Who's In Charge?

Alistair Darling revealed his plans yesterday to "beef up" financial regulation, in the wake of the Northern Wreck fiasco.

Rather perversely, despite the Financial Services Authority (FSA) being given a drubbing for it slack lustre approach to the Northern Wreck fiasco, the government wants to give the FSA more powers.

Darling also rejected the Treasury Select Committee's call for the Bank of England to play a greater role in monitoring individual institutions. Instead the Government plans to legislate to make the Bank of England's role in financial stability more formal.

John McFall, the chairman of the Treasury Select Committee, was unimpressed and described the proposals as "vague".

He is quoted in The Independent:

"The financial stability links between the Bank of England and the Financial Services Authority didn't work, so we need that to be strengthened.

I am looking for a mechanism to increase the financial stability area and that is vague at the moment."

Darling has also proposed that authorities be allowed to give a bank covert support, in the event of a serious problem arising that would affect consumer confidence.

The fundamental weakness of the proposals are that:

1 They give more power to the FSA, which has yet to get its house in order

2 It still does not clarify who, within the tripartite system (Treasury, FSA and Bank of England), is in charge.

Until point two, at the very least, is addressed the financial markets will be exposed to more potential Northern Wrecks.

Ducking The Question

Philippe Bordenave, the chief financial officer of French bank BNP Paribas, ducked questions about the possibility that BNP may bid for beleaguered Societe Generale yesterday.

Quote:

"We have had no time. When they published their announcement our first priority was to avoid the risk of being tarred by the same brush so we decided to immediately issue a statement and to publish very rapidly our results.

Since then, it was last Thursday, my team and I have worked around the clock to get the figures that we are publishing today. During that very short timeframe I have not had much time to elaborate much further on SocGen."

There are legal procedures under way which have attracted a huge amount of media attention so this is another reason why I don't want to comment on SocGen."

Whatever he says publicly, you can rest assured that privately BNP are doing their best to put together a buyout plan.

Aside from the fact that SocGen is now fatally holed below the water line, Gallic pride would never allow such a "national asset" to be sold to an Anglo Saxon bank.

If BNP do not get their offer in soon, and complete on it, SocGen will fall prey to the Anglo Saxons.

The Euro5BN Man Hits Back

Jerome Kerviel, known as the Euro5BN Man, who is alleged to be behind the Euro5BN loss at Societe Generale has claimed that many of his colleagues were also guilty of fraud.

He admitted to prosecutors that he breached legislation, but said that he was not the only worker at the bank to flout the law.

His lawyers claim that he had "committed no dishonest act", and had been made a scapegoat by the bank.

Co-workers, including security checkers and managers, have been implicated in the futures trader's dealings.

Prosecutor Jean-Claude Marin said:

"There were other traders who had acted in a similar way by exceeding their trading limits."

Many are sceptical of SocGen's version fo events, and their haste to blame one person.

Matt McKeith, head of equity dealing at First State Investments in Hong Kong, said:

"I think most people are just astonished that someone could get away with that kind of trade for so long without being noticed.

I'd always be slightly suspicious of the company line in these circumstances."

It transpires that SocGen was warned as early as November by Eurex, the derivatives exchange, about the positions being taken by Kerviel. However, they chose to do nothing about it after Kerviel produced a fake document to demonstrate that his risk had been covered by hedging.

Further problems are now coming out of the woodwork for SocGen. It is now facing legal action from shareholders claiming that the bank is involved in insider dealing. Seemingly a non-executive director (Robert Day) sold off nearly Euro100M worth of SocGen shares, eight days before the discovery of "irregular trades".

SocGen's version of events are now seriously in doubt, as is their competence and credibility.

Banks cannot afford to lose confidence or credibility.

SocGen Emulates Northern Wreck

In the fallout from last week's alleged fraud at Societe Generale, shares in the bank continued to underperform the market falling 3.7% today.

Prompting French Economy Minister, Christine Lagarde, to say that there was no need for Societe Generale to merge with another bank.

However, SocGen's problems have spurred longstanding market speculation that it could be taken over by BNP Paribas. There is also speculation that SocGen might be vulnerable to a break-up bid.

Northern Wreck, SocGen...who's next?

