Pandora's Box

Gordon Brown and Alistair Darling have discovered that by taking shares in Britain's bust banks, they have opened something akin to a Pandora's Box.

The row over Fred "The Shred" Goodwin's (ex CEO of the Royal Bank of Scotland) £650K per annum pension, that his fellow directors generously awarded him for his "services" to the bank has ratcheted up a notch.

Despite pleas from Lord Myners to Sir Fred to give it up, Sir Fred is unmoved and has noted that Lord Myners was aware of the deal and authorised it. Lord Myners is having none of this, and counterclaimed that he was under the impression that it was a contractual obligation; implying that certain members of the board of RBS (when this matter was discussed) must have given him a misleading impression of the situation.

All of this comes against a background of public anger over the waste of money and destruction of value by certain "leading" banks, and the fact that the taxpayer now has to come riding to the rescue.

The public would be forgiven for thinking that as they now own a large slice of some of Britain's leading banks, they may have some say over "trifling" matters such as pension, and bonuses. Indeed, the recent harrumphing by Brown over "rewarding failure" would have stiffened the public's resolve to see "justice" done.

However, what the government daren't let on, but is becoming increasingly apparent from comments made by leading City figures (such as Mervyn King) is that they were complicit in allowing the banks to get away with too much during the "boom" years, by insisting on a light regulatory touch from the FSA and Bank of England.

Now that we have hit lean years the cry has gone up for nationalisation. This, whilst satisfying the public's and certain politicians' blood lust for revenge, will not resolve the problem. As Brown and Darling know, were one bank in the UK to be nationalised (ie 100% taken over) every other bank share in the UK would fall to zero as investors would rationalise that their bank was next. The result would be a complete collapse in the banking systems in this country.

That is why Brown and Darling talk tough, but carry a very small stick; they know that in effect the banks have them over a barrel.

In the meantime, whilst the arguments rage, the wheels are falling off the tripartite regulatory system created by Brown. He would be advised to come up with a new regulatory system soon, lest we face even worse problems in the future.

RBS Breaks a Record

Congratulations to the Royal Bank of Scotland (RBS) for posting the largest loss in British corporate history (£24.1BN in 2008). Given the appalling state of its finances, RBS is to receive a further £25BN capital injection from the overworked British taxpayer, and will place £325BN of toxic "assets" in the government insurance programme.

Clearly RBS is following the old banking maxim that if you owe a small amount, the lender has you by the balls; whereas if you owe a large amount, you have the lender by the balls.

Needless to say the dire situation which RBS has placed itself in threatens many of the jobs of its employees. However, one man who seems to be doing OK is its ex CEO Sir Fred "The Shred" Goodwin, who is currently receiving a pension of £650K per annum (despite being only 50).

Unsurprisingly Alistair Darling is a tad peeved at RBS for treating Goodwin so generously, and even more peeved at Goodwin for taking the money. In fact Darling was so peeved, that he sent Lord Myners to have a word with Goodwin about the wisdom of taking the money.

Darling is still waiting for an answer.

Protectionism Warning

A Belgian committee on financial regulation, chaired by Alexandre Lamfalussy (who designed the EU's current system of cross-border supervision), has warned that the European wide bailouts of banks could lead to the rise of protectionism and undermine the EU.

The committee has issued a report that recommends the creation of an EU wide supervisory scheme for banks and financial bodies.

Were this scheme to be implemented, what would be the role of the Bank of England and FSA wrt supervision?

The Return of The Rock

Northern Rock is to return to the mortgage market, by offering loans of up to 90% of value.

The nationalised bank has been given Treasury approval for the £14BN mortgage scheme.

There is a degree of irony here, as Gordon Brown has decreed that 100% mortgages are to be legislated out of existence.

Indeed Northern Rock compounded the irony when it announced that, despite losses of £1.4BN in 2008, it would still be paying bonuses to senior executives, so that they don't leave.

I thought Brown didn't approve of such payments?

Gordon Brown - World Policeman

The truth is finally dawning on people that Gordon Brown has more than a little responsibility for the financial mess that we now find ourselves in, eg:

- The failure of his tripartite regulatory system to control the banks.

- The waste of public sector resources in good years on consultants, IT systems and other "initiatives" that have all failed.

- The massive increase in the size of the public sector, for precious little "real world return".

- The dithering over Northern Rock and the financially ruinous HBOS Lloyds merger/bailout.

- The £2Trillion debt resulting from his bank bailout plan.

Now that people and his own party have finally woken up to his role in this mess, there are those who seek to position themselves to takeover as and when he "falls" or is pushed onto his sword.

