The Oncoming Storm - Eurogeddon

Europe is poised to bailout Spain and Italy to the tune of £600BN, and the Telegraph reports that a  Bank of England policy maker has told traders to prepare for a devastating market seizure similar to the collapse of Lehman Brothers.

Batten down the hatches!

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Greece Out of Cash In Six Weeks

Theodoros Pangalos, the Greek Deputy Prime Minister, has issued his fellow countrymen a stark warning that unless they get real, the country will not receive any more money from the Eurozone and that it will run out of cash in six weeks.

Sadly, a prophet is rarely heeded in his own country!

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The Farepak Debacle V

Regular readers may well recall that I have written several articles (some years ago) about the collapse of the Christmas savings company Farepak.

To add insult to injury of those who were robbed of their savings by its collapse, it now transpires that the cost of administering Farepak now stands at £8.2M in fees paid to BDO the administrator, lawyers and various others.

As for the 120,000 people who lost money (an average of £400 per person) the most they can expect to receive in compensation is £5.5M, most are still waiting, which equates to roughly £45 per head!

It is sad and ironic to see accountants and lawyers doing better than those who can least afford to lose money.

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It's The Politicians Stupid!

As markets throughout the world plunge, on fears of another financial crisis, the blame for this can be laid full square at the feet of the politicians.

Those in the US who used the stage of Capitol Hill for their self serving antics over the debt ceiling and the "leaders" of Europe, who have behaved and bickered with crass stupidity, are equally to blame.

José Manuel Barroso, the inept President of the European Commission, publicly warned that Eurozone countries are failing to stop the “contagion” of the debt crisis. All very well, maybe. However, by publicly stating that, he needless to say spooked the markets.

To add to the feeling of panic, Italy publicly stated that China has told it that if the European Central Bank will not buy Italian debt, why should China?

I have to ask, by making this public, what exactly were the Italians thinking?

1 It spooks the market even more

2 It shows that they themselves are desperate, as clearly they are trying to offload their debt to all and sundry.

Add into the melting pot the fact the the "leaders" of Europe recently claimed, with self inflated pride, that they had "solved" the Eurozone crisis and that they had earned their holidays and you have a recipe for disaster.

Take all of the above together, and it is self evident that the blame for the current crisis can be attributed to the politicians. Politicians who clearly do not understand that markets are driven by primal instincts (fear, greed, euphoria and a pack mentality).

Until the politicians actually "get it", the crisis will continue and worsen.

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Bright Future For Ex Farepak Director?

William Rollason has joined Bright Futures (a holding company focussed on providing specialist contract catering services within the corporate business, local authority and independent schools sectors) as a non-executive director.

However, his tenure as NED may be short lived, Rollason was chief executive of European Home Retail, the parent company of Farepak (the Christmas hamper business that went bust in 2006) and moves are afoot in the High Court by the Insolvency Service to disqualify the 9 directors of Farepak and its parent from holding a directorship again.

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FSA Humiliated

Unsurprisingly the FSA's attempt to hide the details of its 18 month "investigation" into the near collapse of RBS, via a pathetic one paragraph "a series of bad decisions was made" fig leaf, has brought down upon it the scorn it so richly deserves.

Sir Fred "the shred" Goodwin is said to be perfectly happy for the report to be published (not that his approval or disapproval needs to be sought), and indeed George Osborne is pushing for the report to be published. RBS is, after all, a public asset.

However, the FSA are defiantly sticking to its guns and refusing to publish until a "legal view" could be established that it could do so within the exemptions of the law.

A nice "excuse" clause such as that may well be appropriate for certain private organisations. However, as noted, RBS is a public asset it is in the public's interest to see the results of the FSA's labours.

Quite why the FSA is so determined to keep the report hidden from public view is causing many people to wonder as to whether it is protecting RBS, or itself and its investigation, from rigorous scrutiny.

Either way the FSA, by this shameful episode, have demonstrated that it has no future.

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A "Series of Bad Decisions"

The FSA has announced that it will not take any enforcement action against the ex CEO of RBS, Fred "The Shred" Goodwin; the FSA has now closed its 18-month probe into the conduct of RBS executives, the acquisition of ABN Amro in 2007 and a 2008 rights offering.

