Liquidity Issues

It seems that not every business is finding it impossible to raise funds from the recalcitrant and reluctant banking sector.

The Times reports that De Beers, the world's largest diamond producer, will refinance$1.5BN of debt and will go ahead with a $1BN rights issue.

There had been some doubt about De Deers' ability to refinance $1.5BN of its $3BN debt, due to mature in March. However its banks, a.o. Royal Bank of Scotland and Lloyds Banking Group, have agreed more favourable refinancing terms after De Beers' shareholders (including Anglo American and the Oppenheimer family) said that they would inject more cash into the business.

Other companies, with less illustrious and cash rich shareholders, may well still struggle to raise finance from the moribund banking sector.

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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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Bank Cuts Rates

Banks across the world have made a series of co-ordinated interest rate cuts today (eg Sweden's Riksbank cut rates by 1.75% to 2%)in an attempt to ease the pain of the recession and to restart the engine of liquidity.

The Bank of England also cut rates by 1% to 2%, they are now at 1951 levels.

As already noted, we are heading towards zero rates.

The question is, will the banks willingly pass on these cuts and start lending again or are more drastic measures required?

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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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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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Housing Market Grinds To A Halt

The Royal Institution of Chartered Surveyors (RICS) report that the housing market ground to a virtual standstill last month, as a result of the lack of mortgages.

RICS report that the average number of property sales handled by surveyors, over the past three months, fell to 14.4.

Needless to say the government's botched leak about the possibility of lifting stamp duty for a few months has added to the problems, as people have now delayed making a purchase until the situation is clarified.

Unfortunately the government will not be clarifying its position anytime soon, as the Treasury blames Number 10 for the leak and Number 10 claims it was not responsible.

Brown's government is collapsing around his ears, and is bringing the economy down with it.

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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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The Price of Dithering

The FT reports that Chancellor of the Exchequer, Alistair Darling, is considering a new plan to help resuscitate the housing market by allowing banks to swap new mortgage assets for government bonds.

The Treasury is formulating a plan to extend the Bank of England scheme, where high quality outstanding mortgage backed securities are exchanged for gilts to incorporate new mortgage lending.

Sir James Crosby, the former chairman of HBOS, is expected to propose the idea tomorrow when he delivers his interim report on the mortgage market.

It is a pity that it takes Labour's meltdown in the polls and the disastrous Glasgow bye election to motivate them to tackle this open sore. Had they moved with alacrity, in the final quarter of 2007 and at the beginning of 2008, the liquidity crisis could have been better contained.

Regrettably the government dithered, the result being that Deloittes are now warning that the economy is heading into recession, and may face a slump on the scale of the early 1990s.

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Retail Sales Slump

Statistics from the Office for National Statistics show that retail sales growth has dropped by 3.9%, in the three months from April to June.

This is the largest fall since the department began collecting the statistics back in 1986.

As noted yesterday, the dearth of mortgages and the seizing up of the housing market is now negatively impacting the rest of the economy.

It beggars belief that the Bank of England and the Treasury are not pulling out all the stops to free up liquidity. Instead there is a possibility that the Bank will in fact raise interest rates next month.

Utter folly!

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Kick Starting The Mortgage Market

The ongoing mortgage drought has caused pain not just to those seeking to borrow, but also those wishing to lend (less loans means less commission and less interest).

Finally those in the mortgage industry appear to be waking up to the fact that they need to do something about this mess. The Council of Mortgage Lenders (CML) want to free up UK banks and building societies to offer new home loans, to do this it wants the Bank of England to guarantee a market in mortgage-backed securities and covered bonds.

The CML claims that the key issue is the lack of available funding to support new mortgage lending, the proposal would cover new mortgages.

"The CML firmly believes that with quick and decisive implementation of the mortgage market funding proposal, the Government could mitigate the difficulties that households and the housing market will otherwise face, as well as helping to restore greater confidence to the financial system as a whole."

A nice idea. However, I doubt that the government or Bank of England will rush to act on it.

Speed and decisiveness is not the hallmark of the current administration.

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The Engine of The Economy Splutters To A Halt

The engine of the British economy, the housing market, looks set to splutter to a halt. Figures released by the Royal Institution of Chartered Surveyors (RICS) indicate that house price declines in June stayed close to the most widespread decline since RICs began to measure the property market in 1978.

The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 88%, in May it was 92%.

To add to the market's woes, RICS state that property sales have fallen to the lowest on record. Additionally mortgage approvals fell to the lowest in at least nine years in May, many buyers are finding themselves frozen out by tight lending conditions.

The Bank of England, as it considers what to do with interest rates and easing liquidity, would do well to bear in mind that the housing market is the engine of the economy.

Kill that off, and the economy dies with it.

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Broke

The credit crunch is going to severely dent the British economy over the coming year or so.

This news should come as no surprise to those who have followed the ongoing meltdown of the banking system, and the knock on effects on consumer expenditure. However, it would seem to be "news" to the government and Alistair Darling.

The National Institute of Economic and Social Research predicts that there will be a £16BN shortfall of tax revenues over the next two years.

Jim O'Neill, chief economist at Goldman Sachs, who forecast the collapse of the US property market, said that Britain was likely to be the worst hit of the world's economies.

Mr O'Neill is quoted in The Times and said that Britain, with its heavy reliance on financial services, was "in the eye of the storm of a deleveraging world economy".

He added:

"The UK mortgage market is effectively frozen . . . House prices are going to go through negative changes . . . It's going to be a challenge for UK policymakers."

It certainly is going to be a "challenge", the question is are our policymakers and government up to the job?

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Northern Rock Broke The Rules

The Financial Services Authority (FSA) review of the Northern Rock fiasco shows that Northern Rock breached capital rules six months before its collapse.

