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.

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.

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.

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.

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?

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?

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!

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.

No Confidence

A Populus poll for The Times shows that two thirds of voters think that the Government's measures to boost the economy will make no positive difference in either the short or long term.

This will become a self fulfilling prophecy; because if people don't have confidence in the future they won't spend any money, and Britain's consumer based economy will remain stuck in recession.

Woolworths In Administration

As expected, Woolworths is now in administration. Deloittes, who are acting as administrators will keep the stores open and pay staff in the period up to Christmas; there are expressions of interest in the company.

However, this sorry state of affairs could have been avoided if certain lenders had not blocked the company's plans for selling the retail unit to Hilco.

The lenders who blocked the plans included Barclays, and Bank of Ireland subsidiary Burdale Financial.

Woolies Suspended

The Times reports that shares in Woolworths have been suspended at 1.22p this morning, as the company attempts to conclude talks to sell its 840 store retail business.

Hilco are understood to be prepared to buy the retail division for £1. However, the banks that Woolies owes money to are less than happy with the possible losses arising on such a deal.

Added to the problems that Woolies faces, in trying to secure a deal, is funding the wage bill and continuing to trade "solvently". The directors are under a legal obligation to trade solvently, in the event that Woolies becomes "insolvent" (ie the banks refuse to provide any more working capital) then the company will be forced into administration thus threatening 30,000 jobs.

In the "good old days" of "privately" owned banks (ie before the banks went cap in hand to the government for a bailout) the banks would have only themselves and their "consciences" to answer to wrt pushing a company in administration.

However, now that they are semi nationalised, for them to force 30,000 people onto the dole queue in this manner would be a tad "politically unwise" to say the least.

That being said the banks are very capable of making a very foolish decision and consigning Woolies to the dustbin of history, were they to do so they would be signing their own death warrants.

Rearranging The Deckchairs on The Titanic

Alistair Darling delivered his pre budget report yesterday, which in theory was designed to ease the pain of the recession.

However, at best it can only be described as tinkering with palliatives in the short term with painful costs in the medium/long term.

A cut in VAT from 17.5% to 15% will have little effect on demand, as stores etc are already offering 20% discounts; indeed it is considered likely to cause more administrative hassle than it is worth. Darling needed to cut VAT by more than this, were it to have any significant effect; regrettably the EU has placed a lower limit on VAT of 15%.

Darling made a number of predictions about growth, or rather "shrinkage", he estimated that it would be at worst - 1.25% next year and forecast that the economy would recover in 2010, with growth of 1.5% to 2.0%.

Given the Treasury's wildly inaccurate growth forecasts in the past, quite why anyone would believe these now is beyond me.

Darling offered a number of fiscal stimuli, mainly related to bringing forward government spending on roads etc and putting off planned tax rises until later.

None of these will "stimulate" the economy much, and given the fact that everyone has had due notice that taxes will rise (eg national insurance) they will not loosen their purse strings.

All in all these palliatives will have little real positive effect, and most likely will be more trouble than they are worth as Darling has added more complexity to an already complex tax system.

Paulson Rescues Citigroup

The US government, in the shape of Hank Paulson (the hapless and hopeless US Treasury Secretary), has come to the rescue of Citigroup which has seen its shareprice collapse over the last week.

Paulson has come up with a package, including guarantees against losses on assets, worth $306BN together with a $20BN.

There is irony here.

Those of you with a reasonable memory may recall that when Lehman Brothers faced a similar crisis, Paulson was happy to let it go to the wall. The result being the current banking crisis and the world's worst recession since the 1930's.

The question that the shareholders and employees of Lehman Brothers doubtless wish to ask Paulson is this:

"Why do you consider Citigroup worth saving, but not Lehman Brothers?"

Paulson doubtless must now be wishing that he had rescued Lehman Brothers, thus saving the world from his self inflicted recession and banking crisis.

Bush and his team most assuredly are leaving behind them quite a legacy, whether this is the legacy that they would wish is of course another matter.

Start Lending!

John McFall, the chairman of the Treasury select committee issued a blunt warning to banks last night.

"The banks appear reluctant to launch their recapitalisation lifeboat and start lending again to households and businesses.

They are navel gazing and looking warily at each other instead of concentrating on their customers, many of whom are still in peril on a sea of uncertainty."

To add to the pressure on the banks, heads of the main high street banks have been summoned to the Treasury today for a final warning.

The cosy world of banking has been turned upside down, yet the bankers don't seem to have grasped that yet.