicans used a speech by Nancy Pelosi (seemingly she hurt their feelings) as their excuse for voting "nay".

The result of this collective madness was entirely predictable, Wall Street suffered its worst ever one day fall in history (down 778 points).

The essential truth that those who cite "moral hazard" fail to grasp is this.

If your neighbour's house is buring down, even if he started the fire himself, you do not stand idly by watching it burn; you try to put it out.

Once the fire is out, you can punish him afterwards.

The "good people" in Congress will have a lot of explaining to do, when their constituents realise that falling shares mean that their savings and pension plans are going down the toilet.

Thursday is now slated for a rerun of the vote, let us trust that some commonsense now enters the minds of Congress.

The Great Bailout

US President George Bush has said that Democrats and Republicans will come together to pass the bailout plan to rescue the US economy.

All well and good, if what he says actually comes to pass. However, the bailout was never a matter of merely throwing billions at the problem to make it go away but of injecting confidence into the economy.

The bailout plan had the possibility of working, until it became apparent that Paulson in fact had no plan and McCain pushed himself in front of the cameras in a bid to appear as a dealmaker (thus wrecking any possibility of th deal being passed last week).

Bush then publicly said that the world economy was in gave danger if the plan was not approved, and privately said during the disastrous McCain inspired meeting that "this sucker is going to go down". Paulson, pouring petrol on the flames, then got down on bended knee to Nancy Pelosi (House Speaker) begging her to pass the bill.

Those actions and words send a very clear signal that those in office are not in power. No matter how many billions of dollars are now thrown at this issue the markets have had the confidence kicked away from beneath them by the failed leadership in Washington, and the desire of a very old angry man to become president.

The road ahead is uncharted and dangerous. Bush has done to the US economy what no terrorist or hostile country could ever do, that's quite a legacy!

Time Running Out For Bradford and Bingley

Bradford and Bingley have announced that their mortgage processing centre in Borehamwood, Hertfordshire, is to be closed and the 300 staff made redundant.

It seems that it does not have a future as an independent business, its credit rating has now been cut to one notch above "junk".

The Financial Services Authority is trying to find a buyer for the bank, in order to avoid another Northern Rock fiasco.

FBI Investigation

The Times reports that the FBI is investigating a number of executives from Fannie Mae, Freddie Mac, Lehman Brothers and AIG.

The Times states that are investigating as to whether the executives lied to shareholders, and whether fraud helped caused some of the troubles at these organisation.

The investigation includes whether executives deliberately misled the stock market about the state of their businesses.

Needless to say the politicians who oppose the $700BN Paulson bailout have latched onto this as another reason not to give money to greedy Wall Street bankers.

All well and good.

However, moral hazard and regulation can be addressed after the crisis has been dealt with.

When your neighbour's house catches fire (even if he started it deliberately) you do not stand idly by watching it burn (remonstrating with him about his stupidity), you help him put it out.

Another point that those who hate greedy bankers should remember is this, people were happy enough to borrow the money when it was cheap and to saddle themselves with debt; no one put a gun to their heads.

The Dead Cat Bounce II

Lats week I wrote about the rebound in shares, in response to the US bailout of the financial system, being a "dead cat bounce".

It would seem that I was right.

Shares in London and Asia have fallen sharply, as doubts grow about whether the $700BN bailout will work. At the time of writing:

-The FTSE is down 2%
-The CAC down over 1%
-The MSCI index of Asia-Pacific shares (excluding Japan) down 2%
-The Dow down over 3%

The package proposed by Henry Paulson, US Treasury Secretary, is expected to face opposition from members of Congress about how to pay for the plan.

Additionally, other American industries outside Wall Street have begun to ask for similar assistance; eg bans on short-selling have been requested by car and real estate companies.

Senator Richard Shelby, the leading Republican on the Senate Committee on Banking, Housing and Urban Affairs, said in a statement yesterday that the proposal was "neither workable nor comprehensive".

"I am concerned that the Treasury's proposal is neither workable nor comprehensive, despite its enormous price tag. In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted, and may actually cause the Government to revert to an inadequate strategy of ad hoc bailouts.

Given that markets have recently taken confidence in the prospect of government involvement, I believe Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion. We owe the American taxpayer no less."

That is all very well, but the issue is one of confidence. A lengthy review will sap the confidence and destroy the financial system before any "cure" is discovered.

I noted last week:

"The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.

No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.

The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally."

The bailout will not stop shares falling, but it will stop the world wide financial system from collapsing by giving it a much needed boost of confidence.

Testing times require bold measures.

Now is not the time for dithering and navel gazing.

No New Taxes

The Times reports that Alistair Darling has pledged that there will be no tax increases, despite the fact that Britain may have to borrow £90BN next year.

The Chancellor said people were "hard pressed" and it was not time to be "taking money out of the economy".

Where will the money come from then?

The Dead Cat Bounce

Share prices are surging today on reports of a massive bailout of toxic debt by the US government, coupled with the ban by the FSA on short selling of financial stocks.

