Loans and Finance

Loans and Finance

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

Monday, March 31, 2008

New Bank Code

Today the new voluntary bank code comes into effect, which will "in theory" require banks and building societies to do more to help customers in financial difficulties.

The new code states that banks must contact customers that they think may be heading toward debt problems, until now the onus has been on the individual to contact the bank.

Consumer group Which? said the new code should have gone further, such as raising minimum credit card repayments.

Banks must now assess whether people will be able to repay their debt, before they are given new loans or have their credit limits increased. They must look at customers' credit ratings, and take into account their income and other financial commitments.

Surely they they were doing this anyway?

Saturday, March 29, 2008

The FSA

Were the FSA to be regulating itself, given its recent report about its failings, it would have failed itself.

Friday, March 28, 2008

House Prices Fall

Figures from the Nationwide show that the price of the average house has fallen in March by 0.6% to £179,100.

The annual rate of house price inflation is now 1.1%, the lowest since March 1996.

Fionnuala Earley, group economist for Nationwide, is quoted in The Times:

"The outlook for UK house prices is clearly more downbeat. Some of the downside risks we identified in November have become a reality — most notably the continued turmoil in the financial markets."

Howard Archer, chief economist for Global Insight, is predicting a 5% fall in house prices this year and next.

The downturn and continued uncertainty wrt the economy adds to the pressure on the Bank of England to cut interest rates.

Thursday, March 27, 2008

Behind The Curve

I am not the only person who believes that the Bank of England and Mervyn King have been slow to realise the dangers of the ongoing credit crunch.

Former Bank of England policy maker DeAnne Julius has weighed in. She is quoted on Bloomberg as saying:

"They're behind the curve.

If I were still on the committee I'd be voting for a half-a-point cut
."

She went on to say that King had not communicated enough with financial markets as well as banking regulators and the Treasury, as the crisis developed last August.

She blamed the Bank of England for the run on Northern Rock Plc, which the government was forced to nationalise last month.

The question is, will Mervyn King listen?

Wednesday, March 26, 2008

FSA Admits To Being Unacceptable

Hector Sants the CEO of the beleaguered Financial Services Authority (FSA) has finally admitted what everyone else has known for many months, namely that its handling of Northern Rock was unacceptable.

The FSA's internal review of the fiasco stated that the "quality, intensity and rigour" of oversight by its management had been inadequate.

It said that its supervisory teams had failed to follow up with Northern Rock on the vulnerability of its business model, as the credit crisis took hold last summer.

Resources were inadequate, and managers failed to ensure that all available "risk information" was used to help to prevent an impending crisis.

Sants said that the FSA's handling of the affair was "not carried out to a standard that is acceptable".

He is quoted in The Times:

"It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge."

Shutting the stable door after this horse has well and truly bolted, the FSA will now introduce a new group of specialists to review the supervision of "high-impact firms" with the number of staff monitoring each firm increased from previous levels.

It said the risk department of the FSA would be expanded and supervisory training would be upgraded, there will also be greater focus on liquidity and supervision of high-impact retail banks such as Northern Rock.

Needless to say, the FSA has refused to apologise.

Michael Fallon, senior member of the Treasury Select Committee, had called for the report to contain the word "sorry".

Quoted in The Times, Mr Fallon said:

"They failed in their duty.

There were too few people regulating a very large bank and they didn't pay enough attention to liquidity issues
."

Exactly!

What is the point in the FSA if it doesn't act in a proactive manner in order to ensure the effective functioning of the financial system?

Simon Morris, of CMS Cameron McKenna, said:

"If a major firm regulated by FSA were to operate with such poor management oversight and such weak systems and controls, then FSA would have shut it down by now".

Whatever the FSA claims that it is now doing to improve matters, these "improvements" will come to nothing if the current tripartite system (where no one is actually in charge, and therefore responsible) remains in place.

Unfortunately, because this dysfunctional system was created by Gordon Brown, until Brown is removed from office there will be no change to the tripartite system and the UK's financial system will continue to remain exposed to failures such as Northern Rock.

