The "Luck" of The Irish

Commiserations to the people and government of Irleand who, having come to the rescue of their beleaguered banks during the global credit crisis, now have to do it again.

The Irish government will now take control of Allied Irish Banks Plc, and inject extra cash into the previously nationalised Anglo Irish Bank Corp. The cost of the rescue is estimated to be around Euro50BN.

The Irish budget deficit will be approximately 32% of GDP. In order to try to avoid following Greece, and having to ask for an EU/IMF bailout, the government will be making further cuts in its budget.

As to whether this is politically acceptable remains to be seen.

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Credit Card Companies Given a Slap

The Consumer White Paper, published today, proposes a number of measures that will change how credit card firms interact with their customers:

- they will be banned from raising credit limits without asking the customer first

- unsolicited credit card cheques will be banned

- they will not be able to raise interest rates on existing debts

- repayments will have to be put towards paying off the most expensive debt, rather than the cheapest as most now do.

However, there is of a course downside, monthly payments will have to rise. Which ironically will hit hardest that section of the community (ie the poor and debt burdened) which the White Paper allegedly was meant to help.

Have they really thought this through?

Surely a better course of action would have been to pressurise the companies to reduce their extortionate interest rates (17% or more), in the face of base rates that are 0.5%?

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Interest Rates To Fall

It looks a racing certainty that the Bank of England will announce later today a cut in interest rates from 1% to 0.5%.

Given that this leaves it little manoeuvring room for further cuts, the Bank will also start the process of quantitative easing (ie printing money).

The objective of both of the policy instruments is to ease the credit drought, to try to bring the economy back to life.

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The Retail Crunch

Things must be bad in the high street if even the Queen's shop, Fortnum and Mason, is having to lay off staff.

Maybe now the bottom is finally being reached?

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We Are All Bankers Now

In a delicious irony, despite the mistrust and dislike of the bankers who have brought the country to the edge of financial collapse, the British taxpayer finds himself/herself owning 43% of a new "superbank".

The "superbank" has been formed out of the wreckage of the merger between Lloyds TSB and HBOS, which was rejected by investors (who only bought less than 1% of the shares offered by both banks).

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Quantitive Easing

Today the MPC of the Bank of England will announce its decision wrt interest rates. The "smart" money is on there being a cut of between 0.5% and 1%. However, some pundits have noted that as the recent cuts have not eased the credit drought, using the same tool again will be pointless.

Either way, it seems that other weapons are needed in order to address the fundamental issue of a credit drought. Hence the solution being mooted in many quarters (and not being denied by the government) of printing money (quantitive easing), and using the money to buy assets ranging from government or commercial debt to private equities.

There is a danger of inflation. However, under the current circumstances a small dose of inflation may be exactly what is needed.

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Waterford Wedgewood Collapses

The "real" economy is now feeling some very "real" pain from the banking crisis. It was announced today that Waterford Wedgewood will be placed into administration, thus threatening 1,900 jobs in the UK.

Waterford Wedgwood missed a January 2 deadline to meet loan repayments. Its net debts are around Euro449M, and it had been unable to raise Euro150M of new equity.

The company had been making losses for the last six years.

As ever, it will be the fundamentals that determine which companies survive this recession (now that the era of "easy" money has ended); ie profits and cash flow.

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Barclays Warns On House Prices

John Varley, CEO of Barclays, gave a stark warning about the length and depth of the recession; by saying that house prices could fall by 30% to the end of 2009 compared with their peak, and that unemployment could top 7.5%.

He gave this warning during an interview to be broadcast on Sky News this evening. During the interview he expressed some remorse for the culpability of the banks in the ongoing collapse of the economy, noting that mortgages of 100% or more were madness.

The Times quotes him from the Sky interview:

"I think if you look at the players who were involved in what's happened to the world, I think there are quite a lot of players. They would include central banks, they would include governments — but they would certainly include the banks.

And the banks have to be prepared to have the humility to acknowledge that and accept it and to say sorry. They need to take their share of responsibility, we need to take our share of responsibility as an industry."

I aggree, now the banks and government have to work together to try to limit the damage that the recession will inflict and to kickstart the economy.

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Banks Refuse To Pass on Rate Cut

Unsurprisingly many banks have refused to pass on yesterday's interest rate cut of 1%. The Times reports:

"Hundreds of thousands of borrowers will be denied the full benefit of yesterday’s cut in interest rates because many banks are refusing to pass on the whole one-point cut to all mortgage customers.

