Wednesday, April 30, 2008

The Falls Continue

House prices continue to fall, Nationwide's measure of house prices has shown the first annual fall in 12 years.

Prices are now 1% lower than this time last year.

For those who already own property, and are seeking to move, the fall should not affect them as the effects of a reduction in selling and buying prices will cancel each other out.

However, first time buyers may not be helped that much by this fall; as mortgages are now proving very difficult to obtain and many lenders now require a 10% deposit.

Tuesday, April 29, 2008

Northern Rock Broke The Rules

The Financial Services Authority (FSA) review of the Northern Rock fiasco shows that Northern Rock breached capital rules six months before its collapse.

That in itself is a damning indictment of the way that the bank was run. However, to compound its guilt, Rock also failed to tell its shareholders about it whilst the FSA dozed in the background.

Northern Rock reported a capital ratio of 9.74% at the end of March 2007, which was "in breach of its capital requirements", and told the FSA on April 19 2007.

Yet, the FSA did nothing.


Seemingly they were afraid of the CEO of Rock and his cronies.

The FSA themselves say that they have been cowed by "strong and aggressive characters within Rock’s management team".


What is the purpose of the FSA if it will not stand up to bullies and con men?

Rock did not bother to tell its shareholders, and compounded its lie by telling them in April that it had "excess capital" which it would pay back to shareholders via higher dividends.

The FSA, aside from ignoring the capital alert, had blood on its hands as far back as October 2006; when the Bank of England warned it about the risks of Rock's wholesale funding model.

The shareholders of Rock, who have lost everything, have the right to be furious with both the ex board of Rock and the FSA.

Undoubtedly both the board (executive and non executive directors) and the FSA must brought to account for this.

The most effective option available for the shareholders is to mount a class action against the board and the FSA. At the very least the shareholders should push to bankrupt the ex members of the board, and ensure that those who ran the FSA during this period are barred from holding public office/regulatory positions ever again.

It is little wonder that the financial services sector is regarded with such contempt these days.

Monday, April 28, 2008

Mortgage Misery

The mortgage misery continues with an announcement by Nationwide and Abbey that will dampen the ardour of those borrowers who do not have a deposit of at least 10%.

As from Thursday, Nationwide will offer loans for 95%t only to existing borrowers or people taking out a three-year, fixed-rate mortgage.

A from tomorrow, Abbey will have only one deal left for homeowners with 5% equity — a five-year, fixed-rate deal charging 6.99%.

In other news it seems that the EU will be taking a close look at the Bank of England's attempted rescue package of £50BN, there is a risk that the EU will declare it unfairly subsidising British banks.

Friday, April 25, 2008

A Pyrrhic Victory!

Britain's banks lost their battle in the High Court yesterday over unauthorised overdraft charges.

Mr Justice Andrew Smith ruled in favour of the OFT, stating that it can apply consumer contract regulations to decide if bank overdraft charges are fair or not.

In summing up, Judge Smith said:

"I reject the banks' contention that the Relevant Terms (the bank terms being challenged by the OFT) are exempt from assessment as to fairness under the 1999 Regulations.

This does not mean that the Relevant Terms are necessarily to be regarded as unfair or that they are not binding on consumers under the Regulations.

Those are not questions for me to decide in this judgment

The OFT can now decide if the charges are unfair and, if so, what a fair fee should be.

However, the banks will undoubtedly appeal.

Those who expect to see a compensation cheque dropping through their door, in the near future, had better not hold their breath.

The rest of us, who did not slip into unauthorised overdrafts, can expect the banks to introduce charges on our accounts in the future.

A Pyrrhic victory!

Thursday, April 24, 2008

Banks Face Defeat

In a rare piece of good news for the hard pressed indebted public, today the High Court will hand down judgement on whether or not the Office of Fair Trading (OFT) can rule that bank charges are unfair; it is expected that the ruling will go against the banks.

If the OFT wins, it is then expected to decide that bank charges are too high.

