The Farepak Debacle IV

Those of you with long memories may recall that I wrote several articles about the demise of Farepak (the Christmas hamper business) in 2006.

The wheels of justice in Britain grind slowly and, over fours years later, 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.

The ex directors intend to fight this action against them.

Farepak had more than 100,000 who (unusually for many British people) actually tried to plan ahead for their Christmas, and put some money away to cover the cost. When Farepak collapsed they lost on their money (on average £400 each).

The Insolvency Service said "the conduct of each director in relation to the relevant company or companies makes him or her unfit to be a director".

Farepak was not regulated by the Financial Services Authority at the time, it was quite outrageous that it acted as a saving bank yet was outwith the control of the FSA!

Its victims received only about 17.5p in the pound from a government-backed response fund set up after the company's collapse.

Last year they heard they would receive a further 15p in the pound after Farepak's joint liquidators, BDO Stoy Hayward, announced that an action against the directors of Farepak had been settled for £4M, with no admission of liability by the directors.

Post Farepak the government finally took action and announced that payments to Christmas Hamper schemes would be ring-fenced, so that savers will be protected from suffering the same fate as the victims of the Farepak collapse.

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Banks Speed Up - Sort Of

A rare piece of good news for bank customers whereby the banks, whose reputation has sunk to an all time low, have actually started to do something the benefits their long suffering customers.

A banking scheme for one-day cash transfers over the phone or on the internet has started.

This is designed to speed up the process of transfers, which previously took up to four days.

Can you guess what happened to the money being transferred during this four day period?

It earned the banks a very nice £30M in interest per annum.

How nice for them!

Under the new scheme customers will be able to make one-off payments, up to a maximum value of £10K, over the telephone or via the internet. These payments will leave their account and arrive at the destination account on the same day.

The 13 banks included in the scheme are: Abbey, Alliance and Leicester, Barclays, Citi, Clydesdale and Yorkshire Banks (National Australia Group), Co-operative Bank, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Northern Bank (Danske Bank), Northern Rock, and Royal Bank of Scotland Group (including NatWest and Ulster Bank).

I wonder what the catch is?

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The ECB Ostrich Policy

The European Central Bank (ECB) yet again has refused to cut base rates, despite the current melt down in the financial markets and the cut by the Bank of England of 0.25% yesterday.

Jean-Claude Trichet, the ECB president, yesterday held the eurozone rate at 4%.

Notwithstanding the ostrich policy of the ECB, and lacklustre action of the Bank of England, the US Federal Reserve is expected to cut at least another 0.25% from its 2.25 per cent rate this month.

However, until the leading central banks co-ordinate their policies (not just interest rates) this crisis will not be abated.

When will the Bank of England and ECB wake up?

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Inflation Up

Consumer Price Inflation (CPI) rose to 2.5% in February, it was 2.2% in January, as a result of increases in energy bills.

The Bank of England's target for CPI is 2%, any rate above that makes it more difficult for the Bank to cut interest rates.

However, given the financial tsunami that is heading our way from the USA, it is likely that the Bank will have to cut rates further if it is to try to avoid recession in the UK.

Whilst the headline rate may look relatively benign, underlying increases in the price of staples such as; cheese, milk and bread prices (which rose by a staggering 17.6% in February) will hit households very hard.

The Retail Prices Index (RPI), which is a better guide to reality, remained unchanged at 4.1%.

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Lending Tightened

The Bank of England (BOE) has warned that the number of households defaulting on their mortgage payments is expected to rise over the next three months.

The BOE also noted that banks were now less willing to lend, because of the higher cost and reduced availability of credit.

Add this to the very gloomy New Year message from the Prime Minister, and it is clear that 2008 is not going to be at all pleasant for those seeking credit or those already in debt.

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Fiddling While Rome Burns

In a sure sign that both the board of Northern Rock and the union representing the staff there have collectively lost touch with reality, it has been agreed between the two bodies that Northern Rock will pay staff a bonus of £200 plus a one off payment of 2% this year together with a payrise of 4%.

No doubt, under normal circumstances, they might be deserving of a bonus and rise.

However, circumstances are very far from "normal" at the moment.

Northern Rock is relying on £30BN of public money to keep it afloat.

Seemingly Northern Rock was warned by Unite, the union representing the staff, that without its staff there would be no company left to rescue.

Well, here's a newsflash for the board and the union:

THERE IS NO COMPANY LEFT, THE PREVIOUS BOARD DESTROYED IT.

