FSA Investigate Coutts

In its dying days, the Financial Services Authority (FSA) has decided to try to show some teeth.

RBS has announced that the FSA has launched an investigation into Coutts (the Queen's bank which is also, ironically, part of RBS the "people's bank"), over the sale of AIG bonds in the years before AIG's collapse.

RBS issued the following statement:

"In July 2010, the FSA notified RBS Group that it was commencing an investigation into the sale by Coutts & Co of the ALICO (American Life Insurance Company) Premier Access Bond Enhanced Variable Rate Fund to customers between 2001 and 2008 as well as its subsequent review of those sales."

The FSA investigation may be of interest to Keith Mills, who has mounted a high profile publicity campaign against Coutts, including placing billboard advertisements criticising the bank close to its headquarters. He also has launched court proceedings against the bank.

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FBI Investigation

The Times reports that the FBI is investigating a number of executives from Fannie Mae, Freddie Mac, Lehman Brothers and AIG.

The Times states that are investigating as to whether the executives lied to shareholders, and whether fraud helped caused some of the troubles at these organisation.

The investigation includes whether executives deliberately misled the stock market about the state of their businesses.

Needless to say the politicians who oppose the $700BN Paulson bailout have latched onto this as another reason not to give money to greedy Wall Street bankers.

All well and good.

However, moral hazard and regulation can be addressed after the crisis has been dealt with.

When your neighbour's house catches fire (even if he started it deliberately) you do not stand idly by watching it burn (remonstrating with him about his stupidity), you help him put it out.

Another point that those who hate greedy bankers should remember is this, people were happy enough to borrow the money when it was cheap and to saddle themselves with debt; no one put a gun to their heads.

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The Law of The Jungle

The death of Lehman Brothers has not sated the market's appetite for fresh corpses.

AIG teetered on the brink and has been bailed out, at the eleventh hour, after the US Federal Reserve agreed an $85BN bailout of the company. The deal gives the US Government a 79.9% stake, ie they nationalised it.

Somewhat ironic that the world's leading advocate of free market economics resorts to old fashioned socialist policies of nationalisation, in order to save a capitalist institution.

Now comes the turn of HBOS.

The Times reports that Lloyds TSB is in advanced talks to buy HBOS.

The disclosure followed a statement issued by the Financial Services Authority (FSA) about the strength of HBOS' business, in order to stop the 50% freefall in its share price.

Quote:

"Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.

We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way".

How can seemingly impregnable institutions find themselves so quickly consigned to the dustbin of history?

Confidence.

The capitalist system and banks rely on confidence in the future; when that dissipates, the bedrock on which the system and its constituent parts is based collapses.

Fear, rather than fundamental weaknesses, are eating away at the bedrock of our financial institutions.

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Virgin Takes a Punt on Northern Rock

Sir Richard Branson's Virgin group is trying to take a punt on the corpse of Northern Rock. Virgin has put together a consortium to take control of Northern Rock.

It is in the public domain that there are two other bidders for the Rock, private equity firm JC Flowers and hedge fund Cerberus.

Virgin's consortium includes AIG, the insurance company, and the London hedge fund Toscafund which is headed by the former Royal Bank of Scotland chairman Sir George Mathewson.

In order to boost its credibility, wrt being able to pull off the bid, the consortium are looking for a well respected banking veteran who could take control of the Northern Rock board and reassure regulators, politicians and the financial markets.

The Virgin wishlist, according to the Guardian, includes Sir Brian Pitman and Sir Peter Ellwood ex ceos of Lloyds TSB, former Bank of Scotland chief Sir Peter Burt and HBOS chief executive James Crosby.

The Virgin consortium says that it will inject around £1BN in cash into Northern Rock, together with the Virgin Money business (estimated to be worth £200M).

The consortium would be issued new shares, at a deep discount to the current price, giving it around 50% of the bank. The Northern Rock name would be killed off and the new bank would be called Virgin Money.

JC Flowers and Cerberus have made it clear that current shareholders would receive very little in the event of a takeover.

Given the public offers on the table, and the fact that the sharehodlers are clearly not going to receive very much, it is very surprising to see how the shares have rallied last week. This morning they have fallen by 27% to 199p.

However, anyone currently holding shares in this company must face the reality that the current price may now be incredibly volatile and not necessarily reflect the true "value" of the company; as Northern Rock is now the plaything of the speculators.

As I have already noted several times before, this share now strongly resembles the dying days of Marconi's listing on the FTSE.

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