The Telegraph quotes the FSA:

"The review confirmed that RBS made a series of bad decisions in the years immediately before the financial crisis, most significantly the acquisition of ABN AMRO.

The review concluded that these bad decisions were not the result of a lack of integrity by any individual and we did not identify any instances of fraud or dishonest activity.

The competence of RBS individuals can, and will, be taken into account in any future applications made by them to work at FSA regulated firms.."

The last sentence is the FSA's attempt to add "stones" to their statement of the "bleedin' obvious", namely that "a series of bad decisions" had been made.

The FSA won't disclose details of its investigation, they expect people to blithely accept their opinion and move on.

Not really very much to show for 18 months of "investigation"!

Did not our government, during the run up to the election, say that they were going to shut down the FSA?

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Good Luck To The Irish

Good luck to the government and people of Ireland who are being bullied by the EU into accepting an EU bailout, in order top stop the contagion spreading to other countries in the Eurozone.

A "small matter" worth repeating is the fact that it is down to the crass public comments made recently by certain EU ministers (see my earlier article on the subject) that Irish yields have risen, thus pushing up the cost of their debt.

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The Stench of Putrefaction

Despite some signs that the economy is beginning to grow again, all in the garden is not yet rosy and there is a decidedly strong whiff of putrefaction in the air.

Aside from the survey by the Chartered Institute of Personnel and Development (CIPD) that predicts a total loss of 1.6M public and private sector jobs by 2015 (resulting from government cuts), there is also the danger of the spread of the disease of "zombie households".

A "zombie household" is where a household is trapped in its property because the mortgage exceeds the value, the home owner is barely able to pay the interest payments at today's record near zero rates and the bank has not written down the value of the loan to its "true market value".

In the event that rates rise, as they most certainly will do so in the future, the debtor defaults and the banks are unable to recover the full value of the debt; ie everyone suffers.

Fathom Consulting have recommended that the Bank of England uses a new tranche of quantitative easing to buy lenders' worst mortgages, and place them in a specially created "bad bank".

Until the banks are rid of the fear of a collapse of the value of their current loans, the lending market (needed to power the economy) and the economy will stagnate.

Like it or not, another bailout is required.

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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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Banks on Life Support

The Bank for International Settlements (BIS) has warned that European banks are still "on life support", and that they need to "come clean" about their bad loans.

The Telegraph quotes the BIS annual report:

"Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

Rather bizarrely BIS then state that low interest rates and fiscal stimuli by governments is exacerbating matters, causing "moral hazard".

I would venture to suggest that were the rates and stimuli packages reversed, the slump caused would be far more detrimental to the economic health of Europe than the "moral hazard" issue.

I would also note that the low rates and fiscal stimuli do not in themselves cause banks to behave "immorally". Banks behave either "morally" or "immorally", depending on their culture and internal controls; to blame others for the failings of banks is shortsighted.

BIS do, correctly point out that Europe and the US are unlikely to be able afford to bail out the banks again, and that a Greek sovereign debt crisis is more than likely.

In view of this, to suggest that fiscal and monetary conditions should be tightened at the very time that the US and Europe are struggling to drag themselves out of recession is foolhardy in the extreme.

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Bank of England Expresses Little Faith in Europe

The Bank of England has issued its regular stability report, in which it warns that the European debt crisis is a "key risk" to the UK's banking sector.

It warns that British banks' exposure to other European lenders is making them vulnerable and, as such, British banks should build up their cash reserves.

In other words, the Bank of England believes that there is going to be at least one major default by either a major European bank or sovereign debt default (most likely Greece).

Baton down the hatches, it's going to be a long hot summer!

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Sir Fred's Private Meeting

Sir Fred "The Shred" Goodwin, the disgraced ex head of RBS, has attempted to avoid publicity by requesting that a meeting called for today by the FSA be held in the office of his lawyers rather than at the FSA's own offices.

Clearly, as with RBS's financial strategy during Goodwin's tenure, that idea has come rather unstuck as the media have picked up the story.

The adverse publicity about the meeting has now called into question the actual timing, lest there be any "naughty" journalists waiting outside the offices keen to ask Goodwin a question.