If Northern Rock is sold successfully, its name and loan book will be absorbed into the new company; it is as dead as the parrot in the Monty Python sketch.

No matter how delusional the union and the current board are about awarding pay rises, this simple reality cannot be ignored.

You do not reward people for failure.

PERIOD!

This agreement is beyond belief, and indicates that neither the board nor the union have any grasp on reality.

This sends a very bad message indeed to the customers, shareholders and prospective buyers. It may well scupper the sell off, and quite possibly the staff will find themselves without a job in less than a year.

What use then a pay rise?

Idiots!

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Northern Rock Suspened

Trading in Northern Rock shares was suspended for the fifth time in early session today, after the stock slumped more than 41%.

It has now resumed trading, and is currently down around 21% at around 82p.

Congratulations to the board of Northern Rock for destroying this once solid company with their high risk lending strategy. They have succeeded in consigning the company to the dustbin of history, in a similar manner to the board of Marconi.

The shares in Rock are now the plaything of the speculators and will see rises and falls over the coming days that will make some individuals very rich, but will be of no comfort to the long term shareholders who bought in when the stock was valued at over £12.

I trust and assume that those responsible for this will not be receiving golden handshakes when they depart.

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Bloodbath at The Rock

After weeks of mounting pressure, following the destruction of Northern Rock, the CEO (Adam Applegarth) has finally been persuaded to fall on his sword and resign.

Applegarth will leave by the end of January.

His is not the only head to role in this debacle, that has seen not only a major brand/bank destroyed, but the first run on a British bank in 140 years (thus severely damaging the credibility of Britain's financial system and that of the regulatory authorities).

Matt Ridley, the much maligned and invisible chairman, resigned in October; the bank has now announced that four non-executive directors - Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe - will step down with immediate effect.

Applegarth earned £1.36M last year. Northern Rock refused to comment on whether Applegarth would receive a compensation package when he leaves the business. The more pertinent question is whether they actually would have the funds to be able to pay him.

Rock also stated that three further directors - David Baker, Keith Currie and Andy Kuipers - would step down from the board, although they would remain officers of the company.

A complete shambles, and a humiliation for Britain's financial services industry and regulatory regime.

What other horrors are lurking in the woodwork in other banks I wonder?

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Spend Spend Spend

Proving once again that they are immune to all forms of financial shocks, financial reality and the credit crunch; the British consumer intends to have a jolly good Christmas, and spend themselves out of recession.

That at least is the conclusion of a survey conducted by Deloitte.

In its annual Christmas retail survey, Deloitte found that the average person plans to spend a total of £706 on this year's festivities, up from £662 last year.

However, there is a caveat, the initial survey was carried out in September before the credit crunch started to bite. That being said, the question was reasked in November and the answer given was more or less the same.

Richard Lloyd-Owen, head of consumer business at Deloitte, said:

"Early indicators suggest concerns about bruised financial markets and consumer confidence are nothing more than concerns.

The impact of the credit squeeze could play out in coming weeks when events have had time to percolate through consumer mindsets, but we think it's unlikely."

The largest portion of the increase in consumer's planned expenditure is on socialising, with the average spend expected to be £143 up 18% £121.

Quite whether people will be feeling so happy with their expenditure in January, when credit will be hard to come by, is another matter.

However, Christmas is for wants not needs.

That's the real meaning of Christmas!

The British consumer may just save the economy, let us see.

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Fear

The ongoing, self inflicted credit crunch, is producing an atmosphere of fear in the City. Banks and financial institutions are seeing their share prices drop, as investors fret over which one will be next to announce profit write downs and liquidity problems arising from the credit crunch.

Barclays has decided to try to grab the bull by the horns by asking its auditor, PricewaterhouseCoopers (PwC), to help with a breakdown of Barclays' financial performance for a trading statement due on November 27.

On Friday Barclays shares were briefly suspended, as a result of rumours concerning a possible writedown of £5BN.

Barclays quickly denied the rumours, and John Varley (CEO) issued an internal memo to staff assuring them that the business was sound.

Varley, in his memo to staff, said:

"If there were any substance in the rumours that I have been hearing in recent days, we would not have been required to have made a stock market announcement. But we have not."

What we are now seeing is irrational and unsubstantiated fear undermining the stability of sound financial institutions. This needs to be stopped here and now.

As Roosevelt once warned:

"We have nothing to fear, but fear itself."

The financial services industry and the regulatory authorities need to get a grip on this, otherwise what people fear will take tangible form and the financial markets will totally freeze up.

