The Stench of Corruption and Greed Overwhelms Britain's Financial Services Industry

Britain's tarnished financial services industry and banking sector seems intent on bringing about its own self destruction. Over the years there has been a litany of scandals eg:

- endowment mis-selling
- subprime mortgages
- PPI mis-selling
- LIBOR fraud
- NatWest computer meltdown
- Northern Rock, RBS etc etc to name but a few

However, it seems that the industry is determined to add to its list of self inflicted shame and dishonour. Step forward the usual suspects ie; Barclays (a familiar name), HSBC, Lloyds and RBS which have all admitted to mis-selling interest rate hedges to small and medium sized business customers.

Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all agreed to immediately halt the sale of complex interest rate hedges to smaller businesses and have pledged to compensate potentially thousands of customers who have been screwed by them.

According to the Telegraph the FSA is of the view that about 28,000 businesses had been sold interest rate hedges.

Another nail in the coffin of the tarnished reputation of the UK's financial services industry.

The financial services industry is now fully immersed in its own self created shit, and quite clearly is on the verge of implosion.

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King Rewrites History

Sir Mervyn King, Governor of The Bank of England, has stirred up a hornets nest after his recent BBC radio lecture in which he rewrote history and his/the Bank's role in the financial crisis.

Amongst other things, King said that the Bank would be very happy to co-operate with another inquiry into the collapse of Northern Rock (the bank that the Bank of England refused to bailout).

This willingness to co-operate rather took the breath away of Andew Tyrie, chairman of the Treasury Select Committee, who said that the Bank "should get on with it at the first available opportunity".

Others on the Select Committee expressed astonishment at the Governor's comments, given that the Committee has asked the Bank on numerous occasions to co-operate with an inquiry only to have their requests refused. The Bank remains the only member of the tri-partite system not to have published a review into its role in the crisis.

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Northern Rock Sold To Virgin

Taking a short respite from international news of doom and gloom (bond yields in Spain at 7%, Germany and France fall out over role of ECB etc) it has been announced that Virgin will buy Northern Rock plc (the non toxic part of Northern Rock) for around £750M now, with a possible further £280M over the next few years.

Northern Rock plc will be rebranded as Virgin Money, which has promised not to make anyone compulsorily redundant over the next 3 years.

Taxpayers have put around £1.4BN into Northern Rock plc. Hence the loss is between £400M to £650M.

The "bad bank" part of Northern Rock is estimated to contain losses of up to £21BN.

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The Good, The Bad...

In a rather amusing display of "irony" the results for the two offshoots of Northern Rock (the once proud bank that, owing to its greed and stupidity, self imploded at the start of the financial crisis) have confounded expectations and their nicknames.

Northern Rock (Asset Management), the "bad bank", which houses the mortgage portfolio posted a first-half pre tax profit of £349.7M.

Meanwhile Northern Rock, the "good bank", which houses its savings accounts and undertakes new mortgage lending posted a £142.6M pre-tax loss.

How ironic!

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Northern Rock Shareholders To Receive Nothing

Andrew Caldwell, the BDO valuations partner, has issued a consultaiton document outlining his provisional views on the Northern Rock valuation, and on the amount of any compensation that may be payable to former shareholders.

Former shareholders, seemingly, can expect to receive nothing.

Shareholders have, since the inception of the valuation exercise, argued that treating Northern Rock as if it were not a going concern (before the government rescue) would quite clearly result in a zero valuation on their shares.

Whilst their anger may be understandable, if Northern Rock were a going concern at that time why did it need government help and would it have survived without it?

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The Yorkshire Chelsea Merger

Those members of Chelsea and Yorkshire building societies (due to merge by next April) who had hoped that they may received a windfall, should keep their champagne on ice for another day.

There will be no windfall for members, but there will be job losses for the 3,200 staff working at the 178 branches.

The merged behemoth, to be named Yorkshire Building Society, will have combined assets of £35BN, and 2.7M members.

In reality this is not a merger but a takeover of Chelsea, which has lost £44M from the Icelandic banking scandal and £41M due to buy to let mortgage fraud.

Given the "in vogue" political hysteria against banking behemoths, it is surprising that this deal is going ahead and is being trumpeted so vocally.

Perhaps, in this instance, the politicians and regulators are relieved that another "Northern Wreck" has been deftly avoided?

