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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The False Dawn

The Ernst & Young Item Club has warned that the recent rise in house prices may in fact be a false dawn, they go on to say that property values will not return to their 2007 peak for at least another five years.

However, The Council of Mortgage Lenders (CML) report that the number of loans granted for house purchase in July was 19% higher than in July last year.

Seemingly, in the eyes of CML, this is the "first material annual growth" since early 2007.

The CML do admit that banks are still rationing the amount that they lend:

"The scarcity of mortgage supply and tough lending criteria is making it particularly difficult for first time buyers to enter the market.

Given that they typically purchase cheaper properties, this will have significant implications for those looking to trade up, clogging up the market and limiting the number of transactions taking place."

The banks, as they have always done, will only ever look after their own interests. Only if it is in their interests to kick start the property market, by loosening their lending conditions, will they do so.

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The Metronet Debacle

It would appear that following on from the Metronet debacle, it is a case of once bitten twice shy.

That at least is the view of Terry Morgan, chief executive of the company responsible for maintaining and upgrading the Jubilee, Piccadilly and Northern lines, said he would not put Tube Lines at risk by simply taking on Metronet work.

"I think there's a number of things to happen yet," Mr Morgan said, referring to Metronet's decision to call in administrator Ernst & Young.

"First, someone has got to make certain it can't happen again. Tim O'Toole [London Underground managing director] and the mayor [Ken Livingstone] have made it clear there will have to be some changes with the way the Metronet contracts are let and London Underground will have to rescope the programme."

Source The Daily Telegraph

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The Price of The Metronet Failure

Gordon Brown has not escaped quite so cleanly, as he may have hoped, from the Metronet debacle.

Transport for London (TfL) has promised to stump up £750M to prevent the "meltdown" of London's primitive and shameful tube system, following on from yesterday's announcement by Metronet that they have placed themselves into administration.

Alan Bloom, an insolvency expert from Ernst & Young, has promised the hapless commuters of London who endure on a daily basis the third world tube system that he had an "overriding obligation" to ensure that the tube network does not grind to a halt.

Well, he would say that wouldn't he?

Ken Livingstone, Mayor of London, to his credit had resolutely opposed the PPP Metronet scheme. However, he was bulldozed out of the way by the "big clunking fist" aka Gordon Brown.

Chickens now are coming very firmly home to roost; and the Mayor has warned that the refitting of over 100 tube stations might have to be pushed back years, in favour of a multibillion-pound overhaul of the underground's signalling systems that Metronet was due to carry out.

Mayor Livingstone said that London now faced a "difficult period", while TfL tried to handle Metronet and "the clunking fist's" legacy of a £2BN cost overrun, a lending freeze from its banks and question marks over who inherits its two PPP contracts.

One has to ask some blindingly obvious questions:

1 How were things allowed to get to this stage in the first place?

2 Was no one overseeing this fiasco?

3 Who will be held to account?

4 What has the clunking fist got to say for himself now?

Needless to say, it will be the long suffering taxpayer who gets saddled with another one of this government's financial foul ups.

Tim O'Toole, a senior TfL executive and head of London Underground, said that he expected the taxpayer to plug any financial gaps left by the Metronet intervention.

"This will feed in with the larger discussion with the government about the funding of TfL and transport in London."

Quite!

The cash bung of £750M will be enough to cover Metronet's funding gap until the end of this year; after that...who knows?

By the way, the reason the clunking fist imposed PPP contract was to transfer the financial risk of managing public sector assets to the private sector.

Yes, you did read that correctly!

It would seem that the risk has been very speedily transferred back, which would indicate that PPP contracts are not worth the paper that they are printed on.

Well done Metronet and the clunking fist.

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Metronet Goes Into Administration

Metronet, the London Underground contractor, has announced that it will go into administration after overspending by a staggering £2BN; it has asked Mayor of London (Ken Livingstone) to appoint the administrator.

Alan Bloom, an insolvency specialist at Ernst & Young and the former administrator of Railtrack, is expected to be appointed to run Metronet.

Metronet said that its two Public Private Partnership contracts to renovate and maintain London's tube system were unsustainable. Its Metronet BCV programme, for the Bakerloo, Central and Victoria lines, had an unpluggable funding gap of just under £1BN. Metronet's creditors and shareholders – Balfour Beatty, WS Atkins, Bombardier, EdF and Thames Water – had refused to provide more funding.

Quote:

"Metronet Rail BCV requires additional funding to enable it to carry out its contractual obligations during the period of the Extraordinary Review.

This company has now established that it has no access to such further funds."

The second contract, Metronet SSL, for London's sub-surface tube lines, has an an overspend of £1BN. Metronet said blamed the PPP regulator for not providing emergency funds for Metronet BCV.

Quote:

"Applying the logic of the PPP Arbiter's draft direction to the circumstances of Metronet Rail SSL, the Board of this infrastructure company has come to the conclusion that any application for Extraordinary Review... would come to a similar position."

The collapse of Metronet is a kick in the groin to the then chancellor, Gordon Brown, and his PPP policy. Brown bulldozed the tube PPP through despite strident objections from those who knew it would be a disaster.

Hardly surprising that he was so keen to become PM, thus avoiding the mess that he created.

The head of London Underground, Tim O'Toole, has assured Londoners that the service on the lines that Metronet is responsible– nine of the capital's 12 – will continue as normal.

Hardly much of a reassurance, given that the service is a shambles anyway.

We can expect this to be a shambles, not just for the current tube passengers but also for the Olympics 2012.

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Living Beyond Our Means

Those of you who are yet to be convinced that we as a nation are living beyond our means, should read the Spring forecast presented by the Ernst & Young ITEM Club.

The report starts out optimistically enough, predicting growth of 2.9 % GDP for 2007 and noting that a rapidly expanding business sector is now driving UK economic growth faster than household or government spending.

However, ITEM then goes on to note that as a nation we are far too relaxed about risk, inflating assets and the costs of borrowing (as a result of the "benign" economic conditions in which we are living).

Professor Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, says:

"Many people are following the Chancellor's lead and are borrowing to finance consumption. The UK's current deficit has reached 3.5 % of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There's a danger that we are slithering into complacency."

Spencer warns of an increase in interest rates, which will squeeze homeowners and borrowers.

Quote:

"...it is clear that interest rates will be pushed up again to 5.5% after the May MPC meeting, putting them 1% above their level in early August."

He warns:

"Both as individuals and as a country we have borrowed a huge amount to support this growth. The bottom line is that we are all living beyond our means.

In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy's so sweet, what will happen when it turns sour?".

Economies work in cycles, we have been privileged to live in a time when the British economy has enjoyed a lengthy period of growth and prosperity. However, history teaches us that at some stage, there will be a downturn.

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