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Fiddling While Rome Burns

Thomas Huertas, acting managing director of wholesale and institutional markets at the Financial Services Authority (FSA), gave a less than ringing endorsement of the quality of staff at the FSA when speaking at the Reuters Finance Summit.

Quote:

"We are operating with the team that we have. It is a high quality team. It is in our view doing the job.

We can always use better quality people. We said we would like to have more quality people and any CVs you push in our direction would be most welcome."

The FSA has come under heavy fire for it's "lightness of touch" in applying principles based regulation, rather than a rules driven approach. The Northern Rock debacle has hardly helped its reputation.

Huertas claims that the full lessons from the Northern Rock debacle will not be clear until next year. Far too long to wait for that, in my view.

Asked if the FSA was operating at full stretch, as a result of the liquidity crisis, Huertas said:

"Yes, it's fair to say that.

We have business as usual to regulate and supervise 20,000 firms here in the UK and there is a huge amount of work on liquidity and capital and large exposures that have dramatically increased and our staff are stretched."

He believes that it is too early to talk about shaking up the tripartite system of regulating banks.

He is wrong.

The Northern Rock debacle provides clear evidence that the current tripartite system does not work, as does the aftermath where each member of the tripartite system (Bank of England, Treasury and FSA) sought to blame the other.

The fact remains that the board of Northern Rock were allowed to destroy the company, without any meaningful intervention from the regulatory authorities.

Make no mistake, Northern Rock in its current form is finished; the fact that the board (aside from the chairman) cling on to office and the FSA claim that no changes in the regulatory framework are needed is a disgrace.

The FSA is fiddling while Rome burns.

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The Silence of The Banks

Whilst the credit crunch has hit home on the other side of the Atlantic, with profit warnings issued (eg Citigroup) and the scalps of leading bankers being claimed, on this side of the Atlantic matters seem relatively sedate and calm (aside from the Northern Rock debacle).

However, there are those who believe that this calmness precedes the storm and that the silence of the banks about their exposure wrt bad debts and dubious debt bundles precedes a similar meltdown here.

Analysts are calling for British banks to give public statements about their precise exposure to the global credit crisis.

Credit Suisse warned, in a briefing note, that investors are being "spooked" by the banks' silence. The complexity of British accounting standards has allowed the banks to perform a "smoke and mirrors" act wrt disclosing their true exposure.

The Financial Services Authority (FSA) claim that banks are bound by the Stock Exchange listing rules, in the same way as other companies. However, the rules allow companies to keep information private if they are unable to quantify the size of the problem reasonably precisely.

Given the ever shifting nature of the credit crunch, that is quite an opt out clause.

Whilst the banks, the analysts and the regulatory authorities engage in theorising about the true nature and size of the crisis, the hapless British financial consumer is already feeling the effects. Banks and other financial institutions are already tightening their lending rules, and reducing the credit that they extend to consumers and potential house buyers.

It is clear that, for the consumer holding debt, matters will get a lot worse before they get better.

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Taxpayers Can Sue HMRC

The court of appeal ruling in favour of Neil Martin a builder who lost £500K, as a result of errors made by HMRC when it processed his company's Construction Industry Scheme (CIS) application in 1999, leaves HMRC open to being sued by taxpayers for errors.

The ruling means that HMRC has a duty of care to taxpayers, and taxpayers may now sue HMRC for damages in certain circumstances.

This is particularly relevant in cases where the HMRC help taxpayers with their returns.

The result will of course mean that HMRC will no longer offer taxpayers help in completing their returns, as such the process of submitting a return will become even more tortuous and difficult to complete.

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House Prices Fall

House prices in Britain fell for the first time in two years in October, according to a survey by Hometrack.

The average cost of a home in England and Wales declined 0.1% to £176,100 from September. Whilst prices in central London fell by 0.5%.

Consumers are now sitting on debt of over £1.4 trillion.

The Bank of England stated that UK banks have approved the fewest mortgages in 26 months in September. Lenders have granted 102,000 loans for house purchases, the fewest since July 2005 and down from 108,000 in August.

The Bank of England needs to wake up to the fact that, whatever its high moral principles about excess debt, there are a large number of people sitting on debt that they cannot afford to service.

Like it or not, cuts in rates are necessary to avoid the economy going into freefall.

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Lack of Understanding

A study by CreditExpert reveals that most people have a "worrying" lack of understanding about the financial impact of rising interest rates on mortgage payments.