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Financial Prisoners

Keith Morgan, head of wholly owned investments for UKFI, gave evidence to the Treasury Select Committee yesterday. He painted a bleak picture for those hapless 85% of Northern Rock borrowers trapped in the wreck of that once respected bank.

Seemingly they will become financial "prisoners" when they are assigned to Northern Rock's "bad" bank.

Some 476,000 mortgage borrowers (some of whom were foolish enough to borrow up to 125% of their property value) will be transferred to the "bad" bank (hereinafter called Northern Rock Assets Management), because they will be unable to remortgage elsewhere.

Approximately 10% of the loans are in arrears.

Gordon Brown, in rare display of decision making and speed, is rushing to return the "good" part of the bank to the private sector.

For why?

So that the Tories cannot claim credit for doing so, when they win the election next year.

Hardly a noble motivation!

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FSA Award Themselves Payrise

The Financial Services Authority (FSA) has awarded itself, or rather 20% of its staff, a 10% pay rise.

Despite the fact that its expenditure exceeds its income, by around £23M, the FSA justifies this largess as "necessary" compensation for the closure of its final salary scheme to existing members.

This is the same FSA that, as an organ of the state, presided over the collapse of Northern Rock and the near collapse of the entire banking system.

This is also the same FSA that lectures banks etc against bonuses and unrealistic pay awards.

Given that they have less than two years before they are abolished by the Conservatives, they appear to be trying to make the most of their remaining time on earth.

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Northern Wreck - A Monument To The Failure of The FSA

Northern Rock (the 100% state owned bank) announced a 24% increase in half year losses to £724M today.

Seemingly the number of bad loans tripled in six months. Maybe enticing people into borrowing 125% of a property's value wasn't such a good idea?

It reported that 3.92% of its mortgages are in arrears. The national average of mortgages in arrears is 2.39%.

Quite where the FSA was, and what it was doing, whilst the then board of Northern Rock were destroying value is anyone's guess.

Northern Rock remains a monument to the failure of the FSA and the tripartite regulatory system created by Brown.

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Dead Man Walking

The Tories have promised to abolish the hapless and hopeless Financial Services Authority (FSA) when, as seems likely, they win the next election.

The FSA was set up by Gordon Brown in 1997, as part of his much derided and failed tripartite regulatory scheme. It has had many "triumphs" since inception, eg:

- standing up for the life assurance industry against the hapless consumers who were conned into buying worthless endowment mortgages

- allowing the board of Northern Rock to destroy the company

- allowing RBS to come to edge of ruin

- allowing banks and credit card companies to charge extortionate rates of interest

- allowing banks, credit card companies and loan companies to sell ineffective and over priced PPI

- standing by as the banks operated the world's largest Ponzi scheme (bundling and selling worthless debt in a frenzy of greed)

- allowing the banks and mortgage companies to push Britain into an unsupportable level of consumer debt

More generally asleep at the wheel, and lacking any real pro active energy, the FSA will not be missed by the consumer; but may well be by its paymasters in the financial services industry (whom the FSA stood up for on numerous occasions).

Responsibility for regulation of the financial markets will be given to the Bank of England, and a new consumer protection agency will be created with the necessary "clout" to make sure the public were treated fairly.

Not before time!

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Doomsday Scenario

The FSA is currently stress testing banks under the doomsday scenario whereby unemployment reaches 3.7M, house prices halve and the recession lasts another 1.5 years.

Needless to say, the FSA will not be publishing the results of its stress test; lest it becomes a self fulfilling prophecy.

The question is, what will the FSA do if it finds that banks are likely to fail under such conditions?

The FSA claims that its use of stress tests is "embedded in our regular supervisory processes". That being the case, why did it not identify in the past banks, such as Northern Rock, that were already "basket cases"?

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Treasury Asleep At The Wheel

It seems that, despite the "tut tuts" of Gordon Brown and the government over "excess" and "risky" lending, the Treasury was happily allowing Northern Rock to continue to offer 125% mortgages after the Rock sought a state bailout.

After the bailout in September 2007, Northern Rock lent a further £800M. Unsurprisingly many of these mortgages have gone bad.

Maybe someone should tell the Treasury that they are meant to be safeguarding taxpayer interests?