Britain's biggest mortgage bank, which received billions of pounds in taxpayers' money, failed to respond in full to the latest move by the Bank of England. Halifax cut its standard variable rate (SVR) by only 0.25 percentage points, while Nationwide will trim its rate by 0.69 points.

A borrower with a £150,000 loan paying Halifax’s SVR will see payments drop by only £25 a month.

Only Lloyds TSB, HSBC and Woolwich said that they would cut their SVR by one percentage point. However, HSBC and Woolwich failed to pass on last month’s 1.5 percentage point cut."

It seems that the banks have not yet learned that the rules of the game have changed. In the "good old" days they could more or less do as they pleased to their debtors/customers, safe in the knowledge that very few people "that mattered" would kick up a fuss.

However, two fundamental changes have occurred:

1 The banks, as a result of their greed, stupidity and ignorance, have jeopardised the financial system of the the Western world by unleashing a lending frenzy and by gambling trillions on complex financial instruments that they didn't understand. In the event that these deals unravel completely, as they may well do, the losses incurred will exceed the annual GDP of many middle to high ranking economies.

2 The UK government now owns shares in some of the major banks. It has been reluctant, thus far, to call the shots; but as time goes on it will become increasingly interventionist.

Like it or not, no matter how hard the banks may squeal that they are barely able to make a living in the current economic environment and that they must take account of the higher risks, the issue is not simply a matter of capital base and margin differentials between base rates and LIBOR.

The higher risks that the banks complain of are due to the fact that they all but ignored risk in the past, and went on a lending and gambling binge. All very well, but it is not right that the debtors/customers are made to pay for the greed and short termism of the banks.

The issue now is one of politics, culpability and people's livelihoods/homes. The fact that the banks have yet to grasp that point indicates that they are still in denial.

My advice to the banks is wake up now, the rules of the game have changed, or you will soon be on the receiving end of a very nasty wake up call.

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Silly Money

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The Great Bailout

US President George Bush has said that Democrats and Republicans will come together to pass the bailout plan to rescue the US economy.

All well and good, if what he says actually comes to pass. However, the bailout was never a matter of merely throwing billions at the problem to make it go away but of injecting confidence into the economy.

The bailout plan had the possibility of working, until it became apparent that Paulson in fact had no plan and McCain pushed himself in front of the cameras in a bid to appear as a dealmaker (thus wrecking any possibility of th deal being passed last week).

Bush then publicly said that the world economy was in gave danger if the plan was not approved, and privately said during the disastrous McCain inspired meeting that "this sucker is going to go down". Paulson, pouring petrol on the flames, then got down on bended knee to Nancy Pelosi (House Speaker) begging her to pass the bill.

Those actions and words send a very clear signal that those in office are not in power. No matter how many billions of dollars are now thrown at this issue the markets have had the confidence kicked away from beneath them by the failed leadership in Washington, and the desire of a very old angry man to become president.

The road ahead is uncharted and dangerous. Bush has done to the US economy what no terrorist or hostile country could ever do, that's quite a legacy!

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Pissing In The Ocean

The government, in a rather piss pathetic attempt to reanimate the corpse of the housing market, has announced that it will exempt properties worth less than £175,000 from stamp duty (the current exemption is £125K).

Given that the average house price in the UK is around £200K, this will have next to little effect.

Additionally, statistics show that the number of property deals that are already exempt from stamp duty has fallen almost as much as those liable for the tax; in other words the exemption is irrelevant.

The fundamental issue facing prospective house buyers is the lack of mortgage funding, not so much shaving a few thousand pounds off the price. This measure does not address the liquidity issue in any shape or form, it is pissing in the ocean.

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Darling Surrenders

Alistair Darling has all but given up trying to keep Britain out of recession, by announcing today in The Times that Britain could be heading for its worst economic downturn for 60 years.

Darling also admitted that he had no idea how serious the credit crunch would become.

This is man who has clearly given up, and who is likely to be out of a job in the next month.

Regrettably the British economy and British voters are stuck with Labour and the disastrous tripartite regulatory system that Brown created for another two years, the damage that Labour will do to the economy in that time is incalculable.

Every Labour government ends in economic failure.

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What A Whopper

The Times quotes Professor Kenneth Rogoff, a leading academic economist, as saying that there will be worse news to come from the worldwide credit crunch.

"The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.

We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one — one of the big investment banks or big banks."

Heartwarming stuff!

However, before people start jumping from window ledges, it is worth remembering that financial crises come and go; additionally, the crunch is as a result of the banks' greed and stupidity.