At the time of writing, the FTSE is up over 7%, the DAX up by almost 4% and the CAC up by 6%.

Talks are being held between the US Treasury Department and the Federal Reserve to examine proposals to move illiquid toxic assets, backed by mortgage debt into a government backed vehicle; ie they will be taken out of the balance sheets of the banks and financial institutions that created them.

In the event that this this scheme is put into action, this will be the largest bailout in American history.

The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.

No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.

The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally.

Emergency Aid

The world's leading central banks, including the Bank of England, have joined forces and injected approximately £100BN into the world's financial system.

The action is US funded, whereby the US Federal Reserve is lending the Bank of England, the European Central Bank (ECB), the Swiss National Bank and the central banks of Canada and Japan the money to pump into their financial systems.

The question is, given that the US government allowed Lehman Brothers to go to the wall on Monday, will this restore confidence into the system?

The Law of The Jungle

The death of Lehman Brothers has not sated the market's appetite for fresh corpses.

AIG teetered on the brink and has been bailed out, at the eleventh hour, after the US Federal Reserve agreed an $85BN bailout of the company. The deal gives the US Government a 79.9% stake, ie they nationalised it.

Somewhat ironic that the world's leading advocate of free market economics resorts to old fashioned socialist policies of nationalisation, in order to save a capitalist institution.

Now comes the turn of HBOS.

The Times reports that Lloyds TSB is in advanced talks to buy HBOS.

The disclosure followed a statement issued by the Financial Services Authority (FSA) about the strength of HBOS' business, in order to stop the 50% freefall in its share price.

Quote:

"Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.

We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way".

How can seemingly impregnable institutions find themselves so quickly consigned to the dustbin of history?

Confidence.

The capitalist system and banks rely on confidence in the future; when that dissipates, the bedrock on which the system and its constituent parts is based collapses.

Fear, rather than fundamental weaknesses, are eating away at the bedrock of our financial institutions.

Lehman Collapses

In case anyone has not heard, the Wall Street bank Lehman Brothers has filed for chapter 11 bankruptcy protection, after emergency talks to find a buyer failed.

Lehman Brothers was one of Wall Street's biggest dealers in fixed interest trading, and was heavily invested in securities linked to the US sub prime mortgage market.

The FTSE has fallen 3% on the news. The effect that it will have on UK banks remains to be seen, and will depend very much on their exposure to it.

London's Reputation Tarnished

London's reputation as the world's leading financial centre was further tarnished yesterday when the London Stock Exchange suffered its worst systems failure in eight years, forcing it to suspend trading for seven hours.

To add to the woes of those trying to trade yesterday the crash happened on what would have been one of the busiest days of the year, hot on the heels of the news over the weekend that Fannie Mae and Freddie Mac had been bailed out.

A cynic might argue that the system was deliberately shut down, so as to avoid a massive spike in bank shares occurring.

Reuters quoted one trader as saying:

"We have the biggest takeover in the history of the known world ... and then we can't trade. It's terrible."

Another said:

"This halt today clearly has once again damaged (the LSE's) reputation as a leading exchange, especially on a day like today, highlighting that it may have been unable to handle the volumes this morning."

The LSE have not given an explanation for the crash, traders though are demanding an explanation.

LSE Chief Executive Clara Furse wrote to the FT on Monday, somewhat ironically, and said that the system used by the LSE was "the cutting edge".

This is just one of a string of issues that has tarnished the City's reputation. Other include; the endowment scandal, fat cat bonuses for failed executives, Northern Rock, excess bank and credit card charges, the mortgage drought, mis-selling of mortgages, PPI mis-selling etc.

The great and the good of the City should bear in mind that reputations are hard to earn, but easy to lose.

Freddie and Fannie Balied Out

President Bush bailed out Freddie Mac and Fannie May yesterday, as he announced that the two mortgage lenders would be taken over by the US government.

Seemingly they were weeks away from collapse.

President George Bush is quoted in The Times as saying that the failure of Freddie or Fannie would have been "unacceptable".

"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing.

Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."

Henry Paulson, the US Treasury Secretary, said:

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit.

Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

This robust and decisive action contrasts with the dithering of the British government last year, when faced with the Northern Rock fiasco.

British banks have invested billions into bonds insured by Freddie and Fannie, had they collapsed the banks would have made significant losses.

We can breath a short sigh of relief, and be thankful that the US government did not shy away from a tough decision or dither over it.

Gordon Brown take note!

Decision Day

In less than an hour the Bank of England Monetary Policy Committee will announce their decision about interest rates.

Most pundits expect them to remain unchanged. However, the decision comes against the backdrop of Darling's suicidal warning about the state of the economy over the weekend, the announcement by the OECD that we are facing recession, Brown's ineffectual economic revival package and figures released by the Halifax that show that house prices fell by 12.7% in the year to August.

Given the above, one wonders quite how bad things must become before the MPC is prompted to cutting rates.

If and when they do, it might be the time to really panic!

