Christmas Windfall For Barnsley Building Society

Members of Barnsley Building Society are in for an unexpected Christmas present as they will receive up to £5,000, after the building society recovered money tied up in failed Icelandic banks.

Barnsley was forced to merge with Yorkshire Building Society after £10M it had deposited with two Icelandic banks, Kaupthing Singer & Friedlander and Heritable Bank, was feared lost.

However, as per the Telegraph, it promised that any money it recovered from the banks' administrators would be returned to its savers and borrowers. Approximately £8.8M has been recovered.

Barnsley's savers will receive 3.31% of their total savings balance held with the society on October 21 2008, subject to a minimum of £25 and a maximum of £5,000. Borrowers will get a flat payment of £250, although all payments will be taxed at source. Approximately 28,000 account holders will benefit.

To qualify for the windfalls, savers and borrowers are required to have maintained continuous membership between October 21 2008 and October 21 this year with one or more of the brands in the Yorkshire Group, which also includes Chelsea and Norwich & Peterborough building societies and Egg.

The payments are expected to be completed by 21 December, just in time for Christmas.

Tchenguiz Brothers Arrested

The FT reports that Vincent and Robert Tchenguiz, the high profile property entrepreneurs, have been arrested as part of an investigation into the collapse of Kaupthing, the Icelandic investment bank.

Enforcement officers from the Serious Fraud Office and the City of London police made the arrests in the early hours of this morning. It is reported that a raid has also been carried out on the offices of Rotch Property, the investment vehicle that controls the brothers' property portfolio.

Additionally eight residential addresses in London were searched (seven men were arrested), and two residential properties in Reykjavik were searched (two men were arrested).

Robert Tchenguiz lost £1BN in one day when the UK subsidiary of Kaupthing collapsed.

Iceland Leads The Way

Iceland has turned the corner of its recession, its economy grew by 1.2% in the three months to the end of September.

How has this been achieved?

It defaulted on its debts, allowed banks to fail and let its currency slide.

Meanwhile, Ireland has passed an austerity budget that will increase its debts and ensure that its economy will stagnate for years to come.

Why cannot Ireland emulate Iceland?

Simple, it is shackled to the Euro. As long as it chooses to put politics above economics its economy will remain moribund.

The Euro itself, despite achieving the political "success" of bailing out Ireland, is under renewed pressure.

For why?

The markets do not accept, quite rightly, that applying sticking plasters to individual failing states is a policy that will work. A Euro wide policy is required to resolve the crisis, eg the issuance of Eurobonds. However, the members of the Eurozone have neither the political will or economic strength to enact such a policy.

Euro 40BN Claim Against Kaupthing Bank

Wikileaks reports that 28167 claims, totalling over 40 billion euro, have been lodged against the failed Icelandic bank Kaupthing Bank hf.

President Blocks Compensation

Olafur Grimsson, the President of Iceland, has thrown a spanner into the works re the Icelandic government's promise to pay £3.4BN of compensation to Britain and the Netherlands for the collapse of the Icesave bank in 2008.

President Grimsson has declared that a national referendum must be held to determine whether or not the legislation is passed.

Given that a petition urging him not to sign the bill had attracted 62,000 signatures (25% of Iceland's population) by last night, it is clear which way the result of the referendum may go.

Councils Breached Guidelines

The Audit Commission has issued a report "Risk and Return: English local authorities and the Icelandic banks" that states that seven local authorities breached guidance and their own treasury protocols by investing £32.8M with Icelandic banks just before their collapse last October.

The report identified the following boroughs as negligent;authorities and the Icelandic banks, found London Borough of Havering, Kent County Council, Redcar and Cleveland Borough Council, Restormel Borough Council, Bridgnorth District Council, North East Lincolnshire Council and South Yorkshire Pensions Authority.

The authorities relied too heavily on credit rating agencies and external advisers.

Kent invested £3M of its cash in an Icelandic bank, after a finance official failed to open an e-mail which warned it not to do so.

The majority of the 451 authorities had invested within the rules laid out by the Chartered Institute of Public Finance and Accountancy (Cipfa). However, the report recommends a review of Cipfa guidelines, training for councillors and staff to enable them to interpret and question external and internal advice, monitoring of a wider range of information continually and revision of the national framework to reassess the consideration given to liquidity, security and yield.

