Money

Those who occupy the top positions in Britain's boardrooms have had rather a pleasant year. The BBC report that directors of Britain's leading companies saw their pay jump 37% over the past year.

Those in charge of firms listed on London's FTSE 100 index earned, for the first time, more than £1BN in total for the 12 months to the end of June.

The best place to be is, of course, a bank - Barclays Bank.

Now you know why banks need to keep their charges so high!

Credit Card Charges

Which? has discovered a game easier than shooting pigs in a barrel, that of criticising the charges made by credit card companies on their hapless customers.

Which? state that since the Office of Fair Trading (OFT) ordered a cut in default fees to £12 last year, "ingenious methods" had been used to recoup the income.

Needless to say the banking industry has denied that is is acting unfairly, and claims that different fees were inevitable after the OFT ruling.

True enough, if they want to maintain their very high levels of profits.

Which? highlighted a number of money making charges levied by the card companies, including:

-Low usage fees
-Raised interest rates for withdrawing cash
-Annual fees for having a card
-Fees for using cards abroad
-Shorter interest free periods

Martyn Hocking, editor of Which? Money, said:

"Credit card providers seem to be resorting to a raft of ingenious methods to recoup lost revenue following the OFT crackdown on penalty fees."

Sandra Quinn, of the UK payments association Apacs, retorted:

"We always said that charges would change as a result of the OFT ruling.

We have been much more upfront about how charges are applied - every statement now has a summary box listing charges and key information about charging."

The latter part about being "more upfront" is particularly amusing, as it implies that credit card companies tried to hide their fees before!

Why would they do that then?

The credit card industry is also in trouble in respect of its many and varied methods for calculating the annual rate of interest (APR). Which? claim that there are at least 12 different methods in use for calculating an APR.

Following a complaint from Which? in April, the OFT said it would investigate the issue.

As I have noted before, banks are not charities. They are in business to make money, when one avenue for making money is closed they will find another. They treat their customers in this way because they know that they can get away with it, and know that many of their customers are so deeply in debt that they think that they need a credit card just to keep their heads above water.

In order to avoid these charges:

1 Pay off your credit card in full each month

2 Dump those cards that have an annual fee or low usage fee

Savings Fall

Research carried out by the Post Office shows that British people are now saving less than they ever did in the last 50 years.

A staggering 25% of people fail to save any money whatsoever; those that do bother to save are doing so for indulgences, such as holidays.

Given the dismal reputation of the financial services industry (arising from eg the endowment scandal, the pensions scandal, excessive interest charges for credit, excessive bank charges, mis-selling of insurance policies etc) it is hardly surprising that people cannot be bothered to save. They simply do not believe that the money will be there for them when they need it.

The financial services industry will need to get its house in order and rebuild its shattered reputation, if it wants people to ever trust it again.

Heads Start To Roll

The so called "credit crunch" has claimed its first high-profile victim in the UK. Edward Cahill, head of Barclays' European collateralised debt obligations (CDOs), resigned on Monday.

On Wednesday, two investment funds set up by his business had their credit ratings slashed by Standard & Poor's, the rating agency, because of losses from investments in US mortgage-backed securities.

This has not been a good week for Barclays, as it has had something of an unseemly public spat with HSBC, over an interbank loan that Barclays tried to raise from HSBC. Unfortunately, because Barclays made the request rather late in the day HSBC was unable to help and Barclays was forced to go to the Bank of England for the £314M necessary to balance its books.

The Credit Crunch

Despite media and political hysteria over the ongoing "credit crunch", it would seem that well run and well regarded companies are still able to raise money.

The Guardian reports that Rio Tinto has raised a record £20BN to fund its acquisition of Alcan, despite the turmoil in the credit market.

It would seem that the market is reassessing the true worth of companies and financial products, rather than collapsing in the panic that the media might have people believe.

There will be a bloody outcome for those companies assessed to be bad risks, and for those that rashly took on high risk investments. As always it is the fundamentals that are the key to a successful investment, not market hype.

Soft Prices

It seems that the UK house market, to use an estate agent's phrase, may be "softening". Asking prices for properties in London have fallen for the first time in a year.

That at least is the view of Rightmove, which said that London asking prices fell by 0.1% in the past month.

Over England and Wales, as a whole, prices rose 0.6% in August, compared with 0.3 per cent in July. The took the annual rate is now 12.8% compared with 10.3% in the previous month.

Miles Shipside, commercial director of Rightmove, was quote in The Times:

"This fall is the first we have seen for some time and is an early warning signal that even the buoyant London economy is susceptible to market forces.

The capital and international status of London means that prices are likely to be more resilient in the longer term, unless the current turmoil in the financial market undermines employment and wealth creation."

He would of course try to talk the market up, wouldn't he?

Swiss Banker Speaks Out

The Swiss central bank chief, Jean-Pierre Roth, lashed out at the US economic system in an interview on Sunday. Roth was speaking about the ongoing credit crunch, that has caused volatility in the world financial system.

Roth said:

"Something unbelievable happened.

We're certainly not at the end of the story with developments in the US mortgage market. The source is bad loans.

