Nationwide Warning

Nationwide has warned that a recession may now be likely, as the average house price in the year to July fell to a three-year low of £169,316.

The average price of a home is now £15,000 lower than in July last year.

Nationwide state that house prices have fallen nine months in a row, and in July declined by 1.7% (in June the fall was 0.8%).

The question is what will the Bank of England do with rates this month?

There is of course a silver lining to this. Those who waited to buy a house, and did not rush into borrowing ludicrous multiples of income, are now in a much better position than a year ago.

Fraud

Eight people were arrested yesterday in raids across London, as part of a crack down by the Financial Services Authority (FSA) against insider dealing.

Among the eight were a UBS AG back-office employee and a JPMorgan Cazenove Ltd sub-contractor.

Sarah Small, spokeswoman for UBS, is quoted on Bloomberg:

"A junior member of UBS's support staff in London has been arrested and has been suspended from work while the FSA carries out its investigation."

Tessa Murray, a spokeswoman for London-based JPMorgan Cazenove, said the unidentified individual was a "sub contractor who provided services in a support function and is no longer providing services."

Former Cazenove & Co. partner Malcolm Calvert appeared at a hearing last week after being charged with 12 counts of insider trading.

Aside from headline grabbing arrests in the City, it is also apparent that the level of fraud in the UK as whole is increasing (as people become negatively impacted by the liquidity crisis).

KPMG report that fraud in the UK increased by 50% in the first half of the year, compared to the previous six months, 128 cases of fraud went to courts in the year's first half.

In the same period, fraud against banks totalled more than in any whole year for the past 20 years, at more than £350 million.

Money brings out the worst in people.

Mortgage Lending Collapses

As the government dithers over what to do to restart the mortgage market (which in turn underpins the housing market and the rest of the economy), the Bank of England stated that mortgage approvals fell by 68.4% to a record low in the year to June.

Mortgage approvals have fallen from 41,000 in May to 36,000 in June. The rate of mortgage approvals was the lowest since records began in 1993.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, is quoted in The Times:

"The latest numbers from the Bank of England demonstrate, in the clearest possible way, the consequences of the credit crunch for the residential property market.

Against this backdrop, it is not surprising that the high street appears under increasing pressure with consumers scaling back purchases of a range of household goods.

Unless the authorities take steps to restart the mortgage market, the likelihood is that there will be more bad news in store for the housing market and the retail sector during the latter part of the year."

The government is inextricably linked in the voters' minds to this meltdown, as Brown has for the last ten years promised "no more boom or bust". Surely that would be enough incentive for the government to try to do something?

Regrettably, the current dithering and inaction would indicate not!

The Price of Dithering

The FT reports that Chancellor of the Exchequer, Alistair Darling, is considering a new plan to help resuscitate the housing market by allowing banks to swap new mortgage assets for government bonds.

The Treasury is formulating a plan to extend the Bank of England scheme, where high quality outstanding mortgage backed securities are exchanged for gilts to incorporate new mortgage lending.

Sir James Crosby, the former chairman of HBOS, is expected to propose the idea tomorrow when he delivers his interim report on the mortgage market.

It is a pity that it takes Labour's meltdown in the polls and the disastrous Glasgow bye election to motivate them to tackle this open sore. Had they moved with alacrity, in the final quarter of 2007 and at the beginning of 2008, the liquidity crisis could have been better contained.

Regrettably the government dithered, the result being that Deloittes are now warning that the economy is heading into recession, and may face a slump on the scale of the early 1990s.

Retail Sales Slump

Statistics from the Office for National Statistics show that retail sales growth has dropped by 3.9%, in the three months from April to June.

This is the largest fall since the department began collecting the statistics back in 1986.

As noted yesterday, the dearth of mortgages and the seizing up of the housing market is now negatively impacting the rest of the economy.

It beggars belief that the Bank of England and the Treasury are not pulling out all the stops to free up liquidity. Instead there is a possibility that the Bank will in fact raise interest rates next month.

Utter folly!

Mortgage Approvals Record Low

The British Bankers' Association (BBA) report that mortgage approvals dropped to a new low in June, falling 66.4% compared with the same month last year.

David Dooks, director of statistics at the BBA, is quoted in The Times:

"Another record low number of mortgages approved by the banks for house purchase means that the whole market is likely to be at its least active since the early 1990's."

The downturn in the property market is now impacting the rest of the economy that relies on property transactions to provide an engine of growth eg; DIY, furnishings, etc.