Careless Talk Costs Cents

Alistair Darling is learning the lessons that previous Labour Chancellors have learned, namely that careless talk costs the pound dear.

Sterling continued on its downward path today, falling to a 12 year low (88.2) against the Bank of England trade weighted index of currencies and to its lowest against the dollar ($1.7669) since April 2006.

The fall has been attributed, not unsurprisingly, to Darling's outburst over the weekend over the state of the economy.

The fact that he is now barely on speaking terms with his old "friend" Gordon Brown have given the markets little comfort, as divisions over policy and presentation between number 10 and number 11 mean that the economy will suffer.

Until Brown and Darling decide what the real story is, and what to do about it, the economy will continue to decline.

Pissing In The Ocean

The government, in a rather piss pathetic attempt to reanimate the corpse of the housing market, has announced that it will exempt properties worth less than £175,000 from stamp duty (the current exemption is £125K).

Given that the average house price in the UK is around £200K, this will have next to little effect.

Additionally, statistics show that the number of property deals that are already exempt from stamp duty has fallen almost as much as those liable for the tax; in other words the exemption is irrelevant.

The fundamental issue facing prospective house buyers is the lack of mortgage funding, not so much shaving a few thousand pounds off the price. This measure does not address the liquidity issue in any shape or form, it is pissing in the ocean.

Self Flagellation

The FT today asserts that Chancellor Darling's bizarre self flagellation over the weekend, when he stated that the UK economy is facing times as bad as any ever seen in the last 60 years, may in fact have been a tad overdone.

Quote:

"The chancellor also claimed this weekend that the economic times facing Britain were arguably the worst in 60 years. His precise meaning has been in dispute but it would certainly be nonsense to suggest the UK faces the worst downturn in six decades.

It is true that in specific areas – trust among financial institutions, in particular – the UK is in very bad shape by historical standards. But, more generally, the assertion is untrue."

I have to concur, quite why the Chancellor came out with this bizarre assertion remains to be clarified. There are a number of possibilities:

1 He knows he is about to be sacked, and wants to go out "with a bang".

2 He has given up and lost the plot.

3 He knows something about the economy that no one else, including other members of the Treasury or government, knows.

Whatever the real reason, it would be advisable for the government and Darling to get a grip; the economy, and the citizens of this country, are not best served by such public flagellation and rifts.

Darling Surrenders

Alistair Darling has all but given up trying to keep Britain out of recession, by announcing today in The Times that Britain could be heading for its worst economic downturn for 60 years.

Darling also admitted that he had no idea how serious the credit crunch would become.

This is man who has clearly given up, and who is likely to be out of a job in the next month.

Regrettably the British economy and British voters are stuck with Labour and the disastrous tripartite regulatory system that Brown created for another two years, the damage that Labour will do to the economy in that time is incalculable.

Every Labour government ends in economic failure.

Banquo's Ghost

Much like Banquo's ghost, Northern Rock continues to haunt the government.

Northern Rock, having sold excessively expensive and outsized mortgages to those who could least afford to manage them, is now attempting to repossess the homes of those who have failed to keep up with the payments on these most unsuitable of products.

Research published by Standard & Poor shows that Northern Rock has been responsible for one in 13 repossessions in the UK in the second quarter of this year, as its customers are getting into trouble much faster than other borrowers.

Standard & Poor's research shows that a monthly average of 353 of "The Wreck's" best borrowers faced repossession in the second quarter, up from 134 in the previous three months.

S&P also noted an increase in Northern Rock borrowers falling more than 90 days behind on their repayments.

This of course indicates that the loan book may not be as healthy as the government would have had us believe when it made the taxpayer responsible for bailing out this failed firm.

Lib Dem Treasury spokesman Vince Cable accused Northern Rock of being very aggressive in dealing with repossessions, after granting mortgages worth more than the value of properties.

He is quoted in The Journal:

"Northern Rock have been particularly ruthless in repossessions because they have got a lot of 125% Together mortgages which were completely mad at the time and even madder now."

The man who oversaw Northern Rock's grab for customers, and pushed for an aggressive lending policy that has failed the company and its customers, has done rather well for himself though.

Adam Applegarth, ex CEO, was allowed to leave with over £1M in bonuses and pension top-ups and is currently still receiving over £60K per month.

Nice work if you can get it!

Wheels Falling Off The Economy

Official figures indicate that Britain is on the verge of recession as output ground to a halt between April and June this year, the poorest performance since 1992.

Jonathan Loynes, of Capital Economics, is quoted in The Times:

"The economy now looks set to grow by just 1.2% or so this year, with a very strong chance of a technical recession in the second half. And things will be considerably worse in 2009."

The pressure is now on the Bank of England to wake up to the threat of recession and to cut rates. However, given that Mervyn King has already publicly admitted that Britain may well slip into recession, it would seem that he is prepared to allow this to happen; ie there will be no rate cuts.

Greed

Britain's utility companies are to be congratulated on being even more greedy than banks, insurance and credit card companies, in their brazen fleecing of the consumer.