Tuesday, March 25, 2008

The Sharks are Circling

The ongoing credit crunch has caused banks and finance companies to withdraw many of their mainstream products, and to tighten their lending criteria. As such, it should come as no surprise to learn that the vacuum left is now being filled by loan sharks who charge extortionate rates of interest (100% or more) to those who are desperate for credit.

The Times reports that debt campaigners have seen many clients forced to borrow at extortionate interest rates, because they have had their credit cards cut off or have been refused loans.

The Financial Services Authority (FSA) estimates that up to seven million people had difficulty gaining mainstream credit, and Citizens Advice reports that mortgage arrears problems had gone up by 35% in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.

The credit crunch is now adversely affecting the "man in the street". The Bank of England and Gordon Brown, who claim that the economy is sound and stable, need to wake up to the fact that people should not be placed in a situation where they are forced to borrow at "criminal" rates of interest merely to put food on the table.

Monday, March 24, 2008

Vote of Confidence in HBOS

The BBC reports that senior management and staff at HBOS have bought over £6M of the bank's shares after a steep fall in the firm's share price last week.

The bank said the move was a "demonstration of confidence" after it was hit by "malicious rumours".

HBOS CEO, Andy Hornby, spent £414,000 of his annual bonus to buy 92,812 shares.

HBOS executive directors and 250 senior managers, purchased 1.4 million shares at 446.25p.

Friday, March 21, 2008

Where's The Plan?

Following on from yesterday's meeting between Mervyn King (Governor of The Bank of England) and the CEO's of Britain's leading banks, the Bank of England said that it would continue to offer an extra £5BN of one-week money on top of its usual repo auctions every week until its policymakers decided whether to change lending rates at their next monthly meeting on April 9.

The trouble is this is not enough.

The banks need to see that there is a plan co-ordinated between the central banks and governments of the key financial centres.

So far only the Fed and US has been proactive. There is, as yet, no co-ordinated plan.

Until there is one, the situation will continue worsen.

Thursday, March 20, 2008

Scum!

Stock market manipulators (Scum!), tried yesterday to bring down HBOS by spreading a false rumour that HBOS had begged the Bank of England for an emergency loan.

This was vehemently denied by HBOS and Bank of England. However, the damage had been done and the share price fell by 17%; earning shorters a tidy sum.

The FSA said that it would pursue traders guilty of "market abuse".

The trouble is that these warnings come after the damage is done. The Bank of England and FSA need to get their acts together and work in a pro active rather than reactive fashion.

The Bank of England has said that it will double its weekly emergency funding to £10BN. When compared with the pro active approach taken by the Fed, this is a mere drop in the ocean and shows that the Bank of England has yet to "get" what is happening in the markets.

Unsurprisingly the UK's major financial institutions are highly unimpressed by the Bank of England's, and government's, handling of the crisis so far. As such, the chief executives of Halifax Bank of Scotland, Royal Bank of Scotland, Barclays, Lloyds TSB and HSBC have called for a meeting today with Mervyn King (Governor of The Bank of England) for an "exchange of views".

Let us hope that they are able to knock some sense into him.

The BoE, UK government and ECB simply do not "get" this yet.

They need to ditch their tired old mantras about "moral hazard" and inflation worries. These issues are dead and buried for the moment.

When you see your neighbour's house on fire, even if he started it himself, you don't sit back and do nothing. You help him put the fire out, before it reaches your house.

Only large scale co-ordinated efforts by the central banks (BoE/ECB etc), governments, and main banks will stabilise this situation.

Banks need to start lending to each other again; to do this they need to be given a guarantee by BoE/ECB et al that their funding etc will be underwritten. This means BoE et al need to be imaginative, as the Fed and US government has been.

The trouble is, they are simply not up to the job.

Wednesday, March 19, 2008

Bear's Rn't Us

A tribute to all the analysts, financial commentators, self proclaimed financial "experts", traders and pump and dump operators who have scammed billions out of the naive, foolish and trusting (ie ordinary investors).

Chickens are now coming home to roost!



Fed Cuts Rates

As predicted, the Federal Reserve cut rates yesterday. However, the rate cut of 0.75% was not as high as the 1% expected by many.

To some extent, the markets have reacted positively in the short term to this cut. However, it will need to be backed up by coordinated central bank and government action around the world if the markets are to be stabilised.

