Loans and Finance

Loans and Finance

Text

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

Friday, February 29, 2008

Housing Market Weakens

The gloomy clouds shrouding the housing market continue to cast their shadow. Nationwide report that house prices fell by 0.5% in February, for the fourth month running.

Hoverer, measured on an annual basis, house prices are still rising by 2.7%. This is the lowest annual growth rate since November 2005. Less than a year ago house price inflation was 11.1%.

Adding to the gloom, the Land Registry report that the total number of houses sold in November 2007 fell by 20% compared to November 2006.

Nationwide, whose job it is to sell mortgages, publicly remain calm about the situation; they note that the fall in annual house price inflation, between January and February (annual house price inflation in January was 4.2%), could be overstating the trend.

Nationwide also noted that the fact that the UK does not seem to be heading for a recession should provide some support. They forecast flat house prices for 2008.

The property market, just like all other markets, is driven in part by sentiment. The sentiment, and future direction of the market, will depend on there being no further unpleasant economic/financial shocks this year.

Does anyone have a crystal ball?

Wednesday, February 27, 2008

The End is Nigh

Hector Sants, the chief executive of the Financial Services Authority (FSA), has added his voice to the Greek chorus of doom and gloom that is currently serenading the financial services industry.

He has stated that the era of cheap borrowing by British banks is over. As such, in his view, the banks will revert to more "old fashioned" financial products and "relationship" banking.

Sants makes his comments at an interesting time for the FSA, as it is about to publish an internal review of its handling of the Northern Rock crisis.

He has already admitted that, although the FSA identified the risks in Northern Rock's business model, it failed to communicate adequately the potential problems and to force the mortgage lender's management to address the risks.

In other words, the FSA was asleep at the wheel.

He attempted to redirect the "story" by talking about banks and the ease of obtaining credit. He told the BBC:

"Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen.

Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect
."

He predicted that banks would stop pushing complex financial products onto their customers, and instead get know their clients in the long term.

Whilst I agree that the market has changed, and that banks will change their approach, I do not agree that we will see them improving the relationships with customers or indeed even trying to "get to know them".

The credit crunch is a direct result of the greed and stupidity of banks and other financial institutions. They have no intention of being held accountable for this, and are passing on the costs of this fiasco to the retail consumer, via increased interest rates and credit restrictions.

The banks are now so highly automated and reliant on computer driven statistical analysis of their customers, for making decisions, that they will never return to "relationship banking".

Credit decisions are made by computers and statistical models, the banks merely use humans as the interface to try to "explain" (ie obfuscate) their often "bizarre" decisions to their helpless customers.

As regards not trying to push complex financial products onto customers, that is tosh. The banks' greed has not been abated, as soon as they come up with another "pyramid" style scheme (such as sub prime mortgages) they will most assuredly pump and dump it on their long suffering customers.

The FSA needs to wake up to the reality of banking (greed and stupidity) in Britain in 2008, otherwise it will have many more Northern Wrecks on its hands.

Tuesday, February 26, 2008

Nationwide Puts Up Rates

As the effects of the self induced banking credit crunch continue to ripple through the economy as whole, Nationwide has told customers wanting a loan for over 75% of a property's value that they will have to pay higher rates of interest to cover the increased risks.

Nationwide has raised interest rates on deals above 75% by 0.2%.

Whilst this will hit first time buyers the hardest, it is a logical decision in the face of a faltering property market; building societies are not charities, they have as much right to make a profit as any other financial institution.

The increase in rates will also penalise existing customers, who have mortgages over the 75% threshold, and who are looking to remortgage. Statistics indicate that the average deposit in the UK is 20%.

Monday, February 25, 2008

House Prices

Hometrack report that house prices in Britain have dropped for a fifth month in February, by 0.2%, as result of banks curtailing their lending.

Hometrack forecasts that home prices will rise by a meagre 1% in 2008 (33% of 2007).

They surveyed 3,500 real estate agents and surveyors; basing their figures on estimates of achievable, rather than asked, prices.

However, the fundamental issue that people actually need to get their heads around, when they talk about property in the UK, is whether there is enough housing available in the areas where people want to live.