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Northern Rock Mortgage Arrears

The Times reports that Northern Rock (the bank owned by the taxpayers) mortgage arrears have risen by 394% (from 3,492 to 17,264).

Given this situation, and the fact that the housing market has not yet stabilised, how wise is it for the Rock to be offering 90% mortgages?

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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?

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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.

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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

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Time Running Out For Bradford and Bingley

Bradford and Bingley have announced that their mortgage processing centre in Borehamwood, Hertfordshire, is to be closed and the 300 staff made redundant.

It seems that it does not have a future as an independent business, its credit rating has now been cut to one notch above "junk".

The Financial Services Authority is trying to find a buyer for the bank, in order to avoid another Northern Rock fiasco.

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London's Reputation Tarnished

London's reputation as the world's leading financial centre was further tarnished yesterday when the London Stock Exchange suffered its worst systems failure in eight years, forcing it to suspend trading for seven hours.

To add to the woes of those trying to trade yesterday the crash happened on what would have been one of the busiest days of the year, hot on the heels of the news over the weekend that Fannie Mae and Freddie Mac had been bailed out.

A cynic might argue that the system was deliberately shut down, so as to avoid a massive spike in bank shares occurring.

Reuters quoted one trader as saying:

"We have the biggest takeover in the history of the known world ... and then we can't trade. It's terrible."

Another said:

"This halt today clearly has once again damaged (the LSE's) reputation as a leading exchange, especially on a day like today, highlighting that it may have been unable to handle the volumes this morning."

The LSE have not given an explanation for the crash, traders though are demanding an explanation.

LSE Chief Executive Clara Furse wrote to the FT on Monday, somewhat ironically, and said that the system used by the LSE was "the cutting edge".

This is just one of a string of issues that has tarnished the City's reputation. Other include; the endowment scandal, fat cat bonuses for failed executives, Northern Rock, excess bank and credit card charges, the mortgage drought, mis-selling of mortgages, PPI mis-selling etc.

The great and the good of the City should bear in mind that reputations are hard to earn, but easy to lose.

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Freddie and Fannie Balied Out

President Bush bailed out Freddie Mac and Fannie May yesterday, as he announced that the two mortgage lenders would be taken over by the US government.

Seemingly they were weeks away from collapse.

President George Bush is quoted in The Times as saying that the failure of Freddie or Fannie would have been "unacceptable".

"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing.

Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."

Henry Paulson, the US Treasury Secretary, said:

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit.

Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

This robust and decisive action contrasts with the dithering of the British government last year, when faced with the Northern Rock fiasco.

British banks have invested billions into bonds insured by Freddie and Fannie, had they collapsed the banks would have made significant losses.

We can breath a short sigh of relief, and be thankful that the US government did not shy away from a tough decision or dither over it.

Gordon Brown take note!

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Banquo's Ghost

Much like Banquo's ghost, Northern Rock continues to haunt the government.

Northern Rock, having sold excessively expensive and outsized mortgages to those who could least afford to manage them, is now attempting to repossess the homes of those who have failed to keep up with the payments on these most unsuitable of products.

Research published by Standard & Poor shows that Northern Rock has been responsible for one in 13 repossessions in the UK in the second quarter of this year, as its customers are getting into trouble much faster than other borrowers.

Standard & Poor's research shows that a monthly average of 353 of "The Wreck's" best borrowers faced repossession in the second quarter, up from 134 in the previous three months.

S&P also noted an increase in Northern Rock borrowers falling more than 90 days behind on their repayments.

This of course indicates that the loan book may not be as healthy as the government would have had us believe when it made the taxpayer responsible for bailing out this failed firm.

Lib Dem Treasury spokesman Vince Cable accused Northern Rock of being very aggressive in dealing with repossessions, after granting mortgages worth more than the value of properties.

He is quoted in The Journal:

"Northern Rock have been particularly ruthless in repossessions because they have got a lot of 125% Together mortgages which were completely mad at the time and even madder now."

The man who oversaw Northern Rock's grab for customers, and pushed for an aggressive lending policy that has failed the company and its customers, has done rather well for himself though.

Adam Applegarth, ex CEO, was allowed to leave with over £1M in bonuses and pension top-ups and is currently still receiving over £60K per month.

Nice work if you can get it!

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