The councils deny the report's findings.

Rita Greenwood, the finance officer at Havering council, said that the council made a deposit in an Icelandic bank 20 minutes before an alert went out which downgraded the banks to a lower security rating.

"We refute being called negligent. We rely on ratings done by established international organisations such as Fitch and Moody's and we were absolutely following all our policies and procedures."

The Guardian quotes Nick Chard, Kent county council's cabinet member for finance:

"The position and language used by the Audit Commission is quite extraordinary; it really is a case of the pot calling the kettle black. The Audit Commission's own internal report stated that they were not aware of the potential problems with Icelandic banks until Monday 6 October 2008; yet they are highly critical of local authorities making deposits after April 2008."

He noted that the commission has 18% of its total deposits in Icelandic banks compared with Kent's 9%.

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

Icleand Deal Agreed

Some good news for some of the hapless individuals who placed their life savings offshore in an unprotected environment.

Iceland's prime minister, Geir Haarde, said that an agreement had been reached (a 'common understanding') with EU member states that will see it cover savers' deposits in return for financial assistance, including agreeing on a stabilisation package from the International Monetary Fund (IMF).

The government of Iceland will "cover deposits of insured depositors in the Icesave accounts in accordance with EEA law."

I would express some words of caution here, before people start to pop open the champagne, until the money is back in a UK bank account don't bank on this happening.

As per the PM's website:

"talks between Iceland and several other EU member states, led to a common understanding that will form the basis for further negotiations".

This is not a done deal by any means.

Worthless Guarantee

As I predicted earlier this week, the guarantee by the Icelandic authorities re bank deposits was not worth the newspapers it was printed in.

Icesave, the online British arm of Iceland's second biggest bank Landsbanki, announced yesterday that its customers could no longer withdraw or deposit money, as Landsbanki was taken into receivership.

The Icelandic government then reneged on their pledge to guarantee deposits.

Alistair Darling told the BBC:

"The Icelandic government have told me, believe it or not, they have no intention of honouring their obligations there."

The Icelandic authorities, by reneging on their pledge, have signed the death warrant of their economy.

Gordon Brown is threatening to sue the Icelandic authorities.

Brown has also set out a radical £500BN package today to save the British banking sector from collapse and break the damaging logjam in credit markets.

At last, some much needed action!

The House of Cards Comes Tumbling Down

The FTSE fell by 6% this morning, despite the fact that congress approved the bailout.

The Times reports that Alistair Darling will make a statement later today on whether he will bail out the UK's banks.

On Saturday Angela Merkel, the German leader, criticised the Irish decision to guarantee all deposits in their leading banks without consulting other European countries. One day later Ms Merkel was forced to take almost the same action.

All very well.

However, the uncomfortable truth, that governments dare not speak of is that if there were to be a serious run on the banks the governments that have guaranteed the deposits (Iceland, Ireland and Germany) would not be able to honour their guarantees.

What we will now see is a re run (albeit on a much larger sale) of the day when Britain was forced out of the ERM by market forces. This time market forces will show that a country's guarantees are worthless, and are in effect a house of cards.

The market will win, but at a terrible cost.

Iceland will be the first to go. It is clear that the governments, and political systems, of the world are not able to keep pace with events.

The long term result will be that banks across the world will end up being nationalised, and every citizen of the world will end up being in debt for the rest of their lives.

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.

Foreign Banks Offer The Best Deals

Analysis prepared by moneysupermarket.com shows that seven foreign banks in the UK market offer savers interest rates of over 5.2%, with a further two offering rates in excess of 4.75%.

Stuart Glendinning, the managing director of the comparison website, said:

"This is a foreign invasion everyone with money to save can welcome.

These new banks offer savers more choice, higher rates and also put pressure on the existing providers to raise their rates. The only losers are the UK banks and building societies."

India's ICICI Bank and Landsbanki from Iceland both offer 5.45%.

Yet another example where the British financial services industry has been found to be wanting. The message here is clear, adapt and innovate or die.