The answer to that still apears to be, no.

Friday, February 22, 2008

Northern Rock Shares

The government has stated that, despite the suspension of Northern Rock PLC shares from listing and market trading, people are allowed to trade in bilateral off market or over the counter trades.

The current spread, apparently, is a ludicrous 25p-24p. This is of course absurd, given that the likely "value" of Northern Rock shares is in fact 5p or less.

However, the government, quite correctly, also warned that such trades wouldn't be entitled to claim compensation.

A statement issued by the Treasury said:

"Persons dealing in shares of Northern Rock, or instruments referenced to such shares do so entirely at their own risk."

Fair enough.

However, the question is, why are the shares still suspended?

Wouldn't it be better to allow them to be traded, and thus offer shareholders a chance to pull out now?

Indeed, wouldn't this afford the government a way of "valuing" the bank?

Thursday, February 21, 2008

Banks - Who Trusts Them?

Given the recent scandals involving SocGen and Credit Suisse, and the massive write downs being posted by banks as a result of their reckless gamble in the US sub prime market, how can anyone (borrowers, savers or investors) seriously trust them anymore?

Wednesday, February 20, 2008

The Perversity of The Housing Market

Despite the ongoing credit crunch, and the tightening of lending conditions and reduction in credit it seems that the housing market in the UK may be a little more resilient than some pundits have been claiming.

The Council for Mortgage Lenders (CML) reports that gross mortgage lending rose in January to £26.5BN, an increase of 11% compared to the £23.9BN in December.

However, this amount is still lower than most months in 2007.

The CML is expecting lower lending volumes over the course of 2008.

Michael Coogan, director general of the CML, is quoted:

"Gross lending held up well in January. However, there is considerable uncertainty in the housing market at the moment and we expect lending volumes to be lower in the coming months.

Home buyers might be more inclined to transact if their moving costs were reduced and the government has the opportunity to address this by raising stamp duty thresholds and cutting the rates of stamp duty in next month's Budget
."

A nice wish, but an unlikely reality.

Tuesday, February 19, 2008

The Failure of The UK's Financial System

Those of you who missed last night's Dispatches documentary on Channel 4, about how the banks have gambled away billions of pounds of our money, should access a re-run of it as soon as possible.

In the programme, private equity financier Jon Moulton laid the blame for the current financial meltdown firmly at the door of the banks that gambled billions of pounds away on high risk sub prime mortgages in the USA.

Northern Rock, unsurprisingly, was mentioned more than few times. Moulton, aside from blaming the then board of this bank for destroying it because of their greed and arrogance, also directed his ire towards Gordon Brown.

Who he stated, quite correctly, wrecked the financial regulatory regime when he took away the Bank of England's responsibility for monitoring and regulating financial institutions and the markets in 1997 and split it up across:

-The Treasury
-The FSA
-The Bank of England

Moulton noted, as I have done many times on this site, that the tripartite regime's major failing is that no one is actually in charge; as was self evident when Northern Wreck imploded.

Moulton castigated the three members of the regime for their incompetence, and for failing to heed the obvious warning signs of the financial storm heading our way He warned that worse is to come, as the banks announce their results over the coming weeks.

Indeed, we see today that Barclays profits have been hit by a massive £1.64BN write down emanating from their failed gamble in the US sub prime market.

Will things improve?

In the short to medium term, no:

1 Banks and other financial institutions are taking massive losses, and continue to draw in their lines of credit. In other words, they will stop lending to each other and to the ordinary person in the street. The economy will take a very severe hit.

2 As long as Gordon Brown is Prime Minister, and that looks likely for the next year or so, the current failed tripartite regulatory mechanism will not be changed for the better. He is the arrogant architect of this failure, but will never admit to it.

As stated, watch the Dispatches documentary on Channel 4,

Monday, February 18, 2008

Northern Rock Shareholders Fight Back

It seems that the shareholders in Northern Rock do not intend to take the nationalisation of The Wreck lying down.