Harriet Harmon, so the media gossip goes, is lining herself up to takeover. The interesting add on to this "testing the water" gossip is that a story has surfaced that Brown is being touted by the German Chancellor, Angela Merkel, for a new job as a global financial watchdog.

God help us all if he were to assume that politically untenable position, given what he has done to the UK economy the damage he would do to the world economy is unthinkable.

Roll The Presses!

The Times reports that the Bank of England will write to the Chancellor asking permission to start printing money (quantitative easing), in order to buy up government and other securities.

The Bank, having almost exhausted its interest rate arsenal, is hoping that this will ease the credit drought.

All well and good, but this should have been done quite some time ago.

RPI Falls

The Retail Price Index (RPI) fell to an annual rate of 0.1% in January, giving rise to fears of deflation.

Despite the fall, the cost of living as experienced by those who inhabit the real world (as opposed to the statisticians' virtual reality), feels uncomfortably high.

Power and gas prices have risen significantly over the last year, as have food prices. This year's council tax rises will also be inflation busting, averaging around 4%-5%.

Low "inflation" or not, the actual cost of living remains ruinously high for many families at the moment.

Lloyds Shares Continue To Fall

Shares in Lloyds Banking Group fell further this morning (to around 54p) as investors digested the shock news released by Lloyds in the middle of Friday that their newly acquired bank, HBOS, lost £10BN.

The size of the loss and timing of the announcement was unexpected, and has raised fears that Lloyds will require a sizeable injection of capital from the government, ie nationalisation (the government already has a 43% stake in it).

It seems that HBOS continued to lend/invest in property deals long after other banks had stopped doing so. The person in charge of the division that squandered the money, Peter Cummings, left in January with a payout of £600K.

The added irony of this worse than worthless performance is that the CEO of Lloyds, Eric Daniels, only a few days ago had told the Treasury Select Committee that the acquisition of HBOS was "strategically a very good acquisition and will prove to be so in a couple of years".

Maybe so, but should he not have tempered his enthusiastic comments with a warning about the loss that they were due to report?

Surely Daniels knew about the loss at that stage?

Fred The Shred's £200M Blow Job

Sir Fred Goodwin, Royal Bank of Scotland's former chief executive, blew £200M when he hired top sports stars on "reckless" contracts to entertain clients, as part of a £200M sponsorship binge, just a few weeks before he was kicked out of the bank.

Brown Panders To The Headlines

Gordon Brown, sensing that the public are a tad "vexed" with greedy bankers, has decided to opt for the short term political palliative (used by politicians who are on the skids) of pandering to the public blood lust.

He appeared before the Commons Liaison Committee yesterday and said that banking bonuses should not be a "one way bet", adding that even though a bonus has been paid that where the recipient had been shown to have lost the company money that bonus could be reclaimed.

No doubt, in the limited imagination of the headline grabbing politician, this may seem to be a terrific idea. However, reality is a cruel mistress and there are a number of questions that arise:

1 Over what period would the employee be liable to repay a bonus?

2 Precisely what would be the criteria for reclaiming the bonus?

3 What happens if the employee cannot afford to repay the bonus?

4 What happens if the employee leaves the firm?

5 Will this "bonus reclaim" option be only applicable to bankers (whom Brown hates), or to all companies and even politicians (who fail to deliver on their promises)?

In short, the idea is unworkable and Brown knows that full well!

A Failure of Regulation

The Times reports that the Financial Services Authority (FSA) claims that it raised concerns about internal risk controls at HBOS in 2002.

Yet nothing appears to have been done, why?

Moreover, why was Sir James Crosby (who has now resigned from the FSA), CEO of HBOS between 2001 and 2006, appointed deputy chairman of the FSA by Gordon Brown?

A Collective Spanking

Sir Fred Goodwin and Sir Tom McKillop, the former chief executive and chairman of RBS, will apologise for destroying one of Britain's leading bank at a meeting of the Treasury Select Committee today.

Also attending the trial by humiliation will be Andy Hornby and Lord Stevenson of Coddenham, the former chief executive and chairman of HBOS.

Whilst all of this may make the politicians feel important as they are seen to flex their muscles in the headlines, the very pressing questions of what to do about bonus payments in the future, and how to avoid a similar disaster needs to be addressed.

Chancellor Darling has promised a review. Unfortunately that will not be completed until the end of the year. Just in time for the next round of bonus payments!

Barclays Uses Commonsense

Not all banks have their heads up their own backsides, when it comes to bonuses and the public perception of failure and greed.