Regrettably the UK and ECB are still sitting on their hands, like rabbits caught in the headlights they are frozen in panic.

Tuesday, March 18, 2008

Inflation Up

Consumer Price Inflation (CPI) rose to 2.5% in February, it was 2.2% in January, as a result of increases in energy bills.

The Bank of England's target for CPI is 2%, any rate above that makes it more difficult for the Bank to cut interest rates.

However, given the financial tsunami that is heading our way from the USA, it is likely that the Bank will have to cut rates further if it is to try to avoid recession in the UK.

Whilst the headline rate may look relatively benign, underlying increases in the price of staples such as; cheese, milk and bread prices (which rose by a staggering 17.6% in February) will hit households very hard.

The Retail Prices Index (RPI), which is a better guide to reality, remained unchanged at 4.1%.

Monday, March 17, 2008

Bear Stearns Sold For 6%

In a rapid chain of events, following on from last week's announcement that Bear Stearns needed emergency funding from JPMorgan, it has been announced that JP Morgan has now bought Bear Stearns for $240M.

This represents a mere 6% of it market value.

The fact that this solution and deal was put together over the weekend, says much about the speed at which American financial institutions react to and resolve problems and crises.

The Fed will reduce interest rates by 1% tomorrow. However, the Bank of England and ECB will continue to sit on their hands and do precious little.

The proactive approach says much about how the equivalent British financial institutions and government do not react to, or resolve, similar problems.

The consequences of the UK government's, the FSA's and Bank of England's indecision and dithering over the Northern Rock debacle will be burdening the British taxpayers for years to come. Thousands of Northern Rock jobs will be lost, and the credibility of our financial system has been shattered.

Regrettably, as long as Brown (the man who created the tripartite system) is in charge, the lessons will not be learned and another Northern Rock will occur.

Friday, March 14, 2008

The Flight To Commodities

Fear and panic are sweeping the world's financial markets as the effects of the ongoing credit crunch, self inflicted by the greed and stupidity of the banks, claimed another high profile victim.

Carlyle Capital Corporation (CCC), a $21BN mortgage fund, collapsed. This fund, although it invested in "high quality" mortgages, had leveraged itself to hilt. Thus proving the old adage, don't invest with money that you can't afford to lose.

The City is bracing itself for a string of similar fund collapses.

The result of this carnage is that there is a flight away from financial products to commodities. Gold is leading the way, breaking through the $1000 an ounce barrier.

This should come as "heartening" news to Gordon Brown who, when he was chancellor, sold much of Britain's gold reserves off for less than a third of that amount.

Could someone please ask him why he did that?

Thursday, March 13, 2008

Darling's Ostrich Budget

Darling's Ostrich Budget
Yesterday's budget, presented by Alistair Darling, aside from being tedious and predictable betrayed the fact that Darling and the government are burying their heads in the sand over the meltdown in the world's financial markets.

Stock markets across Europe and Asia are falling this morning as the dollar slumped to new lows, and fears grow that the US Federal Reserve's $280BN liquidity bailout will fail to stop a market meltdown and a US recession.

The Carlyle Capital Corporation (CCC) admitted today that it is likely to be liquidated, after failing to reach an agreement with its lenders. The company defaulted on $16BN of debt, and bankers are seizing its assets.

Several hedge funds with assets of more than $4BN are on the brink of collapse, or had halted withdrawals.

Meanwhile Darling tinkers with the tax on booze and fags, and worries about plastic bags.

Wednesday, March 12, 2008

The Budget

As predicted Alistair Darling put booze and fags up in today's budget, you have until Sunday to stock up at pre budget prices.

The BBC has an easy to read summary Budget Highlights.

Egg on its Face

Ian Kerr, the chief executive of Egg, has resigned in the wake of the public relations disaster in which Egg was accused of unfairly withdrawing credit cards from thousands of responsible customers.

Egg, in an act of sheer folly, last month sent out a letter to 161,000 card users telling them that their agreements would be terminated in 35 days because they had a "higher than acceptable risk profile".

The reality being widely touted in the media and by experts was that Egg was dumping customers who paid off their debts on time, these were deemed to be unprofitable.

