Loans and Finance

Loans and Finance

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

Wednesday, December 31, 2008

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!

Tuesday, December 23, 2008

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Given the fact that the figures supplied by the ONS are, more often than not, unreliable and most certainly out of date the situation is presumably far worse.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

Monday, December 22, 2008

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?

Friday, December 19, 2008

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.

Thursday, December 18, 2008

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.

Wednesday, December 17, 2008

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.

Tuesday, December 16, 2008

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.

Monday, December 15, 2008

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.

Thursday, December 11, 2008

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.

Tuesday, December 09, 2008

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.

Monday, December 08, 2008

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.

Friday, December 05, 2008

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.

Thursday, December 04, 2008

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?

Wednesday, December 03, 2008

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?

Tuesday, December 02, 2008

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!

Monday, December 01, 2008

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.