Ad to whether this meeting actually yields anything tangible (aside from a slap on the wrist fine for Goodwin) remains to be seen:

1 RBS is now effectively owned by the taxpayer, yet the banking sector itself has no reformed and continues to pay itself very generously and trade in high risk derivatives despite bringing this country close to financial collapse.

2 The FSA is likely to be shut down by the government.

3 Sir Fred appears to be enjoying the fruits of his labours. He recently met with the Duke of York (one assume that Fergie didn't arrange that), and has bought £3.5M "fortress" in Edinburgh.

Let us trust that the banking sector is reformed in time, before we are hit with the next crisis which will most assuredly bankrupt this nation.

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Greece Receives Euro20BN

Greece has received Euro20BN, being the first tranche of the IMF/EU Euro110BN bailout package.

This temporarily may relieve pressure on the Euro and on Greece. However, it is merely buying time and delaying the inevitable exit by Greece from the Euro.

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Ernst & Young To Go The Way of Andersen's?

The Times reports that Ernst & Young (E&Y) could face legal action after a $38M 2,200 page US report into the collapse of Lehman Brothers accused E&Y of professional negligence over a number of years before the collapse of Lehman Bothers in 2008.

The report states that Lehman's used Repo 105 (an accounting "fudge") to remove temporarily up to $50BN from the balance sheet.

The report criticises Ernst & Young, who were Lehman's auditors:

"..for among other things its failure to question and challenge improper or inadequate disclosure in those financial statements".

Could it be that Lehman's will do for E&Y what Enron did for Andersen's?

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How To Destroy Brand Value

The ongoing safety issue wrt Toyota, and the company's handling of the issue, highlight how brand value (so painstakingly built up over the years) can be so very easily and quickly destroyed by an inept and unresponsive management.

The Times has added fuel to the fire by reporting that Toyota was forced hand over to US congressional investigators a memo produced in 2006, by its own factory workers, concerning issues over car safety.

The memo was sent to Katsuaki Watanabe, president of the company in 2006, and condemns "safety sacrifices" made by the company in pursuit of profit.

It noted that that vital processes were in the hands of "amateurs".

Toyota is learning the lesson that all businesses must learn, no business lasts forever.

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President Obama's $10BN Banking Bill

Royal Bank of Scotland (RBS), Barclay's and HSBC may find their US operations having to pay up around $10BN to US authorities, as they fall under the net of President Obama's proposed tax on financial institutions bailed out by taxpayers.

The tax ("financial crisis responsibility fee") needs to be approved by Congress, if approved it will net the US administration $90BN over 10 years.

The British banks may also find themselves facing extra taxes, as The White House will lobby G20 nations to introduce their own version of the tax.

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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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Did Brown Create a False Market?

When Gordon Brown persuaded Lloyds to take on the wreck of HBOS, he put his "reputation" on the line.

This "reputation" was placed even more on the edge of the precipice, when it became apparent that HBOS was on the verge of collapse.

How surprising then, that at that very moment, the Bank of England bailed HBOS out with a secret (secret to the public and shareholders) loan.

The question is, did Brown create a false market in the shares in order to save his "reputation"?

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A Mountain of Debt

Brown's Bankrupt Britain has a nasty habit these days of breaking records, not the good ones but the bad ones relating to the size of debt.

Sure enough, as is becoming the norm, another record has been broken. In October the UK Government had to borrow £11.4BN. This is the worst monthly figure since records began in 1946.

Tax receipts fell by £4.1BN, compared with October 2008, and spending increased by £4.5BN.

The total public sector net debt now stands at a staggering £829.7BN (59% of GDP).

Certainly the figures are not good, most certainly if the government does not come up with a credible plan to show how it will rein in the debt external and internal confidence in the UK will evaporate; the situation will become far worse, as Sterling will collapse and high achievers/businesses will uproot and leave the country.

However, the ability of the current government to set up a credible plan is limited by a number of factors:

1 Time, an election has to be held by May 2010.

2 Gordon Brown will need to play to the gallery of public opinion in order to try to win the election, any plan that sets out tax rises and spending cuts will not be aviable to fight an election on (in Gordon Brown's eyes).

3 Gordon Brown doesn't have a credible plan.

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