However, even if the OFT does win and make that call, the banks will find other ways to charge their long suffering customers. Most likely the banks will introduce a charge for all account holders.

In the event that the court decides that some terms and conditions are subject to fairness assessment, while others are not, there will have to be further hearings to decide the exact level of charges.

Suffice to say, whatever the outcome, the brand image of banks and other financial institutions is at an all time low.

Wednesday, April 23, 2008

Mortgage Slump

The liquidity crisis has had a devastating impact on mortgage approvals, they fell by 50% last month to their lowest level in 10 years.

Alistair Darling pleaded with bankers yesterday, to pass on rate cuts. He was given the metaphorical finger, and was told that rates would to continue to rise.

An image of Canute on the beach, readily springs to mind.

Tuesday, April 22, 2008

Darling Lectures Banks

Alistair Darling is pressing banks and other lenders to improve their fixed-rate deals and offer mortgage holidays, in exchange for the £50BN bailout from the Bank of England.

I suspect that his words will fall on deaf ears.

Abbey has withdrawn all its buy-to-let mortgages, and has announced an an increase in fixed-rate deals of 0.61%.

Darling admits that, as we are in a free market economy, he cannot force lenders to offer better deals.

That being said, once this liquidity crisis is solved, the banks can expect a much "firmer" regulatory environment.

Monday, April 21, 2008

The Rescue Package

As expected the Bank of England has announced its rescue package, designed to unthaw the liquidity freeze.

The initial scheme will be for £50BN, the Bank will allow lenders to swap assets (including credit card debt) for government backed bonds.

Mervyn King, the Governor of the Bank, is quoted in The Times:

"The Bank of England's special liquidity scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks."

In the event that £50BN is not enough, the package will be increased to £100BN.

It is a pity that it has taken so long for the Bank and government to act.

Saturday, April 19, 2008

The "White" Knight

At last the Bank of England, much like a white knight, is riding to rescue of the poor beleaguered banks.

Next week a "rescue" package will be announced whereby the Bank of England will offer around £50BN of gilts in exchange for secured assets from the banks.

This, in theory, is meant to ease the liquidity crisis and dig the banks out of the hole that they made for themselves.

As ever, when dealing with this government, there are a few catches. Not least is that fact that £50BN may well be not enough.

The other issues is that the gilts will have a life of just less than one year. The sneaky trick here is that by shying just short of one year, the gilts will not appear on the books of the government as debt. The banks wanted a 3-5 year package.

Should the Bank of England have done this?

Undoubtedly, yes!

Is this enough?

Unlikely, time will tell.

Whilst this may provide some short term relief for the banks, the final solution probably requires more to be done by the Bank of England, the government and the banks themselves.

Once the liquidity crisis is resolved the banks should be very aware that they will pay a heavy price for their greed and stupidity. The regulatory environment will move very aggressively against them, so as to stop something like this happening again.

The banks will well deserve whatever is going to be thrown at them.

Friday, April 18, 2008

RBS Rights Issue

The Royal Bank of Scotland (RBS) is reportedly preparing a rights issue to replenish its capital reserves.

The rights issue is needed to repair the balance sheet that has been badly dented by the cost (£47BN shared between two others) of buying ABN, and the £1.6BN in write downs from the credit crunch.

Reports indicate that RBS are looking to raise £12BN.

Previously RBS has indicated, via a briefing from chairman Sir Tom McKillop to major shareholders, that there would be no rights issue.

Things change quickly these days!

Wednesday, April 16, 2008

HBOS Give Brown The Two Fingered Salute

Following on form yesterday's breakfast meeting between Gordon Brown and senior bankers, a follow up to Darling's public pleadings for banks to reduce the costs of borrowings, HBOS will give its response tomorrow.

It is reported that Halifax Bank of Scotland (HBOS) will increase its two-year fixed and tracker mortgages by as much as 0.5% from tomorrow.

It seems that Brown and Darling are being ignored.

As I said yesterday Brown and Darling are "nothing more than hopeless and helpless observers wringing their hands as the British economy and banking system collapses around them."