French Lessons

The recent SocGen scandal whereby Jerome Kerviel has been fingered by directors of Societe Generale, one of France's most banking prestigious institutions, as being solely responsibly for losing Euros5BN has provided a little "light relief" for other banks and investors caught up in the turmoil in the world's financial markets.

However, the matter does raise some rather intriguing questions about how Soc Gen has handled itself during this crisis.

Firstly, and most obviously, how was a relatively junior trader able to get away with such large scale deception over a long period of time?

From January 7th Kerviel had exposed SocGen to the tune of Euro50BN.

How is it that no one noticed this until, allegedly, Friday the 18th?

Reports now indicate that SocGen had seen warning signs much earlier. A classic warning sign of fraud, is an individual who never takes a holiday. Kerviel had not taken a vacation for over 8 months.

Where was the bank's internal audit department?

Why didn't SocGen act on these warning signs?

How is that one lowly trader acting on his own could evade all of SocGen's internal controls, designed top prevent frauds such as this?

SocGen claim that he was working alone.

Yet is this plausible?

Who else helped him?

Another intriguing factor is the timing of the SocGen unwinding of its positions. They unwound their positions on Monday 21st January, the very day that world markets began another freefall, and the day that the Fed made an emergency rate cut of 0.75%.

It seems that Kerviel and SocGen added to the woes of the financial markets, and may have been responsible for pushing the Fed into an emergency rate cut.

Aside from losing Euros5BN, as a result of this fraud, on the same day that SocGen announced this loss (Wednesday 20th January) they also announced losses on sub prime deals of around Euros1.5BN. Note: SocGen are taking the Euro5BN loss to their 2007 results.

How very odd that they combined the announcements!

Was there really a fraud there?

Is it possible that Jerome Kerviel is being made the scape goat for some really lousy legitimate trades made by SocGen?

The timing of the announcement is also raising a number of questions, not least why did they not announce this on the day/weekend that they discovered the fraud?

Indeed, President Sarkozy was kept in the dark for three days over this fraud. He was not told until Wednesday. Suffice to say he is not best pleased, and is asking the very same question.

Why keep quiet for so long over this matter?

The accounting treatment of the losses, taken to the 2007 results, also does not stand up to scrutiny. Why were they not taken to the 2008 results, the year in which the losses were made?

Clearly we have much to learn from the French about how to treat such issues!

It is clear that a lot more is going to come out in the next few days, those in SocGen who think that the worst is over should think again.

Others are going to be joining Kerviel, as he "helps police with their enquiries".

Daniel Bouton, SocGen's chief executive, and Christian Noyer, the governor of the central bank, take note.

Co-ordination

It seems that the central banks just don't get this global economy thing.

Despite the fact that the Western world is linked financially, and despite the fact there is a complete loss of confidence in the banking/finance sector, central banks still refuse to co-ordinate their policy.

The Fed, earlier this week, cut rates by 0.75% and is likely to reduce them by another 0.5% next week. Yet the Bank of England, at best, is likely to only reduce rates by 0.25% next week and the ECB (as usual with its head in the sand) refuses to make any change at all.

When will the central banks get it through their heads that the current crisis is one of confidence?

The only way to kick start the financial markets is a co-ordinated set of rate reductions, that demonstrate to the world that the central banks are working together to resolve the crisis.

Beleagured Darling Offers Concession

The beleaguered and under siege Chancellor of the Exchequer, Alistair Darling, in a desperate attempt to reprieve his Northern Wreck/CGT shattered reputation is today going to offer concessions on his less than popular plans to overhaul capital gains tax (CGT).

Darling will offer concessions to reduce the impact on business of his proposal to impose a single 18% CGT rate, in place of the 10% rate which applied to many business assets.

The concession is expected to reduce by 50% the CGT rate on profits on the first £750K of gains.

We shall see if that burnishes his rusting armour.

Interest Rates

The Fed's cut in interest rates yesterday by 0.75%, has put pressure on the Bank of England (BoE) and ECB to follow suit and act in a co-ordinated manner to stabilise the world's financial system.

Mervyn King, Governor of The Bank of England, gave a warning last night that the UK economy faced its toughest period in more than a decade during 2008. He also gave a hint that rates would be cut, at next week's BoE MPC meeting, by noting that the current rates were bringing downward pressure on demand.

Despite expectations of a cut in UK interest rates, it is unlikely that they will be cut by more than 0.25% (last month's MPC meeting minutes showed a vote 8-1 in favour of no change).