E.ON added its name to the list of shame by raising prices this morning, electricity up by 16% and gas by 26%.

Similar recent increases were imposed by EDF and British Gas.

Time that the sleepy old watchdogs, that are allegedly looking after the interests of the ripped off British consumer, to wake up and earn their pay.

What A Whopper

The Times quotes Professor Kenneth Rogoff, a leading academic economist, as saying that there will be worse news to come from the worldwide credit crunch.

"The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.

We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one — one of the big investment banks or big banks."

Heartwarming stuff!

However, before people start jumping from window ledges, it is worth remembering that financial crises come and go; additionally, the crunch is as a result of the banks' greed and stupidity.

What goes around comes around!

Cash Call Fails

Bradford & Bingley's (B&B) cash call has flopped in the eyes of its shareholders, with only 27.8% of shareholders taking up its £400M rights issue leaving the remainder in the hands of its underwriters, Citigroup and UBS.

B&B's new CEO, Richard Pym, has his work cut out to try to restore confidence in the bank.

That being said, Mr Pym can take some small comfort in the fact that the take up of the B&B issue has significantly exceeded the take up of the HBOS rights issue. Only 8.29% signed up to that issue which closed in July.

Reposessions Up

House repossessions in Britain have risen alarmingly to levels not seen since the last recession.

The number of mortgage repossession orders posted by courts in England and Wales between April and June this year rose by 24% to 28,658, compared to the second quarter last year.

The figures are in line with the number of orders made in mid-1992, at the height of the recession.

Unlike the last recession, repossession figures show that "second charge" repossessions feature strongly in the figures; indicating that many have unwisely used their property to secure an extra line of credit.

Shelter forecasts 9,000 more people will lose their houses to "second-charge" lenders.

Meanwhile the Treasury and Bank of England argue over what to do ease the liquidity crisis; with Mervyn King Governor of the Bank sticking firmly to his principles, and insisting that it is not the Bank's role to provide credit.

HBOS Scales Back

HBOS announced today that it will axe 425 job cuts, and scale back its TMB brand which provides finance for new builds and buy-to-lets.

HBOS recently announced a fall in profits of 72% to £848M.

As from late August, HBOS will cease taking on new business from its TMB division and stop offering loans via its Intelligence Finance brand.

The FT reports that the UK mortgage market will shrink from £368BN in 2007 to £280BN this year because the "number of lenders who relied on securitisation have quit the market".

Housing Market Grinds To A Halt

The Royal Institution of Chartered Surveyors (RICS) report that the housing market ground to a virtual standstill last month, as a result of the lack of mortgages.

RICS report that the average number of property sales handled by surveyors, over the past three months, fell to 14.4.

Needless to say the government's botched leak about the possibility of lifting stamp duty for a few months has added to the problems, as people have now delayed making a purchase until the situation is clarified.

Unfortunately the government will not be clarifying its position anytime soon, as the Treasury blames Number 10 for the leak and Number 10 claims it was not responsible.

Brown's government is collapsing around his ears, and is bringing the economy down with it.

£1M Wiped Out Per Minute

PriceWaterhouseCoopers (PWC) have published an analysis that shows that £1M per minute (£600BN) has been wiped out from the UK's total wealth, since the credit crunch started a year ago.

PWC estimates that £400BN has been written off residential property, and £200BN written off the stock market valuations of the banks and other financial institutions.

PWC estimate that this will lead to a reduction in expenditure of around £12BN to £16BN over the next 12 months.

As if that were not gloomy enough, PWC add the rather worrying caveat that the report is "conservative" and that this is its best case scenario.

Home Reposessions Highest Since 1999

The Council of Mortgage Lenders (CML) reports today that the number of homes repossessed in Britain in the first six months of the year has risen by almost 50% (compared with last year), to the highest since 1999.

Repossessions rose to 18,900 from 12,800. Although this is not good news, it needs to be put in context. In the first half of 1991 home repossessions hit a peak of 38,900.

Homeowners are continuing to face difficulties, as they try to refinance fixed rate mortgage deals that have run out.

Alastair Darling and Gordon Brown's solution, to date, has been to leak an idea about possibly suspending stamp duty. All well and good except:

1 It does not help those who cannot find mortgages.

2 The uncertainty over whether this is a genuine proposal or not will cause people to delay purchase, thus further undermining the market.

A little more thought would be best, before they leak any more ideas.

Pensions Black Hole

As the economic downturn continues, and negatively impacts the FTSE, pension schemes are feeling the effects.

Actuarial consultants Lane Clark & Peacockfell, report that pensions went into a £41BN deficit in mid-July, reversing last year's £12BN surplus.

The effective and efficient management of pensions require a very long term view of market ups and downs. Unfortunately, current pension reporting requirements introduced in 2002 do not take a the long term view and encourage short termism of the worst kind.

A major overhaul of pension reporting is required urgently.