People there who had neither income nor capital got credit with very attractive conditions that could only be tightened with time.

And now we're seeing that there isn't a market for such papers. Now reality is striking back. That leads to massive losses and there will be victims.

Fair comment, except that it should have been clear to senior bankers around the world that the sub prime market in the US was high risk; as such, to say that this was "unbelievable" doesn't ring true.

The Credit Crunch

The ongoing, so called, "credit crunch" may well have repercussions in areas not immediately apparent.

Much of the borrowing used by people/companies for their investments in the bundled debt products that have been over valued, has been financed using cheap borrowed Yen.

This is known as the Yen Carry Trade. Now that the debts are unravelling, so too is the Yen Carry Trade; this has consequences for the Yen itself, as companies liquidate their positions and pay back their Yen borrowings.

The cost of borrowing Yen is rising, as such those trades and investments that were once financially viable are no longer viable.

One area where there has been heavy use of Yen borrowings, both by companies and Japanese housewives, is that of currency speculation in the Turkish Lira. It is very likely that, if the crunch continues, the Turkish Lira will collapse as speculators pull out.

This in turn will severely damage the profits of the Japanese housewives, thus negatively impacting the Japanese economy.

The lesson here is, don't invest what you can't afford to lose.

HIPs

Congratulations to the government for doing their best to wreck the UK property market; with their decision to bring three bedroom properties into the absurd, unloved and unwanted HIPs regime.

This could tip the market into slump.

Another Silver Lining

Further to my article yesterday, about lawyers benefiting from the current "credit crunch" caused by the US sub prime fiasco.

There is another silver lining, this time for those holding mortgages in the UK.

The "credit crunch" has left banks and other lenders unwilling to lend money to each other, as they are afraid that there may be hidden losses.

This has led to a squeeze on the availability of loans, and is threatening to cause total market "seizure".

As such, the Bank of England will eventually be forced to reduce interest rates. Most certainly in the short term it will not increase the rates, as had been widely predicted less than a month ago.

Therefore, ironically, those who hold debt may find themselves in a less worse position than those who have invested their money in funds, pensions and equity.

Funny old world, isn't it?

The Silver Lining

Whilst investors and bankers gnash their teeth as they suffer the fallout from the sub prime mortgage fiasco in the US, there is one group of people that will be rubbing their hands - lawyers.

It seems that the liquidity crunch, brought about by the sub prime fiasco, has exposed another problem. That of the ratings applied by so called "professional" investment firms and hedge funds.

I understand that some companies given AAA+ ratings are in fact not quite as "blue chip" as their ratings would suggest, and that money put into these companies has in fact been lost.

The question therefore arises, why were they given AAA+ ratings?

Seemingly the research done by some "professional" companies that provide ratings was not as thorough as it should have been.

The lawyers will have a field day when people wake up to the fact that the ratings are in fact wrong.

As said, there is always a silver lining!

Spinning On

Those of you who thought that the end of the Blair regime, and the elevation of Gordon Brown to the position of Prime Minister, would herald the death of the age of spin should think again.

The Guardian has calculated that Brown held back £40BN of funds, in his final days as Chancellor of the Exchequer, so that he could to unveil a plethora of measures when he became Prime Minister.

Brown has announced more than £39BN of government spending since he replaced Tony Blair as Prime Minister. Most of that would normally have been revealed in the 2007 comprehensive spending review, due in October.

We still live in an age of spin.

Zurich Sells Insurance Arm

It is reported that Zurich Financial Services is preparing to sell part of its UK life insurance business, in order to release up to £1BN.

The money released would allow Zurich to make a bid for Friends Provident, which recently agreed a highly controversial £8.3BN merger with Resolution.

ECB's Dangerous Game

The European Central Bank (ECB) is currently playing a very dangerous game, as it tries to avert a major credit crisis.

The ECB said that it will offer cash to euro-region money markets for a third trading day, as it tries to avert a credit crunch. This bail out is in response to the credit crisis precipitated by the sub prime mortgage collapse in the US.

The ECB, the U.S. Federal Reserve and other central banks injected $154BN into money markets on August 9 and $135BN on August 10, amid concerns that the U.S. subprime mortgage losses would curtail lending.

The danger here is that markets may interpret these injections as the harbinger of bad news, that has yet to be made public; the markets can smell fear, and are very unforgiving.

The ECB is playing a very dangerous game, which may precipitate something that it is trying to avoid..

Doubts Over Merger

Despite the fact that Friends Provident's chief executive, Philip Moore, said that he believed that the £8.6BN merger with rival insurer Resolution "would be born"; doubts were cast on this by one of the major shareholders of F&C Asset Management (F&C), Dawnay Day.

Moore said:

"Should somebody else make a formal offer to the board of Friends Provident that adds more value than the value from this deal of course we will consider it."

However, Dawnay Day said that it had "concerns" over a tie-up with Resolution Asset Management. F&C is 52% owned by Friends Provident. Under the terms of the proposal, Resolution Asset Management will be injected into F&C but F&C will continue as a separately listed business.