To add to the property market's woes, it is reported that the Bank of England is divided as to whether it should raise interest rates to 5.25% in August.

I don't think the BoE quite gets just how serious the economic decline might be, if not addressed, ie they are as ever behind the cuvre on this issue.

Pre Funded Pot

Mervyn King, the Governor of the Bank of England, has told the Treasury Select Committee that banks should pre fund a compensation pot that would cover customers' losses in the event of another Northern Rock collapse.

He believes, quite rightly too, that the lack of a 100% guarantee of savers' deposits contributed to the run on the bank last year.

The current scheme is funded by the banks, which pay an annual levy. However, it does not hold enough money to compensate savers in the event that a bank collapses.

The Financial Services Compensation Scheme currently guarantees 100% of the first £35K of savings each person has at a bank.

That of course is not enough given the size of many deposits.

Mr King's suggestion is welcome. However, given the large number of people who have now deposited savings offshore with higher interest banks (eg in Iceland), this guarantee will not cover those in the event of a failure offshore.

It is very likely, given people's naivety about money, that these depositors are blissfully unaware that they are exposed to the collapse of their foreign banks.

That again could have disastrous effects on the economy.

An Inequitable Life

Following on from the recent report by Ann Abraham, the parliamentary ombudsman, in which she called for compensation for more than a million policyholders in Equitable Life there are now concerns that more than half of them may in fact get no compensation at all.

The Equitable Members' Action Group (Emag) has estimated that the cost of compensation could be around £4.6BN.

Many thousands of Equitable savers have gone through the Financial Ombudsman Service (FOS) to claim compensation for mis-selling. However, only 50% to 60% received any.

Given this, and the fact that the Treasury will not respond to the report until the autumn, it is unlikely that all the policyholders are going to come out of this scandal with the result that they would wish for.

Emag has threatened a judicial review in autumn, if the government does not satisfy them.

This will be a long battle, by which time many of the policyholders may well have died.

Apology Demanded

Ann Abraham, the parliamentary ombudsman, in a long delayed report has called for Britain to apologise to more than a million policyholders in Equitable Life and offer them compensation.

The apology, not that it will ever come, will be a tad late as the Equitable Life scandal occurred in 2000.

Equitable Life almost collapsed in 2000, after being forced to honour unsustainable guarantees stretching back 30 years. It eventually closed to new business in one of Britain's most dramatic financial scandals.

Ms Abraham has been investigating the scandal for four years, and is quoted in The Guardian:

"(Those) responsible for undertaking financial regulation should act in a way that is compatible with the duties and powers which parliament has conferred on them.

Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report."

Vanni Treves, who became chairman of Equitable Life in 2001, said that the regulators' failure to tackle problems at the society meant the government should compensate policyholders who suffered losses as a result.

"Year after year, the regulators failed to do anything about problems that were absolutely evident to them.

We have paid all the bills we felt we had a duty to pay. Now the government must pay the bills for its own failures."

Abraham noted that the bodies overseeing the insurer were "passive, reactive and complacent", allowing one person to be both chief executive and appointed actuary for more than six years thereby neutralising the appointed actuary's "whistle-blower" role.

Abraham's report recommended a compensation scheme to redress losses, and called on the government to act swiftly, as tens of thousands of policyholders have already died since Equitable Life closed to new business.

The FT estimates that the cost of compensation will be around £4BN.

It is all very well calling for compensation. However, there are two issues that will ensure none is given:

1 The government is broke and cannot afford to pay any.

2 The regulatory regime that failed the policyholders was set up by Gordon Brown, to pay compensation would be an admission of failure. Brown does not do "failure" or "apologies".

Given the recent financial scandals, eg Northern Rock, it is evident that the regulatory regime in the UK has not improved one jot since the days of Equitable Life.

There are other scandals waiting to break.

Kick Starting The Mortgage Market

The ongoing mortgage drought has caused pain not just to those seeking to borrow, but also those wishing to lend (less loans means less commission and less interest).

Finally those in the mortgage industry appear to be waking up to the fact that they need to do something about this mess. The Council of Mortgage Lenders (CML) want to free up UK banks and building societies to offer new home loans, to do this it wants the Bank of England to guarantee a market in mortgage-backed securities and covered bonds.

The CML claims that the key issue is the lack of available funding to support new mortgage lending, the proposal would cover new mortgages.

"The CML firmly believes that with quick and decisive implementation of the mortgage market funding proposal, the Government could mitigate the difficulties that households and the housing market will otherwise face, as well as helping to restore greater confidence to the financial system as a whole."