Labour MP Nigel Griffiths is quoted in The Times:

"I don't believe in pointing the finger...and I have not been seeking Ian Kerr's resignation. But I think it gives a clear warning to all banks and credit card lenders that they must be frank with customers.

I don't feel Egg realised the enormity of the communications disaster they were presiding over by withdrawing cards from 160,000 customers. Egg is a sad lesson to others that they cannot withdraw credit cards from responsible customers without those customers screaming blue murder
."

The Financial Services Authority has passed the matter on to the Office of Fair Trading.

Egg deny that Kerr's resignation is linked to the fiasco.

Tuesday, March 11, 2008

Back To The Nineties

The Royal Institution of Chartered Surveyors (RICS) claimed today that in February the housing market experienced its most severe downturn since the slump of the 1990s.

RICS say that more surveyors reported house prices falls in February, than any other time since June 1990. The RICS gauge of house price trends fell to minus 64.1% last month (in June 1990 it was minus 64.5%), in January 2008 it was minus 54.8%.

RICS also said that the stocks of unsold property on surveyors' books have increased to a ten-year high.

This of course means that those wishing to sell their property need to price it more realistically.

Given people's emotional attachment to their homes, and their unrealistic expectations of making a fast profit, quite how long this new realism will take to sink in remains to be seen.

Monday, March 10, 2008

The Sleepy Old Watchdog

In the most telling outcome of the Northern Wreck fiasco of last year, a Freedom of Information request has revealed that most of the officials at the Financial Services Authority (FSA), who fell asleep at the wheel whilst "supervising" Northern Rock have quit.

The Times reports that five of the seven FSA supervisors working closely on Northern Rock have left.

The fact that this information had to be extracted by use of a Freedom of Information Act request speaks volumes about the FSA and their concept of "transparency".

The fact that five officials have left speaks volumes about the quality of the supervision by the FSA.

A report by Rosemary Hilary, the FSA's internal auditor, about the FSA's supervision of Northern Rock will be released later this month. Hector Sants, CEO of the FSA, is already denying speculation that the report will be a whitewash.

However, despite his claims, Sants also slips in the fact that some details will be held back to protect the legal rights of employees and to respect the confidentiality of competitor banks examined for purposes of comparison.

The FSA doesn't seem to to like the idea of public accountability.

I find this to be somewhat ironic, given that the FSA is meant to supervise and hold accountable organisations that operate within the financial services industry.

The FSA doesn't seem to "get" that the concepts of transparency and accountability also should apply to itself.

Friday, March 07, 2008

US Mortgage Crisis Worsening

There has been a feeling in some quarters that the worst of the credit crunch, brought about by the greed, arrogance and stupidity of the banks was over.

Unfortunately this is not the case. To add to the litany of the banks' failings we must add another, fraud.

Standard & Poor report that the US mortgage crisis will become considerably worse, because the level of fraudulent lending to unsuitable borrowers was much higher than previously estimated.

David Wyss, Standard & Poor's chief economist, is quoted in The Times speaking at a conference in Bombay:

"The panic has subsided, but the housing market has not hit bottom yet. Housing prices won't hit bottom until next summer and the losses won't peak for another two years, until 2009. We are not halfway through this crisis yet.

We underestimated the extent to which fraud was occurring in the industry. It looks [as if], based on some surveys that had been done, the extent of frauds increased sharply in 2006
."

The frauds increased as lenders looked for new customers, having sold all the mortgages that they could to legitimate customers.

In effect the sub prime mortgage industry was nothing more than a pyramid (Ponzi) scam. In order for it to work the banks had to keep selling more mortgages in order to boost their commissions and to maintain their cash flow as other sub prime mortgages, sold earlier, began to default.

These toxic debts were then bundled with good debt and sold around the world to other banks and financial institutions, who deluded themselves that they knew what they were doing.

Hence, as the situation in the US worsens, the effect will be felt here as the banks that were stupid enough to buy these useless products take the hit.

Regrettably the Bank of England has chosen to ignore the economic Tsunami that is heading our way, and has sat on its hands at yesterday's MPC meeting and kept interest rates unchanged.

By the time the Bank of England wakes up to this, it will be too late.