Citywire reports that they intend to take a book-value of £4 per share as the basis for their negotiations, and are prepared (according to David Greene from Edwin Coe, who is working on behalf of around 6,000 Northern Rock shareholders and the UK Shareholders Association) to take the matter as far as the European Court of Human Rights over the next 18 months.

Good luck with that then!

Northern Rock Nationalised

As expected, Northern Rock (or to give it its more formal title, Northern Wreck) is to be nationalised.

After months of dithering, Gordon Brown and his sidekick Alistair Darling have reluctantly been forced to conclude that the only way to safeguard taxpayers' money is to nationalise the bank.

Sharedealing has been suspended.

The government claim that it would seek to compensate Northern Rock shareholders based on the value of their shares. This "value" will be "independently" determined.

Darling has said that:

"The principles for assessing that compensation would be based on the company not receiving public support and that all specific financial assistance from the Bank of England or government had come to an end."

However, given that the bank is nothing but a dead corpse without the government supplied crutches, the "value" of the shares will be pretty close to zero. As I warned on this site some time ago, the shares are as worthless as Marconi shares.

Congratulations to the ex board of directors of Northern Rock (for their greed), and to Brown and Darling (for their dithering) for destroying a once fine institution!

Friday, February 15, 2008

Regulator To Force Realism

The UK pensions regulator is to force companies to use more realistic projections of how long workers will live after retirement.

The regulator will propose a tougher mortality standard early next week. These changes will affect 99.5% of all schemes, and will increase stated liabilities by 6-8%.

In other words, companies will find their profits hit and shareholders/pensioners/workers will suffer as costs and dividends are cut.

Thursday, February 14, 2008

FSA Shows Its Teeth

The Financial Services Authority (FSA) has given a rare display of its teeth.

The FSA has banned former Square Mile Securities Ltd. stockbroker Mohammed Suba Miah. This means that he can no longer work as a broker. The FSA also fined him £21K, over claims he traded customers' shares without their permission.

Margaret Cole, the FSA's director of enforcement, said:

"Stockbrokers are on notice that the FSA will not tolerate abuse.

Our actions against Mr. Miah show that we take this very seriously
."

It is about time that the FSA took firm action against recalcitrant organisations and individuals.

Wednesday, February 13, 2008

Fiddling While Rome Burns

Despite rising factory prices, falling house prices and a collapse in lending; the Bank of England and Alistair Darling still claim that the economic foundations of the UK are rock solid.

Are they wilfully blind, or just mad?

Monday, February 11, 2008

Egg To Be Grilled

Egg and its owner Citigroup Inc are facing a possible investigation over allegations that Egg cancelled credit cards because holders consistently paid up in time.

Last month, Egg said that it was going cancel the cards of around 7% of its customers. Egg claimed that the 161,000 cardholders affected had a "higher than acceptable risk profile".

However, many of those on the hit list made vocal complaints to their MPs and the media pointing out that they had good credit records, and that they were paying off the Egg cards on time.

Following this furore, the Financial Services Authority (FSA) has been forced to get off its backside and has referred Nigel Griffiths' (an MP) complaint about the issue to the Office of Fair Trading (OFT).

Mr Griffiths said that he was "very pleased" about the FSA's action. Doubtless Egg are not so pleased.

Friday, February 08, 2008

A Missed Opportunity

As predicted, the MPC cut interest rates yesterday by a meagre 0.25%.

This reduction is no way near enough to stabilise the UK financial system/markets, and is out of step with the Fed's recent aggressive rate cuts.

A missed opportunity, which will come back to bite the Bank of England in the backside.

Thursday, February 07, 2008

Interest Rates

The Bank of England's Monetary Policy Committee (MPC) sits down today, and decides as to what they will do with interest rates.

The Fed has led the way by slashing rates in the USA. However, we can be assured that the MPC will not follow suit with such an assertive cut.

At best we can hope for a 0.5% reduction, realistically the cut will most likely be 0.25%.

This of course will have little beneficial effect on the economy; as the rate cuts are rarely passed on in full to borrowers, but always passed on in full to savers.

Wednesday, February 06, 2008

Virgin Backtracks

Now that the finishing post is in site, in the race to take over the corpse of Northern Wreck, those organisations that expressed a very public interest in making a bid are now having to get ready to put their money where their mouths are.