What goes around comes around!

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Reposessions Up

House repossessions in Britain have risen alarmingly to levels not seen since the last recession.

The number of mortgage repossession orders posted by courts in England and Wales between April and June this year rose by 24% to 28,658, compared to the second quarter last year.

The figures are in line with the number of orders made in mid-1992, at the height of the recession.

Unlike the last recession, repossession figures show that "second charge" repossessions feature strongly in the figures; indicating that many have unwisely used their property to secure an extra line of credit.

Shelter forecasts 9,000 more people will lose their houses to "second-charge" lenders.

Meanwhile the Treasury and Bank of England argue over what to do ease the liquidity crisis; with Mervyn King Governor of the Bank sticking firmly to his principles, and insisting that it is not the Bank's role to provide credit.

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£1M Wiped Out Per Minute

PriceWaterhouseCoopers (PWC) have published an analysis that shows that £1M per minute (£600BN) has been wiped out from the UK's total wealth, since the credit crunch started a year ago.

PWC estimates that £400BN has been written off residential property, and £200BN written off the stock market valuations of the banks and other financial institutions.

PWC estimate that this will lead to a reduction in expenditure of around £12BN to £16BN over the next 12 months.

As if that were not gloomy enough, PWC add the rather worrying caveat that the report is "conservative" and that this is its best case scenario.

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HSBC 28% Profit Collapse

HSBC revealed some lousy results today, much as expected. The ongoing credit crisis (caused by the banks' irresponsible lending) has knocked £5.1BN (28%) from its first half profits to £5BN.

HSBC will not comment as to whether the losses from its toxic US loans have peaked or not. However, its provision for US consumer finance now stands at $6.8BN (85% higher than the same period last year).

HSBC chairman, Stephen Green, maintained a stiff upper lip and noted that the outlook was challenging.

Quite!

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Increase Liquidity Demand

Today some of the UK's largest banks are lobbying the Bank of England to extend the terms of its Special Liquidity Scheme (SLS), to increase liquidity in the money markets.

The Telegraph reports sources that say that the SLS has not restored confidence to financial markets, as banks continue to avoid lending to each other as well as to customers.

This fact can be attested to by anyone seeking a new mortgage or credit facility.

Finance directors of the banks, and heads of the banks' Treasury departments, will attend a meeting with representatives of the Bank of England. They are likely to press for the Bank to accept mortgages written this year as collateral.

As said many times before, this entire crisis can be defused if confidence is restored within the system. In order for this to happen the commercial banks need to start lending to each other, and the Bank of England needs to kick start that process by showing some proactive confidence boosting leadership.

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Confidence Hits 16 Year Low

Business confidence in the UK has hit a 16 year low, as the effects of the ongoing credit crunch and rising food/energy prices are felt.

The Business Trends report, published by BDO Stoy Hayward, shows that the measure of business confidence over the next quarter declined to 97.7 in June from 98.3 in May, the lowest level since 1992.

Peter Hemington, BDO partner, is quoted in The Times:

"We've not seen short term business confidence plunge this low since Black Wednesday in 1992, indicating that UK businesses of all shapes and sizes are struggling to see any light at the end of the tunnel.

With confidence at a 16 year low, an interest rate rise next week aimed at curbing inflation could be crippling for business, and could worsen the effects of the economic slowdown. Our figures suggest that the MPC will be left with little choice next week other than to leave interest rates unchanged."

We have nothing to fear but fear itself, the gloom and doom will become self fulfilling prophecies if we are not careful.

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Credit Untion Rules To Be Relaxed

As the mortgage and credit drought worsens, the government is desperately trying to look as though it is doing something to ease people's burden. The government announced today, via the BBC, that it will unveil an initiative to help people, eg those on low wages, beat the credit crunch by relaxing the rules on credit unions.

Credit unions are community based savings and loans organisations. They act as low-risk savings and loans providers, usually for the less well-off.

It is an ugly fact of financial life that those most in debt, and least able to borrow more, are at the greatest risk from loan sharks.

Currently any area or organisation can form a credit union; however, they have to operate within their own communities (the Common Bond). The Treasury will broaden the Common Bond, allowing the sector to expand.

The government envisages that by this time next year, people will be able to access cheap, secure loans.

All very well, but the need for low cost credit and an easing of cashflow is now; not in one year's time.

The loan sharks are going to feast themselves sick over the coming months, on the rotting corpses left behind by the government's mismanagement of this crisis.

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