Thursday, March 06, 2008

Mixed Signals From The Housing Market

Chancellor Alistair Darling told parliament yesterday that the housing market was cooling, as price growth slows down. However, he tried to balance that point by noting that it remains fundamentally strong.

Quote:

"Yes it's true that house prices are slowing down, but this is on the back of many years when house prices have been growing at 10 percent or even more in some parts of the country for many years.

I believe the housing market in this country, although it will slow down, is fundamentally strong
."

Well he would say that, wouldn't he?

The Halifax report that house prices fell by 0.3% last month (analysts had predicted a 0.2% fall).

The annual rate of house price growth is now 4.2%.

However, the buy to let sector (which to a large extent has fuelled house price growth) seems to be feeling the effects of the credit crunch, as sources of loans for new entrants are drying up.

The Royal Institute of Chartered Surveyors (RICS) said that the number of landlords instructing estate agents to rent out their properties had fallen by 1% during the final quarter of 2007. This is the first decline in ten years, and compares very unfavourably with the 11% increase the previous three months.

Banks and building societies have increasingly stopped offering buy to let mortgages.

A mixed picture, which indicates unsettled times ahead for landlords, property owners and house hunters.

Wednesday, March 05, 2008

100% Interest Rate

As the blow back from the credit crunch hits the ordinary person in the street, some loan companies are making a killing out of people's financial misery by offering loans with a crippling 100% interest rate.

Seemingly up to two million people have taken loans, with punitive interest rates of up to 100%, from Provident Financial.

Provident Financial, is Britain's largest door step lender, it sells small loans door-to-door.

In 2007 it reported pre tax profits of £115.2M. Peter Crook, Provident's chief executive, said that the outlook for 2008 looked good fro Provident at any rate:

"Current market conditions are favourable for us, as mainstream banks continue to tighten their lending criteria."

Many of Provident's customers borrow around £400, and pay 100% interest on their loans.

The sad irony is that if legitimate (if somewhat "high charging") companies such as Provident ceased to exist, those desperate borrowers who use them would end up in the hands of the loan sharks.

Tuesday, March 04, 2008

The $51M a Day Write Off

Congratulations to HSBC who have so managed to mire themselves in the disaster of the US sub prime market that they are now forced to write off $51M per day in bad loans.

HSBC announced that they wrote off $11.7BN in bad loans last year, mainly from US sub prime defaults, and that this situation was still deteriorating.

Stephen Green, HSBC's chairman, said:

"We're not in a position to say we've turned the corner or passed the worst."

The greed, arrogance and stupidity of the banks have brought about this mess. Regrettably the people who will suffer the most are the poor saps who had these loans foisted on them in the first place, and those who are more financially sound who now seek to borrow money, as the banks retrench from the loans market.

Needless to say, the senior management of the banks do not intend to allow themselves to suffer. Without any hint of irony, HSBC released details of a new executive reward scheme which will allow bonus awards of up to 400%.

Michael Geoghegan, the chief executive, could in theory "earn" a bonus of up to £4M on top of his base salary of £1.07M. He earned £3.5M last year.

Another, unnamed, director of HSBC managed to earn £10M in pay and bonuses last year.

Nice work if you can get it!

Monday, March 03, 2008

FSA Rebuked Again

The much maligned Financial Services Authority (FSA) has been given another rebuke today in a report, issued by the Commons Treasury Select Committee, that says that the FSA must develop a better plan for warning banks and investors of high risks.

The Committee criticised the FSA and Bank of England for failing to ensure that financial companies were prepared for credit crunch.

The FSA and the Bank of England did warn many times that banks were lending too much and too easily. However, they did not match their words with actions.

The Committee wants the FSA, in future, to write a letter to financial companies highlighting two or three key risks. The FSA must then proactively confirm that the companies have considered the risks, and publish a commentary on the responses.

The Committee found that those in charge of the banks did not understand the products sold. No surprises there, as it was not logic or rationality that was guiding the banks' policies and product designs, but greed.

As to whether anything effective will actually get done, on the basis of this report, remains to be seen. The fundamental failing of the current tripartite regulatory system, created by Gordon Brown ten years ago, is that no one is actually in charge of it.

Until Brown goes, that situation will not change, and the tripartite system will continue to be ineffective.