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.
Tuesday, January 22, 2008
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 Unfortunately, the fallout hits the rest of us as credit lines are withdrawn and money/confidence dries up.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.
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.
Monday, January 21, 2008
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 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.
Friday, January 18, 2008
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.
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.
Thursday, January 17, 2008
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.
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.
Wednesday, January 16, 2008
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 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.
Tuesday, January 15, 2008
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.
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.
Monday, January 14, 2008
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.
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.
Friday, January 11, 2008
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.
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.
Thursday, January 10, 2008
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.
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.
Wednesday, January 09, 2008
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.
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.
Tuesday, January 08, 2008
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.
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.
Friday, January 04, 2008
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.
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.
Thursday, January 03, 2008
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.
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.
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