The ECB, not exactly known for its responsiveness to economic reality, is also facing pressure to cut rates; the Euro is already sliding as the market prices in a cut.

The Fed is due to meet next week, and will cut rates again by an expected 0.5%. Once this happens the pressure on the BoE and ECB to follow suit will be irresistible; otherwise their inaction, in the face of aggressive American rate cuts, will in fact further destabilise the world's financial markets.

Emergency Rate Cut II

As I stated earlier today, there has been an emergency interest rate cut.

The US Federal Reserve has cut interest rates by 0.75% to 3.5%.

Quite why the BBC are calling this "a complete surprise" is beyond me, as I wrote about it this morning before the Fed made their announcement.

Now we need the other two major central banks to follow suit, namely the Bank of England and the ECB.

Emergency Rate Cut

The ongoing turmoil in the world's stock markets (London fell by over 5% yesterday, and initially fell by 3% today) has prompted the Western central banks (US, UK and ECB) to finally wake up to the fact that the measures that they have taken so far have been too little, too late.

Fear, as opposed to greed and euphoria, is currently driving the markets. This fear has been brought about by the credit crunch, which in turn was brought about the semi criminal activity of US banks selling unaffordable mortgages to those with no hope of repaying them, then contaminating good quality debt by bundling these toxic mortgages with the debt and selling it on to other banks.

Chickens have come well and truly home to roost, and the banks are getting hit where they deserve namely in their profits. Unfortunately, the fallout hits the rest of us as credit lines are withdrawn and money/confidence dries up.

In reality, as FDR once said:

"We have nothing to fear but fear itself".

As the commercial banks themselves have shown zero leadership and courage during this time, it falls to the fiscal authorities of the US, UK and ECB to intervene and stop the panic.

Bush tried last week with a massive tax cut. Unfortunately, as with much that he has done over the last 7 years, this was a failure. Tax cuts, that are only likely to benefit the wealthy, are not sufficient to drive the economy out of the quagmire that it has found itself in.

The world's markets issued a unanimous two fingers to Bush's "solution", and went into freefall.

The central banks now have no choice but to co-ordinate emergency interest rate cuts worldwide. The market, anticipating such cuts, has risen briefly on the news in London.

It is now up to the central banks to deliver on this.

Northern Wreck

In a clear sign that the shares of Northern Wreck are nothing more than the plaything of speculators, and the last haven for those with zero risk aversion, the shares rose by 44% this morning to over 90p on news that there may be a chance for a private takeover of the bank.

The Treasury have invited new bidders to come forward, and have unveiled a "plan" to keep the corpse breathing.

The government plans to turn the £25BN loaned by the Bank of England into bonds, that will be sold to investors and guaranteed by the Treasury.

Bidders will have until February 4th to submit their full proposals.

However, the Treasury insists that it benefits from any increase in Northern Rock's share price, and has a say over the payment of possible dividends as well as a "range of other provisions appropriate for the provision of financial support of the kind contemplated."

The risk of any mortgage defaults will remain with the taxpayer.

Should negotiations with a private buyer fail, the Treasury said:

"the Government would bring forward legislation which would empower the Treasury, by order, to take Northern Rock into temporary public ownership."

The question that the shareholders needs to ask themselves is this:

Do you seriously expect to receive more than pennies for the shares, even if a private bidder comes forward and obtains the requisite financing?

The risk of nationalisation is still great, and to assume otherwise is utter madness.

The Rotting Corpse of Northern Wreck

As I suggested two days ago, it seems that Brown is holding back on nationalising the corpse of Norther Wreck so that the price will fall further.

That at least is what the Telegraph reports today:

"A Treasury minister appeared to suggest yesterday that the Government may wait for Northern Rock's share price to fall further before taking the company into public ownership.

Andy Burnham, the Chief Secretary to the Treasury, said the Government was watching 'market conditions' to see how to get the best value for taxpayers from any nationalisation of the stricken bank".

In the event that the bank is nationalised, as is more and more likely each day, Brown's self styled reputation for prudence will be fatally holed below the water line. The nationalisation will add billions of pounds of Northern Rock debts to the public finances, which will breach Treasury rules limiting borrowing.

A shambles by anyone's measure.