A nice idea. However, I doubt that the government or Bank of England will rush to act on it.

Speed and decisiveness is not the hallmark of the current administration.

The Engine of The Economy Splutters To A Halt

The engine of the British economy, the housing market, looks set to splutter to a halt. Figures released by the Royal Institution of Chartered Surveyors (RICS) indicate that house price declines in June stayed close to the most widespread decline since RICs began to measure the property market in 1978.

The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 88%, in May it was 92%.

To add to the market's woes, RICS state that property sales have fallen to the lowest on record. Additionally mortgage approvals fell to the lowest in at least nine years in May, many buyers are finding themselves frozen out by tight lending conditions.

The Bank of England, as it considers what to do with interest rates and easing liquidity, would do well to bear in mind that the housing market is the engine of the economy.

Kill that off, and the economy dies with it.

Ruined Reputations

The US, with characteristic speed and vigour, moved to steady the finances of Freddie Mac and Fannie Mae yesterday.

The LA Times reported:

"Acting to prevent a severe disruption of the mortgage market, the federal government stepped in Sunday with plans for a sweeping aid package designed to bolster confidence in battered home-loan giants Fannie Mae and Freddie Mac.

The Bush administration said it would ask Congress to authorize the Treasury Department to lend Fannie and Freddie more money than current limits permit and buy stock in the two companies.

Also Sunday, the Federal Reserve agreed to permit the companies to borrow directly from the central bank, as investment firms were allowed to do after the near-collapse of Bear Stearns Cos. in March. The money would tide Fannie and Freddie over while the administration and Congress rush the emergency measures through."

This action provides an opportunity to reflect on what the British authorities and Bank of England would have done under similar circumstances. To some extent we already know, using Northern Rock as an example, they would have done very little and it would have been too late.

Our monetary authorities have been proven to be asleep at the wheel and, like rabbits frightened in the headlights, frozen with fear when confronted with a serious issue that needs resolute and muscular action.

As I recently noted, leading British banks have met with the Bank of England to ask for more help in stabilising the lending market; the £50BN injection, made earlier this year by the Bank of England, was simply not enough and the actions taken by the Bank and government since then have been too cautious and slow to have any meaningful impact on the confidence of the banks.

However, let me make it clear, whilst the inaction of the monetary authorities has contributed to this crisis the primary blame can be laid at the feet of our "respected" banks.

They willingly chose to buy and sell toxic sub prime debt from the US, in the hope that they could make a fast buck. The sub prime scheme was a classic pyramid selling scam, so long as you could keep selling the debt on without it crystallising the pyramid would keep growing. However, as with all pyramid scams, there is always an end.

Either the directors of our banks were incredibly stupid and did not know/understand what they were buying/selling (what were the risk and compliance departments doing during this period?), or they knowingly participated in the pyramid scam in the full knowledge that at some point it would collapse.

Either way, the reputation of the banks and those who run them has been ruined; it will take many years for the banks to restore their reputations.

The reputations of the British government, monetary authorities, financial services industry, City of London and banks have all been ruined by this scam.

Lessons will need to be learned and senior people removed from office if trust and confidence are ever to be restored.

Increase Liquidity Demand

Today some of the UK's largest banks are lobbying the Bank of England to extend the terms of its Special Liquidity Scheme (SLS), to increase liquidity in the money markets.

The Telegraph reports sources that say that the SLS has not restored confidence to financial markets, as banks continue to avoid lending to each other as well as to customers.

This fact can be attested to by anyone seeking a new mortgage or credit facility.

Finance directors of the banks, and heads of the banks' Treasury departments, will attend a meeting with representatives of the Bank of England. They are likely to press for the Bank to accept mortgages written this year as collateral.

As said many times before, this entire crisis can be defused if confidence is restored within the system. In order for this to happen the commercial banks need to start lending to each other, and the Bank of England needs to kick start that process by showing some proactive confidence boosting leadership.

Bradford & Bingley - The Plaything of Speculators

In echoes of Marconi and Northern Rock, Bradford & Bingley appears to have become the plaything of speculators as it desperately searches for a new CEO and for a white knight to buy it out.

B&B shares jumped more than 25% this morning, 9¼p to 43¼p, on hopes that it will be bought out.

Pundits believe that it is now likely that, barring further disasters, there will be a wind down or buy out.

The pundits fail to recognise the havoc that the speculators will wreak in the short term.

As a guide to the future, look at what happened to the share price of Marconi and Northern Rock.

The R Word

Judging by the recent headlines in the media Britain is poised on the brink of recession, or at least talking itself into one.