Monday saw Olivant pull out, today it is reported that Virgin are backtracking on a promise not to cut jobs if it succeeds in its bid.

Jayne-Anne Gadhia, the head of Virgin Money, said:

"We cannot continue to make the promise that there will be no redundancies, but we would aim very much to minimise any reductions."

When Virgin originally very publicly announced it was interested in bidding for Northern Wreck, last October, it said that it would keep Northern Rock operating in its current form and did not anticipate any job losses.

Needless to say the unions are not best pleased with this volte face. Unite said that it will meet with the company on Thursday to discuss the details of their bid.

Graham Goddard, Unite deputy general secretary, said:

"Unite will oppose any compulsory redundancies."

That's all very nice, but how exactly do they intend to oppose the redundancies without destroying what remains of the corpse of the bank?

The BBC estimate that approximately 1,000 (1 in 6) members of Northern Wreck's staff will lose their jobs.

It seems that the issue that has caused this volte face by Virgin is the insistence by the government that the loans made by the Bank of England to Northern Rock must be repaid in three years, rather than five years as previously expected.

Money has the rather annoying habit of really focussing the mind!

Tuesday, February 05, 2008

The Great Game

Following on from my earlier article this morning, it seems that Luqman Arnold's Olivant has hinted this morning that it may re-enter the game to bid for Northern Rock, despite having pulled out yesterday.

The group admitted that more favourable terms may lure it back in.

Hah, as I said, the pullout was nothing more than a negotiation tactic!

One Down, Two To Go

Luqman Arnold, the former boss of Abbey, has pulled out of the bidding for the corpse of Northern Rock. This gives Chancellor Alistair Darling something of a headache, as he and Gordon Brown are desperate to avoid nationalising the Wreck.

Unfortunately for the government there are only two bidders left, thus reducing the chances of a viable solution that is favourable to the Treasury and taxpayer.

Sir Richard Branson's Virgin Group and Northern Rock's management team are now the only players in the game, thus reducing the ability of the Treasury to call the shots.

Needless to say, Darling is trying to twist Arnold's arm to return to the table; and he may be offering Arnold some extra concessions.

Perhaps that is exactly why theatrically Arnold pulled out at the eleventh hour?

Monday, February 04, 2008

D Day for Northern Wreck

Today, 16:00 to be precise, marks the deadline imposed by the government for bids to be placed for the beleaguered Northern Rock.

It seems that, despite being very pally with the Prime Minister, Richard Branson's Virgin is losing ground in the race to carve up the corpse of the once proud bank.

Virgin's known rivals are Paul Thompson, the former chief executive of insurer Resolution, who is leading a proposal to keep much of Northern Rock's management in place and ex-Abbey boss Luqman Arnold.

Although the deadline for bids is 16:00 today, the Tripartite Authorities, advised by Goldman Sachs, may take until the end of the month to pick a bidder.

The Government has told shareholders that they will not be allowed to determine the decision, but it is likely Goldman and the Treasury will take their views into account.

Failure to complete on a satisfactory deal will mean the nationalisation of Northern Rock.

Friday, February 01, 2008

Whither Interest Rates?

As predicted, the Fed cut rates again this week; down by 0.5% to 3%.

The Fed has also stated that there is the possibility of at least one more cut to come.

Meanwhile in the UK, the very cautious and ponderous Bank of England Monetary Committee will be sitting next week and deciding on whether to cut rates and emulate the Americans.

The word on Threadneedle Street is that there will be a cut, but that it will be a meagre 0.25%.

This is of course far too little, and far too late to have any real effect on the UK financial markets. Given that the government has little room for fiscal mobility, now that public sector debt is spiralling out of control, interest rates are seen as the only tool left in the toolkit that can be used to manage the current crisis.

As for the ECB, as already noted, they are not renowned for operating in the real world and it can be taken as a certainty that they will not cut rates anytime soon.

A wasted opportunity by both the Bank of England and the ECB. They both had the chance to operate in unison with the Fed, and actually make a difference to the world economy.

They have blown it!