Northern Wreck

The long suffering taxpayers of Britain got taken to the cleaners again by Brown and his mob, as it has emerged that £3BN of taxpayer loans to Northern Rock will be written off.

The "Wreck" has published worse than expected results, showing a loss in the first 6 months of £585M, as borrowers fail to meet their obligations.

The Treasury will now convert £3BN of government loans to the Rock, and £400M of Rock preference shares into ordinary Rock shares.

However, the plan does require approval from our lords and masters in Brussels.

HSBC 28% Profit Collapse

HSBC revealed some lousy results today, much as expected. The ongoing credit crisis (caused by the banks' irresponsible lending) has knocked £5.1BN (28%) from its first half profits to £5BN.

HSBC will not comment as to whether the losses from its toxic US loans have peaked or not. However, its provision for US consumer finance now stands at $6.8BN (85% higher than the same period last year).

HSBC chairman, Stephen Green, maintained a stiff upper lip and noted that the outlook was challenging.

Quite!

Nationwide Warning

Nationwide has warned that a recession may now be likely, as the average house price in the year to July fell to a three-year low of £169,316.

The average price of a home is now £15,000 lower than in July last year.

Nationwide state that house prices have fallen nine months in a row, and in July declined by 1.7% (in June the fall was 0.8%).

The question is what will the Bank of England do with rates this month?

There is of course a silver lining to this. Those who waited to buy a house, and did not rush into borrowing ludicrous multiples of income, are now in a much better position than a year ago.

Fraud

Eight people were arrested yesterday in raids across London, as part of a crack down by the Financial Services Authority (FSA) against insider dealing.

Among the eight were a UBS AG back-office employee and a JPMorgan Cazenove Ltd sub-contractor.

Sarah Small, spokeswoman for UBS, is quoted on Bloomberg:

"A junior member of UBS's support staff in London has been arrested and has been suspended from work while the FSA carries out its investigation."

Tessa Murray, a spokeswoman for London-based JPMorgan Cazenove, said the unidentified individual was a "sub contractor who provided services in a support function and is no longer providing services."

Former Cazenove & Co. partner Malcolm Calvert appeared at a hearing last week after being charged with 12 counts of insider trading.

Aside from headline grabbing arrests in the City, it is also apparent that the level of fraud in the UK as whole is increasing (as people become negatively impacted by the liquidity crisis).

KPMG report that fraud in the UK increased by 50% in the first half of the year, compared to the previous six months, 128 cases of fraud went to courts in the year's first half.

In the same period, fraud against banks totalled more than in any whole year for the past 20 years, at more than £350 million.

Money brings out the worst in people.

Mortgage Lending Collapses

As the government dithers over what to do to restart the mortgage market (which in turn underpins the housing market and the rest of the economy), the Bank of England stated that mortgage approvals fell by 68.4% to a record low in the year to June.

Mortgage approvals have fallen from 41,000 in May to 36,000 in June. The rate of mortgage approvals was the lowest since records began in 1993.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, is quoted in The Times:

"The latest numbers from the Bank of England demonstrate, in the clearest possible way, the consequences of the credit crunch for the residential property market.

Against this backdrop, it is not surprising that the high street appears under increasing pressure with consumers scaling back purchases of a range of household goods.

Unless the authorities take steps to restart the mortgage market, the likelihood is that there will be more bad news in store for the housing market and the retail sector during the latter part of the year."

The government is inextricably linked in the voters' minds to this meltdown, as Brown has for the last ten years promised "no more boom or bust". Surely that would be enough incentive for the government to try to do something?

Regrettably, the current dithering and inaction would indicate not!

The Price of Dithering

The FT reports that Chancellor of the Exchequer, Alistair Darling, is considering a new plan to help resuscitate the housing market by allowing banks to swap new mortgage assets for government bonds.

The Treasury is formulating a plan to extend the Bank of England scheme, where high quality outstanding mortgage backed securities are exchanged for gilts to incorporate new mortgage lending.

Sir James Crosby, the former chairman of HBOS, is expected to propose the idea tomorrow when he delivers his interim report on the mortgage market.

It is a pity that it takes Labour's meltdown in the polls and the disastrous Glasgow bye election to motivate them to tackle this open sore. Had they moved with alacrity, in the final quarter of 2007 and at the beginning of 2008, the liquidity crisis could have been better contained.

Regrettably the government dithered, the result being that Deloittes are now warning that the economy is heading into recession, and may face a slump on the scale of the early 1990s.

Retail Sales Slump

Statistics from the Office for National Statistics show that retail sales growth has dropped by 3.9%, in the three months from April to June.

This is the largest fall since the department began collecting the statistics back in 1986.

As noted yesterday, the dearth of mortgages and the seizing up of the housing market is now negatively impacting the rest of the economy.

It beggars belief that the Bank of England and the Treasury are not pulling out all the stops to free up liquidity. Instead there is a possibility that the Bank will in fact raise interest rates next month.

Utter folly!