Capitalism is without doubt the best economic system thus far created by mankind. However, its fundamental weakness is that it relies on confidence in the future; knock that confidence away and you undermine the system.

That aside, warnings about a possible recession are now coming thick and fast David Frost, director general of the British Chambers of Commerce, has warned that there was a "real risk of recession in the coming months". He has noticed a distinct adverse change of mood in the last three weeks

I have noted a number of times that the last thing that needs to happen now is for the Bank of England to raise interest rates, or for Brown to raise taxes. David Kern, economic adviser to the British Chambers, has also argued that the Bank of England must resist "misguided calls" for higher interest rates.

Mr Frost is quoted in The Birmingham Post:

"The temptation for the Government will be to raise business taxes in the next pre-Budget report (this autumn) because the Exchequer is running out of money.

This would be a catastrophe."

The question is, does the government actually have a plan?

I suspect not.

Treasury Plans For Depositors' Savings Attacked

Alistair Darling revealed last week that the Government was planning to increase its guarantee on depositors' savings from £35K to £50K.

However, banks have rounded on the plans saying that they are unrealistic.

The plans would see taxpayers initially foot the bill for paying out deposits, within the first week of a bank going under. The cost would then be recouped by selling the failed bank's assets, and imposing a levy on other banks.

However, banks warn that the government would need to develop a costly centralised database that would store the details of every account and was updated constantly.

Additionally they have warned that transferring customers between banks generally takes three to four weeks, a failing of the banks rather than the government, as such the seven day deadline would be unworkable.

Another fault line within the plan is that it represents a change in the order of creditors when a company goes bust. As such, it would require a large amount of secondary legislation.

The best laid plans of mice and men!

Treasury Accounts Shambles

The Treasury's accounts are in such a shambles that the National Audit Office (NAO) won't sign them off.

The NAO are less that happy with the government's handling of the nationalisation of Northern Rock, and have had a major row with Alistair Darling over it. The NAO is concerned about the way that the bank is being treated on the Treasury's books.

Therefore the Treasury's annual report has been published with the financial accounts removed.

Aside from the humiliation of having their accounts refused, the Treasury also faces falling staff morale and institutional chaos.

Dying governments cause chaos, there are two more years left for institutional meltdown with the Treasury.

Bradford and Bingley Woes

Bradford & Bingley (B&B) has plunged 15% to a new low of 52p this morning, after the US buyout firm TPG walked away from leading its restructured rights issue after Moody's downgraded B&B's credit rating for a second time last night.

This less than welcome news follows B&B's rejection of a proposal of 72p per share from Resolution two weeks ago.

The question that shareholders will be asking themselves is why did the board reject a 72p offer two weeks ago.

Could it be possible that the board of B&B know that the due diligence that Resolution would have carried out, would have found something that would have caused them to walk away as well?

Europe Raises Rates

The European Central Bank (ECB) risked excarbating a European recession by raising European interest rates yesterday by 0.25% to 4.25% (a rate not seen since September 2001).

Jean-Claude Trichet, the ECB's President, fears inflation more than recession and warned that eurozone inflation could "explode" without decisive action.

Taking "decisive" action may well avert inflation. However, it does nothing for the underlying systemic weakness of the European economy and structure. The unified currency and bank, with its "one policy fits all" approach, is not working. Southern European economies (eg Spain, Greece, Italy etc) are facing a bleak recession, exacerbated by rising interest rates. Indeed, services sector activity stagnated across most eurozone countries last month.

Despite the recession the ECB may well increase rates further in the coming months. It will, if it is not careful, end up being the architect of the destruction of the European experiment.

Confidence Hits 16 Year Low

Business confidence in the UK has hit a 16 year low, as the effects of the ongoing credit crunch and rising food/energy prices are felt.

The Business Trends report, published by BDO Stoy Hayward, shows that the measure of business confidence over the next quarter declined to 97.7 in June from 98.3 in May, the lowest level since 1992.

Peter Hemington, BDO partner, is quoted in The Times:

"We've not seen short term business confidence plunge this low since Black Wednesday in 1992, indicating that UK businesses of all shapes and sizes are struggling to see any light at the end of the tunnel.

With confidence at a 16 year low, an interest rate rise next week aimed at curbing inflation could be crippling for business, and could worsen the effects of the economic slowdown. Our figures suggest that the MPC will be left with little choice next week other than to leave interest rates unchanged."

We have nothing to fear but fear itself, the gloom and doom will become self fulfilling prophecies if we are not careful.