Northern Wreck Gets an F

As Northern Rock's shares fall ever lower, credit rating agency Fitch announced that it has cut its rating of Northern Rock to grade F, its lowest. It said that but for Bank of England and Treasury support "the bank would have defaulted".

Meanwhile Gordon Brown, and his sidekick Alistair Darling, continue to dither over what to do about Wreck; nationalise or let it collapse.

It is clear that this failed (destroyed) bank needs to be put out of its misery now, for the benefit of the country and Britain's much tarnished financial reputation.

Does Brown have the cajones to make such a decision?

No, he doesn't.

Northern Wreck

Shares in Northern Rock have plunged to an all time low today to 54p (they traded less than a year ago at £12), on the not unexpected news that the government is close to nationalising the Wreck.

The previous board members of Northern Wreck must be feeling really proud of themselves for destroying this bank!

Quite why the fall in price should come as a surprise to shareholders baffles me. Had they bothered to read this column they would have seen that I have been warning for sometime now that the shares are nothing more than the plaything of the speculators, and will end up in the rubbish bin in the same way as Marconi.

Virgin and Olivant, two companies trying to arrange a deal, are struggling to arrange funding.

Yesterday's extraordinary general meeting, was a damp squib and a waste of time. The board only lost one minor resolution brought by rebel shareholders.

Brown meanwhile kicked any remaining support from under the share price by saying:

"There are a number of companies in the financial private sector that have expressed an interest but public ownership - later to move it back into the private sector - is one of the options. The reason we've got to look at everything ... is that the stability of the British economy is the issue."

Meaning that he will do whatever is necessary to ensure this mess is sorted out ASAP; ie he will nationalise it within weeks.

It is unclear how much would be paid to shareholders in the event of nationalisation. However, the lower the share price the less they will be paid; it will be pennies not pounds.

This is a slow motion car crash that the shareholders could see, yet refused to acknowledge.

The Nationalisation of Northern Rock

It should come as no surprise to learn that Alistair Darling (Chancellor) has laid out plans to nationalise Northern Rock, later this month, and sell off the assets.

His only/last hope of reprieve will be if the private sector bids for the Rock actually come to fruition. However, these look increasingly less likely as:

1 There is a £100M black hole in the pension fund

2 The shareholders are doing their best today to play ostrich, and stop any private sector takeover, in the vain and misguided hope that the bank is worth more than a few pennies. It is not, the previous board oversaw the destruction of this bank in much the same way as Simpson et al destroyed Marconi.

As and when the bank is nationalised, the assets will be sold off piecemeal and the hapless taxpayers will be out of pocket by at least £50M. Britain's reputation as a world class financial centre will take a tremendous knock.

So who is to blame for this mess, who should be held accountable?

In my view the following should be held accountable:

1 The previous board, whose greed and egos led them to ride roughshod over common sense and good banking practice by skewing the bank's risk portfolio heavily into the danger zone.

2 The FSA for being asleep at the wheel, and not stepping in sooner to stop the destruction of the bank.

3 The Prime Minister, whose dithering over the "non general election" caused him to hold Darling back from intervening in this fiasco earlier.

High Noon

Today marks high noon for the banks, as the the much vaunted court case begins that will determine the legality and fate of bank charges for unauthorised overdrafts.

The Office of Fair Trading (OFT) is seeking to prove that bank charges fall under the remit of consumer contracts regulations, which state that "penalty fees" must be proportionate to their cost. The banks claim that the charges, of £30 for bouncing a cheque or exceeding an overdraft limit, are not punitive and so do not fall under the terms of the act.

In the event that the OFT wins, it will begin a second case aiming to prove that fees levied on customers are too high because they exceed costs of £4 a transaction.

If the banks win, they will continue charging customers with impunity.

However, in a perverse twist, whatever the outcome of the case customers can still claim back late payment fees on credit cards of more than £12.

The banks going to court today are Abbey National, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland Group and the Nationwide Building Society. They have every reason to fight, as they make around £3.5BN per annum from these charges and stand to repay consumers £5BN if they lose.

However, whatever the outcome, you can be assured that the hapless consumer will be charged one way or another by the banks.

Northern Rock's Black Hole

Northern Rock has revealed a £100M black hole in its pension fund which, if the bank were to be sold, would cost £200M to wind up.