The Bank of England and the government need to appreciate that, no matter what thier concerns over "moral hazard" are, issues of governance can be dealt with later. Their prime mission must be to prevent the economy from collapsing.

If your neighbour's house is on fire, even if he started it himself, you do not sit idly by watching and waiting for your house to burn down as well; you help him put it out.

Tuesday, April 15, 2008

Hopeless and Helpless

Gordon Brown met with the chief executives of Barclays, HBOS, HSBC and Royal Bank of Scotland, as well as leading investment bankers from the City of London today. This meeting comes against a backdrop of dismal news that equates the dire situation in today's housing market to the grim days of 1978.

Brown called the meeting to urge banks to reduce the costs of loans and to pass on interest rate cuts.

Ironically the Royal Institution of Chartered Surveyors (RICS) released figures today that show that the downturn is worsening.

Approximately 78% more of surveyors said that house prices fell in March than reported increases, its highest level since the the poll began in 1978.

The banks will not have heeded his lecture, as they know that it is not the Bank of England interest rate that matters but the availability of liquidity.

Until banks are able to lend to each other at a rate that equates to the Bank of England rate, the situation will not ease. The government and Bank of England need to open their eyes to the fact that monetary policy alone will not address this problem, and is akin to "pushing a piece of string".

The Bank of England needs to follow the paths mapped out by other central banks, eg the US Federal Reserve, and accept mortgage backed securities as collateral in exchange for government backed bonds.

Until Brown and the Bank of England start to act in a proactive manner, they will appear nothing more than hopeless and helpless observers wringing their hands as the British economy and banking system collapses around them.

Monday, April 14, 2008

The Awakening

The Bank of England and the government appear to be finally showing signs of stirring, as the credit crisis continues to wreak havoc with the world's financial markets and the lives of ordinary people not connected to the City.

The Bank of England will tell mortgage lenders, at a summit next week with Alistair Darling, to pass on interest-rate cuts to their customers. Their reward for doing so will be easier and longer loans from the Bank of England.

The Bank will tell banks and building societies that they will be able to use a wider range of assets as security for loans, and will no longer have to rely on top-rated mortgage securities.

The Bank will also follow the US Federal Reserve in offering more three-month loans to banks rather than concentrating on shorter terms.

Let us see if this is going to be enough, and whether the market can wait another week for it to be told this.

Friday, April 11, 2008

The ECB Ostrich Policy

The ECB Ostrich Policy
The European Central Bank (ECB) yet again has refused to cut base rates, despite the current melt down in the financial markets and the cut by the Bank of England of 0.25% yesterday.

Jean-Claude Trichet, the ECB president, yesterday held the eurozone rate at 4%.

Notwithstanding the ostrich policy of the ECB, and lacklustre action of the Bank of England, the US Federal Reserve is expected to cut at least another 0.25% from its 2.25 per cent rate this month.

However, until the leading central banks co-ordinate their policies (not just interest rates) this crisis will not be abated.

When will the Bank of England and ECB wake up?

Thursday, April 10, 2008

Bank of England Cuts Rates

The Bank of England has cut rates by 0.25% today.

Needless to say this will not be passed on to those in debt, as lenders are in fact raising their rates in line with LIBOR.

The phrase "Pushing a piece of string" comes to mind!

Staring Into The Abyss

Anatole Kaletsky states in The Times today that there is a risk that house prices may fall by between 20%-30%.

The ongoing turmoil in the international credit markets is now affecting the lives of ordinary people in Britain, not just the small number who work for City institutions.

The Fed, in the US, has shown leadership and courage in trying to deal with this mess.

Today the Bank of England decides about how much it will cut interest rates, as Keynes said under these current circumstances:

"That's rather like pushing a piece of string"

The Bank of England and government need to wake up to the fact that tinkering with interest rates alone will not be enough to address this crisis. There needs to be an effective and co-ordinated policy set out and enacted by the Bank of England/government now.