Barclays today announced a profit of £6.1BN (after £8.1BN of write downs), ahead of forecasts but 14% below last year. Barclays also announced that it would not be paying bonuses to its executive directors, and only pay bonuses to those below board level.

A wise and sensitive political decision, all the more so because the government does not have a stake in Barclays. The Royal Bank of Scotland would be wise to take note of this.

Bank Of England Cuts Rates Again

The Bank of England cut rates again yesterday (from 1.5% to 1%), in another attempt to draw a red line under the recession and falling confidence.

Not a moment too soon, judging by the report in the Times that notes that the number of businesses filing for administration (after adjustments for one multi operation failure) in the last quarter of 2008 was 1,289 (a rise of 124%).

However, the Bank of England knows that the rate cuts are meaningless, if banks continue to provide the lifeline of loans and finance to struggling businesses and individuals. To this end it is clear that quantitative easing (ie printing money) is necessary, and will have to be implemented soon.

In other news I am pleased to see that RBS have been reading this site:

Quote:

"I wonder how many of the RBS board will resign for their folly, end eschew generous payoffs?"

RBS have just axed 7 non executive directors, in an attempt to distance itself form those who brought about its destruction.

Quite why RBS needed so many NEDs (given that they allowed Fred "The Shred" and his acolytes to destroy the bank - ie did nothing) remains a mystery.

They would have been well advised to read my advice about the role of NED's, published in 2003. RBS might have been been saved, had they followed that advice.

Pigs At The Trough

The management of the Royal Bank of Scotland, bailed out by the taxpayer to the tune of £20BN, isn't going to allow anything as inconvenient as gross incompetence (it is expected to announce a loss of £7BN-£8BN for 2008) to get in the way of its bonus payments.

The Times reports that RBS is planning to pay large bonuses to thousands of its City traders and senior bankers. Some of the payments are expected to reach tens of millions of pounds, with some bankers in line for six-figure payouts.

It seems that the culture of arrogance is alive and well at RBS, despite the fact that the management should hang their heads in shame for destroying one of Britain's leading banks.

Lord Mandelson, Business Secretary, put it rather more diplomatically then myself (however, it is clear that he is not best pleased):

"What I would say is please be mindful about how this looks and what public opinion will be.

Obviously you have to work in a market where you have got to recruit the best people, keep the best people in place and motivate them.

But they have also got to consider how it looks and how it seems when those mistakes and losses have been made."

The Ring of "Strength"

The Times reports that the Icelandic company Baugur (which means "Ring of Strength") is about to fall into administration.

Baugur owns/controls a number of UK retail companies including Iceland, Hamleys, House of Fraser, Goldsmiths, Mappin and Webb, Principles and Whistles.

The move to administration has been brought about by the collapse of talks with Landsbanki, an Icelandic bank, over restructuring Baugur's £1BN debts.

A classic example of the dangers expanding too fast using other people's money.

FSA Asleep At The Wheel - As Per Usual

Yet again Britain's hapless Financial Services Authority (FSA) has been found to be asleep at the wheel.

It transpires that way back in 2005, the FSA was warned by Tony Shearer (CEO of Singer & Friedlander Group) not to give the go-ahead for the Icelandic bank Kaupthing's acquisition of Singer & Friedlander.

For why?

In Shearer's view the management of Kaupthing were not "fit and proper" to control a British bank.

Mr Shearer will repeat these allegations to the Treasury Select Committee tomorrow, and tell the committee that the FSA rushed through the approval of the change of control.

Kaupthing recently hit the headlines when it was nationalised by the Icelandic Government, after the UK Treasury seized Kaupthing Singer & Friedlander to protect the interests of depositors and taxpayers.

The FSA deny Mr Shearer's version of events. They are quoted in The Times:

"In such circumstances the FSA always conducts checks and only approves the change [of control] if we are satisfied our requirements will be met. In this instance, we do not believe the statement made to the Treasury Select Committee represents an accurate summary of the events."

The trouble is this is but one of a long list of instances whereby the FSA has been found to be asleep at the wheel (eg Northern Rock, endowment compensation, PPI, bank charges etc)

The FSA:

- Hopeless
- Hapless
- Useless
- Toothless

Back From The Dead

It would seem that the much lamented corpse of Woolworths may be about to rise from the grave, albeit in a reduced form.

Shop Direct has bought the name, and intends to relaunch it online this summer.

Needless to say, as Shop Direct already owns other brands (eg Littlewoods and Kays) and that Woolies will only be an online presence there will be little opportunity for many of the old staff to be rehired.

Indeed, Shop Direct announced jobs cuts last week.