Northern Rock also stated that it has finalised a deal with investment bank JP Morgan, which is buying its portfolio of lifetime home equity release mortgages. The gross asset value of the portfolio is £2.2BN (2% of Northern Rock's total assets).

It received a 2.5% premium on the sale.

Seemingly the best way for this bank to survive in any shape of form in the short term, may be for it to sell off its assets piece by piece; then liquidate itself, and put itself out its misery.

Bank Holds Rates

The Bank of England Monetary Policy Committee has decided to keep UK interest rates unchanged at 5.5%.

Decision Day

At noon today the Monetary Policy Committee (MPC) will announce its decision regarding interest rates.

As the credit crunch continues to bite, and people fret about the state of the economy, there is pressure on the MPC to cut rates again following on from its 0.25% reduction in December.

However, whether they do or not may not make that much difference to those with debts and mortgages. As evidenced from previous reductions, banks are very reluctant to pass such cuts on to their borrowers but more than happy to penalise their savers.

As ever, the banks will do well out of whatever the MPC decides to do.

UK Most Exposed To Crunch

The World Economic Forum (WEF) has warned that Britain's economic reliance on the financial services industry makes it more exposed than most to the effects of the ongoing credit crunch.

The WEF's annual Global Risks report warns that Britain may bear the brunt of the growing repercussions.

Quote:

"In Europe, the prominence of the UK's financial sector makes it vulnerable."

The WEF also notes that the crisis has raised "fundamental questions over the vulnerabilities of the current model of financial markets".

The WEF see that paradox in the speed of reactions and cohesiveness of the global financial system:

"while the financial system has been made more efficient and stable in normal times, it is also now more prone to excessive instability in really bad times."

WEF is calling or greater collaboration between policymakers and the private sector to address these problems.

As noted before on this site, the credit crunch is a creation of the bankers out of a situation of their own creation. They have the liquid funds available to lend to each other, but their fear has paralysed them like a rabbit facing the headlights.

Until the banks show some leadership and courage, the crisis will continue.

Crime and Punishment

Following last week's announcement by npower of an average 17.2% increase for gas prices and an average rise of 12.7% for electricity, Ofgem (the energy regulator) has tried to damp down fears of increasing residential gas and electricity prices.

Ofgem, in a response to a letter from Chancellor Alistair Darling, said that market forces (ie customers being able to switch accounts) would ensure that the consumer would not suffer unduly.

Quote:

"In Britain's competitive market some energy suppliers will be better at buying their energy than others and will be able to price at an advantage to their competitors,' Ofgem said.

Over the last five years we seen this happen and companies with high prices have been punished severely by customers. With customers switching at record levels this is set to continue."

This is all very well. However, it assumes that other energy suppliers will not follow npower's lead. Npower disagrees, and said that it expects other suppliers to "follow suit very shortly".

Darling and the government will be sweating in their beds, fearful of the effect that such dramatic price rises will have on the voters' perceptions of the effectiveness of their handling of the economy.

More Powers

The Chancellor of the Exchequer, Alistair Darling, has said that the government will give regulators greater powers to monitor and intervene in troubled banks. This follows on from the destruction of Northern Rock by the then board.

Darling stated that the Treasury will propose legislation in May to allow the Financial Services Authority (FSA) to question banks about their "day-to-day cash", as well as allowing the Bank of England and FSA to "conduct more efficient surveillance".

I am bound to point out that had the FSA been more proactive that, within the powers that they had at the time, they would have been able to intervene earlier and probably prevent the destruction of Northern Rock.

Another aspect of this failure is that of the tripartite monitoring system; whereby the FSA, Bank of England and Treasury fight amongst themselves as to who actually is in control of the financial markets.

The result being that no one actually takes any proactive action.

Under the current rules, the Financial Services Authority supervises banks while the Bank of England sets interest rates and controls market credit costs. Darling and the Treasury manage taxpayer money and the regulation of the system.

One of these three bodies needs to be put in charge of the other two, when it comes to market regulation. That of course will not happen.

Lending Tightened

The Bank of England (BOE) has warned that the number of households defaulting on their mortgage payments is expected to rise over the next three months.

The BOE also noted that banks were now less willing to lend, because of the higher cost and reduced availability of credit.

Add this to the very gloomy New Year message from the Prime Minister, and it is clear that 2008 is not going to be at all pleasant for those seeking credit or those already in debt.