Mortgage Approvals Record Low

The British Bankers' Association (BBA) report that mortgage approvals dropped to a new low in June, falling 66.4% compared with the same month last year.

David Dooks, director of statistics at the BBA, is quoted in The Times:

"Another record low number of mortgages approved by the banks for house purchase means that the whole market is likely to be at its least active since the early 1990's."

The downturn in the property market is now impacting the rest of the economy that relies on property transactions to provide an engine of growth eg; DIY, furnishings, etc.

To add to the property market's woes, it is reported that the Bank of England is divided as to whether it should raise interest rates to 5.25% in August.

I don't think the BoE quite gets just how serious the economic decline might be, if not addressed, ie they are as ever behind the cuvre on this issue.

Pre Funded Pot

Mervyn King, the Governor of the Bank of England, has told the Treasury Select Committee that banks should pre fund a compensation pot that would cover customers' losses in the event of another Northern Rock collapse.

He believes, quite rightly too, that the lack of a 100% guarantee of savers' deposits contributed to the run on the bank last year.

The current scheme is funded by the banks, which pay an annual levy. However, it does not hold enough money to compensate savers in the event that a bank collapses.

The Financial Services Compensation Scheme currently guarantees 100% of the first £35K of savings each person has at a bank.

That of course is not enough given the size of many deposits.

Mr King's suggestion is welcome. However, given the large number of people who have now deposited savings offshore with higher interest banks (eg in Iceland), this guarantee will not cover those in the event of a failure offshore.

It is very likely, given people's naivety about money, that these depositors are blissfully unaware that they are exposed to the collapse of their foreign banks.

That again could have disastrous effects on the economy.

An Inequitable Life

Following on from the recent report by Ann Abraham, the parliamentary ombudsman, in which she called for compensation for more than a million policyholders in Equitable Life there are now concerns that more than half of them may in fact get no compensation at all.

The Equitable Members' Action Group (Emag) has estimated that the cost of compensation could be around £4.6BN.

Many thousands of Equitable savers have gone through the Financial Ombudsman Service (FOS) to claim compensation for mis-selling. However, only 50% to 60% received any.

Given this, and the fact that the Treasury will not respond to the report until the autumn, it is unlikely that all the policyholders are going to come out of this scandal with the result that they would wish for.

Emag has threatened a judicial review in autumn, if the government does not satisfy them.

This will be a long battle, by which time many of the policyholders may well have died.

Apology Demanded

Ann Abraham, the parliamentary ombudsman, in a long delayed report has called for Britain to apologise to more than a million policyholders in Equitable Life and offer them compensation.

The apology, not that it will ever come, will be a tad late as the Equitable Life scandal occurred in 2000.

Equitable Life almost collapsed in 2000, after being forced to honour unsustainable guarantees stretching back 30 years. It eventually closed to new business in one of Britain's most dramatic financial scandals.

Ms Abraham has been investigating the scandal for four years, and is quoted in The Guardian:

"(Those) responsible for undertaking financial regulation should act in a way that is compatible with the duties and powers which parliament has conferred on them.

Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report."

Vanni Treves, who became chairman of Equitable Life in 2001, said that the regulators' failure to tackle problems at the society meant the government should compensate policyholders who suffered losses as a result.

"Year after year, the regulators failed to do anything about problems that were absolutely evident to them.

We have paid all the bills we felt we had a duty to pay. Now the government must pay the bills for its own failures."

Abraham noted that the bodies overseeing the insurer were "passive, reactive and complacent", allowing one person to be both chief executive and appointed actuary for more than six years thereby neutralising the appointed actuary's "whistle-blower" role.

Abraham's report recommended a compensation scheme to redress losses, and called on the government to act swiftly, as tens of thousands of policyholders have already died since Equitable Life closed to new business.

The FT estimates that the cost of compensation will be around £4BN.

It is all very well calling for compensation. However, there are two issues that will ensure none is given:

1 The government is broke and cannot afford to pay any.

2 The regulatory regime that failed the policyholders was set up by Gordon Brown, to pay compensation would be an admission of failure. Brown does not do "failure" or "apologies".

Given the recent financial scandals, eg Northern Rock, it is evident that the regulatory regime in the UK has not improved one jot since the days of Equitable Life.

There are other scandals waiting to break.

Kick Starting The Mortgage Market

The ongoing mortgage drought has caused pain not just to those seeking to borrow, but also those wishing to lend (less loans means less commission and less interest).

Finally those in the mortgage industry appear to be waking up to the fact that they need to do something about this mess. The Council of Mortgage Lenders (CML) want to free up UK banks and building societies to offer new home loans, to do this it wants the Bank of England to guarantee a market in mortgage-backed securities and covered bonds.

The CML claims that the key issue is the lack of available funding to support new mortgage lending, the proposal would cover new mortgages.

"The CML firmly believes that with quick and decisive implementation of the mortgage market funding proposal, the Government could mitigate the difficulties that households and the housing market will otherwise face, as well as helping to restore greater confidence to the financial system as a whole."