Dawnay Day are questioning the logic of the merger, as Resolution is a lower margin business; and the tie up would fly in the face of earlier statement from Friends Provident, that they would be look at higher margin businesses.

Pearl's chief executive, Hugh Osmond, has also made his concerns public, stating that Resolution shareholders would not get maximum value from the deal.

Osmond has opposed the merger, and Pearl has been stake building in Resolution shortly after the proposals were announced. Pearl now has a 16.5% holding in Resolution.

Friends Provident have just released good half-year results. Group underlying profits before tax were up 7% to £264M, on the back of and UK sales of £2.26BN, up 12% on last year.

Bank Signals Rate Rise

Mervyn king, Governor of The Bank of England, has signalled that there will be one more rise in interest rates this year.

In the Bank's quarterly Inflation Report, King indicated that without one more increase (the sixth since last August) he would not be able to keep inflation on target.

Rates are therefore expected to hit 6% within the month.

Wage Rises Highest Since 1998

Salary inflation has reached its highest level since May 1998.

That is the finding of the report on jobs by the Recruitment & Employment Confederation and KPMG.

Michael Carter, people services partner at KPMG, said:

"July's survey results continue to reflect a buoyant labour market.

The availability of staff has deteriorated at the fastest pace for over two years and employers need to continue to be creative in their recruitment strategies."

Permanent salaries, as measured by an index, increased to 65.3 from 64.2.

This will increase pressure on the Bank of England to raise interest rates at least one more time this year.

Insurance Premiums To Rise

Adding to the woes of many of Britain's beleaguered homeowners (beset as they are by rising mortgage costs and flood damage in some parts of the country) is the announcement by two insurance companies that they will put up the cost of household insurance by an average of 10%.

Norwich Union has increased premiums this week, and Lloyds TSB is also expected to follow suit. The companies blame the recent floods.

The higher premiums will affect existing Norwich Union and Lloyds TSB customers who renew their buildings and contents insurance policies, as well as new customers. The price increases will apply to all customers, not just those who were flooded.

It is also reported that Direct Line and Churchill will also be raising premiums. However, it is not clear by how much.

The lesson here is, don't build homes near rivers!

Banks Get Tough

Britain's ever popular and "respected" banks are starting to "get heavy" with those in debt.

The number of home repossessions and county court judgements are rising, while personal insolvencies (IVA's) are dropping. This is a sign that the banks are growing weary of the IVA culture that has sprung up in the UK over the past year or so.

The Council of Mortgage Lenders (CML) reported that the number of home repossessions across the UK has risen to its highest level in eight years, in the first 6 months of 2007. Approximately 14,000 homes were repossessed by banks and building societies in the period Jan-June 2007, this represents a rise of 30% on the same period last year.

CML attributes this to the increase in sub prime lending, ie loans made to people who would normally be considered to be a db credit risk.

Michael Coogan, CML director general, said:

"The greater risks inherent in sub-prime lending are resulting in significantly higher levels of repossession in that part of the market compared to mainstream experience."

It is not just the mortgage market that is feeling a credit squeeze, but also the unsecured loan market as well. There has been a fall in the number of people being allowed to reduce their borrowing by entering into an Individual Voluntary Arrangement (IVA).

The Insolvency Service has reported a 15% reduction in the number of IVAs issued in the second quarter of 2007 to 10,698.

The Registry Trust has reported that the number of county court judgments (CCJs) issued to consumers in England and Wales increased by 5% in the first half of 2007 to more than 420,000.

The credit squeeze will get worse over the coming months. Those that are thinking of increasing their debt burden should make sure that they fully understand what they are committing themselves to.

Post Office Blackmail

The Post Office provides a very fine example of how not to run a business.

With its reputation already in tatters over lost/stolen mail, branch closures and the ongoing threat of strike action, it decided to drive another nail into its coffin by publicly threatening its own postmasters.

The Post Office threatened postmasters with financial penalties for failing to give official explanations for branch closures.

A letter was sent by the Post Office to postmasters, warning them that undercover officials (spies) would visit post offices to ensure that "key messages" about closures were given.

A spokesman for the Post Office said the letter had been wrongly sent out.

Quite so!

The fact that the spokesman chose not to elucidate was that the letter should never have been written in the first place.

The Post Office is not worried about threatening their own postmasters, but worried that the threats were made public.

A fine way to run a business!

Get Out of Jail Card

Congratulations to the Financial services Authority (FSA) for showing its true colours the other day, when it came down firmly in favour of the banks rather than the public in the ongoing row over excess bank charges.

The FSA has ruled that banks will not have to make any more refunds to disgruntled customers, re excess charges, until the court case initiated by the Office of Fair Trading (OFT) is heard next year.

The OFT is taking high street banks to court over the excess bank charges.

Commercial Court judge Mr Justice David Steel has ruled that the trial will take place on a date to be agreed, between January and the end of February 2008.

It is estimated that bank customers have been stung with over £1BN in overdraft charges so far this year.

Well done the FSA for the giving the banks a free "get out of jail card".

Cab anyone remind me as to whom the FSA is meant to work for again?