The trouble is these two organisations have yet to grasp the reality of the crisis, and are still comforting themselves with past economic glories.

The past is another country, we have long since left that country!

Wednesday, April 09, 2008

Shining Knight?

HSBC rode to the rescue of beleaguered mortgage holders today, with an offer to match homeowners' existing deals.

Their "white knight move" targets approximately 1.4 million customers whose cheap fixed-rate deals are ending this year, and who are facing increases in rates from their existing lenders.

HSBC, very wisely, has a greater proportion its of funding from customer deposits and has a strong presence in emerging markets that have been less affected by the credit crunch.

There is of course an irony to this "white knight move". First Direct was one of the first lenders to close its doors last week to new mortgage borrowers. The irony being that First Direct is a subsidiary of HSBC.

Cynics might argue that HSBC's charge of £999 to those who would have gone for First Direct mortgages is a bit rich.

In another twist, HSBC has egg on its face having lost a computer disc containing the personal details of nearly 400,000 customers in the post.

There is a lot of that about at the moment.

Nonetheless, given the lean times in which we live, HSBC's move is doubtless welcomed by many.

Tuesday, April 08, 2008

House Prices Fall

The Halifax reports today that house prices fell by 2.5% in March, the largest monthly fall for 15 years.

It is expected that when the Bank of England MPC meets on Thursday it will announce a cut in interest rates of at least 0.25%.

All well and good.

However, given that the banks and building societies are not passing on these cuts to their borrowers and are in fact increasing their rates, it will have little positive effect on either the housing market or the economy as a whole.

Until the government and Bank of England grasps the nettle of frozen liquidity, and pump in real confidence into the money markets, drip drip rate cuts will have no effect.

Bold actions, such as those taken by the Fed, on an internationally co-ordinated level are required.

The Fed is capable of bold leadership, regrettably the Bank of England is not.

Monday, April 07, 2008

Mortgage Woes

As the liquidity freeze continues, thanks to the ponderously slow response and inaction of the Bank of England, banks and building societies are rationing/withdrawing mortgages and in some cases profiteering.

Halifax is raising rates on trackers and fixes, and will target people with small deposits.

A two year fix for remortgagers with a 5% deposit will increase by 0.45% to 6.79%. However, borrowers with deposits of more than 10% will see smaller increases and those with more than 25% could even see rates fall slightly.

Halifax has also raised rates on its two-year trackers for borrowers who have a 10%, deposit by 0.25% to 6.74%.

NatWest raised its offset mortgage rate by 0.25% to 6.45%, even though Bank rate has been on hold and is expected to fall.

Skipton building society added a £799 fee to its standard variable rate deal offer at 6.7% for new borrowers, unheard of for variable rate mortgages.

Needless to say, this is having a very damaging effect on the already troubled housing market; as people who thought that they could afford to buy a house now find that they can't.

Thursday, April 03, 2008

Mortgage Famine

The Bank of England's Credit Conditions survey predicts that we are in for something of a mortgage famine as banks and building societies withdraw more home loan offers, as demonstrated by First Direct pulling offers to new customers.

Banks are also going to increase the margin over base rate they charge mortgage borrowers, offsetting the benefit of any potential cut in base rate.

Unsecured credit will also be cut back.

Tuesday, April 01, 2008

Northern Wreck

Northern Rock warned that it will be "significantly loss-making" this year and would not make break-even until 2011.

It reported a £168M pre-tax loss for 2007.

In 2006 it made a profit of £627M.

The previous board of directors are to be "congratulated" for destroying this bank.

Where are they now?

Adam Applegarth, the chief executive who led it to destruction, will make £760,000 for the termination of his contract. He will also qualify for a company pension, worth £2.2M, in 10 years. He also gets a staff discount on £75,000 of the mortgage on his home.

Bryan Sanderson, Chairman from October to February, will be paid his £315,000 annual salary and £85,000 office expenses until his fixed contract expires in October 2009.

So well deserving!

Unsurprisingly, Applegarth is now being offered police protection; this costs £10K a year.