A nice idea. However, I doubt that the government or Bank of England will rush to act on it.

Speed and decisiveness is not the hallmark of the current administration.

The Engine of The Economy Splutters To A Halt

The engine of the British economy, the housing market, looks set to splutter to a halt. Figures released by the Royal Institution of Chartered Surveyors (RICS) indicate that house price declines in June stayed close to the most widespread decline since RICs began to measure the property market in 1978.

The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 88%, in May it was 92%.

To add to the market's woes, RICS state that property sales have fallen to the lowest on record. Additionally mortgage approvals fell to the lowest in at least nine years in May, many buyers are finding themselves frozen out by tight lending conditions.

The Bank of England, as it considers what to do with interest rates and easing liquidity, would do well to bear in mind that the housing market is the engine of the economy.

Kill that off, and the economy dies with it.

Ruined Reputations

The US, with characteristic speed and vigour, moved to steady the finances of Freddie Mac and Fannie Mae yesterday.

The LA Times reported:

"Acting to prevent a severe disruption of the mortgage market, the federal government stepped in Sunday with plans for a sweeping aid package designed to bolster confidence in battered home-loan giants Fannie Mae and Freddie Mac.

The Bush administration said it would ask Congress to authorize the Treasury Department to lend Fannie and Freddie more money than current limits permit and buy stock in the two companies.

Also Sunday, the Federal Reserve agreed to permit the companies to borrow directly from the central bank, as investment firms were allowed to do after the near-collapse of Bear Stearns Cos. in March. The money would tide Fannie and Freddie over while the administration and Congress rush the emergency measures through."

This action provides an opportunity to reflect on what the British authorities and Bank of England would have done under similar circumstances. To some extent we already know, using Northern Rock as an example, they would have done very little and it would have been too late.

Our monetary authorities have been proven to be asleep at the wheel and, like rabbits frightened in the headlights, frozen with fear when confronted with a serious issue that needs resolute and muscular action.

As I recently noted, leading British banks have met with the Bank of England to ask for more help in stabilising the lending market; the £50BN injection, made earlier this year by the Bank of England, was simply not enough and the actions taken by the Bank and government since then have been too cautious and slow to have any meaningful impact on the confidence of the banks.

However, let me make it clear, whilst the inaction of the monetary authorities has contributed to this crisis the primary blame can be laid at the feet of our "respected" banks.

They willingly chose to buy and sell toxic sub prime debt from the US, in the hope that they could make a fast buck. The sub prime scheme was a classic pyramid selling scam, so long as you could keep selling the debt on without it crystallising the pyramid would keep growing. However, as with all pyramid scams, there is always an end.

Either the directors of our banks were incredibly stupid and did not know/understand what they were buying/selling (what were the risk and compliance departments doing during this period?), or they knowingly participated in the pyramid scam in the full knowledge that at some point it would collapse.

Either way, the reputation of the banks and those who run them has been ruined; it will take many years for the banks to restore their reputations.

The reputations of the British government, monetary authorities, financial services industry, City of London and banks have all been ruined by this scam.

Lessons will need to be learned and senior people removed from office if trust and confidence are ever to be restored.

Increase Liquidity Demand

Today some of the UK's largest banks are lobbying the Bank of England to extend the terms of its Special Liquidity Scheme (SLS), to increase liquidity in the money markets.

The Telegraph reports sources that say that the SLS has not restored confidence to financial markets, as banks continue to avoid lending to each other as well as to customers.

This fact can be attested to by anyone seeking a new mortgage or credit facility.

Finance directors of the banks, and heads of the banks' Treasury departments, will attend a meeting with representatives of the Bank of England. They are likely to press for the Bank to accept mortgages written this year as collateral.

As said many times before, this entire crisis can be defused if confidence is restored within the system. In order for this to happen the commercial banks need to start lending to each other, and the Bank of England needs to kick start that process by showing some proactive confidence boosting leadership.

Bradford & Bingley - The Plaything of Speculators

In echoes of Marconi and Northern Rock, Bradford & Bingley appears to have become the plaything of speculators as it desperately searches for a new CEO and for a white knight to buy it out.

B&B shares jumped more than 25% this morning, 9¼p to 43¼p, on hopes that it will be bought out.

Pundits believe that it is now likely that, barring further disasters, there will be a wind down or buy out.

The pundits fail to recognise the havoc that the speculators will wreak in the short term.

As a guide to the future, look at what happened to the share price of Marconi and Northern Rock.

The R Word

Judging by the recent headlines in the media Britain is poised on the brink of recession, or at least talking itself into one.

Capitalism is without doubt the best economic system thus far created by mankind. However, its fundamental weakness is that it relies on confidence in the future; knock that confidence away and you undermine the system.

That aside, warnings about a possible recession are now coming thick and fast David Frost, director general of the British Chambers of Commerce, has warned that there was a "real risk of recession in the coming months". He has noticed a distinct adverse change of mood in the last three weeks

I have noted a number of times that the last thing that needs to happen now is for the Bank of England to raise interest rates, or for Brown to raise taxes. David Kern, economic adviser to the British Chambers, has also argued that the Bank of England must resist "misguided calls" for higher interest rates.