That in itself is a damning indictment of the way that the bank was run. However, to compound its guilt, Rock also failed to tell its shareholders about it whilst the FSA dozed in the background.

Northern Rock reported a capital ratio of 9.74% at the end of March 2007, which was "in breach of its capital requirements", and told the FSA on April 19 2007.

Yet, the FSA did nothing.

Why?

Seemingly they were afraid of the CEO of Rock and his cronies.

The FSA themselves say that they have been cowed by "strong and aggressive characters within Rock’s management team".

Pathetic!

What is the purpose of the FSA if it will not stand up to bullies and con men?

Rock did not bother to tell its shareholders, and compounded its lie by telling them in April that it had "excess capital" which it would pay back to shareholders via higher dividends.

The FSA, aside from ignoring the capital alert, had blood on its hands as far back as October 2006; when the Bank of England warned it about the risks of Rock's wholesale funding model.

The shareholders of Rock, who have lost everything, have the right to be furious with both the ex board of Rock and the FSA.

Undoubtedly both the board (executive and non executive directors) and the FSA must brought to account for this.

The most effective option available for the shareholders is to mount a class action against the board and the FSA. At the very least the shareholders should push to bankrupt the ex members of the board, and ensure that those who ran the FSA during this period are barred from holding public office/regulatory positions ever again.

It is little wonder that the financial services sector is regarded with such contempt these days.

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Mortgage Misery

The mortgage misery continues with an announcement by Nationwide and Abbey that will dampen the ardour of those borrowers who do not have a deposit of at least 10%.

As from Thursday, Nationwide will offer loans for 95%t only to existing borrowers or people taking out a three-year, fixed-rate mortgage.

A from tomorrow, Abbey will have only one deal left for homeowners with 5% equity — a five-year, fixed-rate deal charging 6.99%.

In other news it seems that the EU will be taking a close look at the Bank of England's attempted rescue package of £50BN, there is a risk that the EU will declare it unfairly subsidising British banks.

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Mortgage Slump

The liquidity crisis has had a devastating impact on mortgage approvals, they fell by 50% last month to their lowest level in 10 years.

Alistair Darling pleaded with bankers yesterday, to pass on rate cuts. He was given the metaphorical finger, and was told that rates would to continue to rise.

An image of Canute on the beach, readily springs to mind.

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Darling Lectures Banks

Alistair Darling is pressing banks and other lenders to improve their fixed-rate deals and offer mortgage holidays, in exchange for the £50BN bailout from the Bank of England.

I suspect that his words will fall on deaf ears.

Abbey has withdrawn all its buy-to-let mortgages, and has announced an an increase in fixed-rate deals of 0.61%.

Darling admits that, as we are in a free market economy, he cannot force lenders to offer better deals.

That being said, once this liquidity crisis is solved, the banks can expect a much "firmer" regulatory environment.

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The Rescue Package

As expected the Bank of England has announced its rescue package, designed to unthaw the liquidity freeze.

The initial scheme will be for £50BN, the Bank will allow lenders to swap assets (including credit card debt) for government backed bonds.

Mervyn King, the Governor of the Bank, is quoted in The Times:

"The Bank of England's special liquidity scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks."

In the event that £50BN is not enough, the package will be increased to £100BN.

It is a pity that it has taken so long for the Bank and government to act.

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The "White" Knight

At last the Bank of England, much like a white knight, is riding to rescue of the poor beleaguered banks.

Next week a "rescue" package will be announced whereby the Bank of England will offer around £50BN of gilts in exchange for secured assets from the banks.

This, in theory, is meant to ease the liquidity crisis and dig the banks out of the hole that they made for themselves.

As ever, when dealing with this government, there are a few catches. Not least is that fact that £50BN may well be not enough.

The other issues is that the gilts will have a life of just less than one year. The sneaky trick here is that by shying just short of one year, the gilts will not appear on the books of the government as debt. The banks wanted a 3-5 year package.

Should the Bank of England have done this?

Undoubtedly, yes!

Is this enough?

Unlikely, time will tell.

Whilst this may provide some short term relief for the banks, the final solution probably requires more to be done by the Bank of England, the government and the banks themselves.

Once the liquidity crisis is resolved the banks should be very aware that they will pay a heavy price for their greed and stupidity. The regulatory environment will move very aggressively against them, so as to stop something like this happening again.

The banks will well deserve whatever is going to be thrown at them.

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RBS Rights Issue

The Royal Bank of Scotland (RBS) is reportedly preparing a rights issue to replenish its capital reserves.

The rights issue is needed to repair the balance sheet that has been badly dented by the cost (£47BN shared between two others) of buying ABN, and the £1.6BN in write downs from the credit crunch.

Reports indicate that RBS are looking to raise £12BN.

Previously RBS has indicated, via a briefing from chairman Sir Tom McKillop to major shareholders, that there would be no rights issue.

Things change quickly these days!

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HBOS Give Brown The Two Fingered Salute

Following on form yesterday's breakfast meeting between Gordon Brown and senior bankers, a follow up to Darling's public pleadings for banks to reduce the costs of borrowings, HBOS will give its response tomorrow.

It is reported that Halifax Bank of Scotland (HBOS) will increase its two-year fixed and tracker mortgages by as much as 0.5% from tomorrow.

It seems that Brown and Darling are being ignored.

As I said yesterday Brown and Darling are "nothing more than hopeless and helpless observers wringing their hands as the British economy and banking system collapses around them."

The Bank of England and the government need to appreciate that, no matter what thier concerns over "moral hazard" are, issues of governance can be dealt with later. Their prime mission must be to prevent the economy from collapsing.

If your neighbour's house is on fire, even if he started it himself, you do not sit idly by watching and waiting for your house to burn down as well; you help him put it out.

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