An astonishing 70% of those questioned did not know the effect of a 0.5% interest rate rise on a £100,000 mortgage.

The study also revealed that 80% of five mortgage holders do not know what their Annual Percentage Rate (APR) was.

Given this appalling level of financial ignorance in the UK it is hardly surprising that the banks, credit card companies and other organisations within Britain's lousy financial services industry treat their customers with such contempt.

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Darling Digs Heals In

Alistair Darling, the Chancellor of The Exchequer, dug his heels firmly into the ground yesterday; when he met with business leaders who were pressing him to change his plans to abolish tapering relief on capital gains, and replace it with a flat rate 18% charge.

Darling refused to be moved by their pleas.

The Director General of the CBI, Richard Lambert, put a brave face on it and said that the talks had been "positive". He claimed that the Treasury had to look at ways to encourage entrepreneurs.

The CBI, British Chambers of Commerce, Institute of Directors and Federation of Small Businesses believe that the change will negatively impact small businesses and entrepreneurs.

Mr Lambert said:

"We believe the pre-Budget proposals represent a significant step in the wrong direction for the UK economy, and we will continue to press the case for them to be changed.

As things stand, they will hold back vital investment in businesses of all sizes and send out totally the wrong message about the Government's attitude to enterprise."

That's probably very true. However, the announcements made by Darling wrt the tax changes were not done on the basis of sound economics but out of political expediency. Gordon Brown had run scared of an election, and the Tories fox (wrt inheritance tax) needed to be shot.

The remaining years of the Brown/Darling "partnership" will be unhappy ones for the British economy, political short-termism and fudge will replace any semblance of fiscal probity.

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The Long Goodbye

The Chairman of Northern Rock, Matt Ridley, finally resigned on Friday after enduring several weeks of humiliating media articles and a grilling last week by the Treasury Select Committee that left his reputation and the reputation of the board in tatters.

During the weekend it emerged that he will not receive a pay-off from his £315,000 a year job.

The Treasury Select Committee accused him of "damaging the good name of British banking".

This is but the first head to roll, the question is will the others leave without a pay-off?

The Treasury Select Committee will now call investment banks, ratings agencies and accountants for a new series of hearings; after widening the terms of reference of its inquiry into the credit crunch.

The hearings will last until at least the end of 2008.

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IMF Warning on House Prices

With the price of houses in the UK now standing at nine times the average salary, the IMF has finally decided to suggest that there is a high risk that property prices in the UK may fall.

In their view house prices are overvalued by 40%.

However, the report ignores the fundamental structural weaknesses of the UK housing market which in fact underpin the prices:

1 There is a shortage of supply

2 There is an inherent desire to own property

3 There is a large variety of readily available mortgages

4 There are large numbers of wealthy foreigners seeking property in the UK

5 City mega bonuses are distorting the London market, the ripples from which affect the rest of the UK

Only when the above 5 points have been reversed, or nullified, will the property market crash.

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Northern Rock's Directors Face Grilling

Top executives from Northern Rock are currently being grilled by MPs at the Treasury Select Committee. Chief executive Adam Applegarth, Chairman Matt Ridley, non-executive directors Sir Ian Gibson (who is also deputy chairman of Morrisons and chairman Trinity Media) and Sir Derek Wanless are are among those who are facing the committee.

Committee deputy chairman Michael Fallon kicked off the proceedings, setting the tone, with a cutting question as to whether the hapless directors actually "know what's happening at their own bank".

Seemingly the directors are employing the tactic of blaming "unexpected events". Maybe they should have taken Prime Minister Macmillan's comments many years ago, as to what knocks governments off course ("events dear boy"), to heart.

On being pressed by Fallon as to why no one has resigned, Ridley said that his resignation is there if the board wants it.

Well, what's stopping them accepting it?

It is going to be a long day for these hapless directors!

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Early Warning System

Alistair Darling, the Chancellor of The Exchequer, is going to propose the introduction of an international early warning system of potential financial market turbulence at the G7 meeting in Washington this month.

Darling believes that an alert system would strengthen surveillance of the financial sector.

Quote:

"I will urge faster, rapid implementation of international agreements on solvency, accelerated work on international standards for regulating liquidity, more transparent information on credit ratings and action to improve the transparency of off-balance sheet vehicles."

The danger of an early warning system is that, if it too sensitive, it may just spark the panic and meltdown that it was trying to avoid (such as the case with automatic share trading systems, that sell shares when their price moves beyond certain preprogrammed parameters).

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