Mr Frost is quoted in The Birmingham Post:

"The temptation for the Government will be to raise business taxes in the next pre-Budget report (this autumn) because the Exchequer is running out of money.

This would be a catastrophe."

The question is, does the government actually have a plan?

I suspect not.

Treasury Plans For Depositors' Savings Attacked

Alistair Darling revealed last week that the Government was planning to increase its guarantee on depositors' savings from £35K to £50K.

However, banks have rounded on the plans saying that they are unrealistic.

The plans would see taxpayers initially foot the bill for paying out deposits, within the first week of a bank going under. The cost would then be recouped by selling the failed bank's assets, and imposing a levy on other banks.

However, banks warn that the government would need to develop a costly centralised database that would store the details of every account and was updated constantly.

Additionally they have warned that transferring customers between banks generally takes three to four weeks, a failing of the banks rather than the government, as such the seven day deadline would be unworkable.

Another fault line within the plan is that it represents a change in the order of creditors when a company goes bust. As such, it would require a large amount of secondary legislation.

The best laid plans of mice and men!

Treasury Accounts Shambles

The Treasury's accounts are in such a shambles that the National Audit Office (NAO) won't sign them off.

The NAO are less that happy with the government's handling of the nationalisation of Northern Rock, and have had a major row with Alistair Darling over it. The NAO is concerned about the way that the bank is being treated on the Treasury's books.

Therefore the Treasury's annual report has been published with the financial accounts removed.

Aside from the humiliation of having their accounts refused, the Treasury also faces falling staff morale and institutional chaos.

Dying governments cause chaos, there are two more years left for institutional meltdown with the Treasury.

Bradford and Bingley Woes

Bradford & Bingley (B&B) has plunged 15% to a new low of 52p this morning, after the US buyout firm TPG walked away from leading its restructured rights issue after Moody's downgraded B&B's credit rating for a second time last night.

This less than welcome news follows B&B's rejection of a proposal of 72p per share from Resolution two weeks ago.

The question that shareholders will be asking themselves is why did the board reject a 72p offer two weeks ago.

Could it be possible that the board of B&B know that the due diligence that Resolution would have carried out, would have found something that would have caused them to walk away as well?

Europe Raises Rates

The European Central Bank (ECB) risked excarbating a European recession by raising European interest rates yesterday by 0.25% to 4.25% (a rate not seen since September 2001).

Jean-Claude Trichet, the ECB's President, fears inflation more than recession and warned that eurozone inflation could "explode" without decisive action.

Taking "decisive" action may well avert inflation. However, it does nothing for the underlying systemic weakness of the European economy and structure. The unified currency and bank, with its "one policy fits all" approach, is not working. Southern European economies (eg Spain, Greece, Italy etc) are facing a bleak recession, exacerbated by rising interest rates. Indeed, services sector activity stagnated across most eurozone countries last month.

Despite the recession the ECB may well increase rates further in the coming months. It will, if it is not careful, end up being the architect of the destruction of the European experiment.

Confidence Hits 16 Year Low

Business confidence in the UK has hit a 16 year low, as the effects of the ongoing credit crunch and rising food/energy prices are felt.

The Business Trends report, published by BDO Stoy Hayward, shows that the measure of business confidence over the next quarter declined to 97.7 in June from 98.3 in May, the lowest level since 1992.

Peter Hemington, BDO partner, is quoted in The Times:

"We've not seen short term business confidence plunge this low since Black Wednesday in 1992, indicating that UK businesses of all shapes and sizes are struggling to see any light at the end of the tunnel.

With confidence at a 16 year low, an interest rate rise next week aimed at curbing inflation could be crippling for business, and could worsen the effects of the economic slowdown. Our figures suggest that the MPC will be left with little choice next week other than to leave interest rates unchanged."

We have nothing to fear but fear itself, the gloom and doom will become self fulfilling prophecies if we are not careful.

Credit Untion Rules To Be Relaxed

As the mortgage and credit drought worsens, the government is desperately trying to look as though it is doing something to ease people's burden. The government announced today, via the BBC, that it will unveil an initiative to help people, eg those on low wages, beat the credit crunch by relaxing the rules on credit unions.

Credit unions are community based savings and loans organisations. They act as low-risk savings and loans providers, usually for the less well-off.

It is an ugly fact of financial life that those most in debt, and least able to borrow more, are at the greatest risk from loan sharks.

Currently any area or organisation can form a credit union; however, they have to operate within their own communities (the Common Bond). The Treasury will broaden the Common Bond, allowing the sector to expand.

The government envisages that by this time next year, people will be able to access cheap, secure loans.

All very well, but the need for low cost credit and an easing of cashflow is now; not in one year's time.

The loan sharks are going to feast themselves sick over the coming months, on the rotting corpses left behind by the government's mismanagement of this crisis.