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Yesterday, four former bosses of UK’s RBS and HBOS (former HBOS chief executive Andy Hornby, former HBOS chairman Lord Stevenson, former RBS CEO Sir Fred Goodwin and former RBS chairman Sir Tom McKillop) faced the Treasury Select Committee for a questioning session about their role in the financial meltdown and the disasters that came to befall their banks.

The key snippets of this session, which has been dubbed “the show trial” for all the public apologies it started off with, can be found here.

Read the rest of this entry »

Most of us feel that auditors should indeed be worried now. After all, none seem to have been raising any alarms over the extent of bad loans accumulated by major financial institutions, or over risks that banks exposed themselves to through entering into derivatives contracts they claimed they understood but did not. And now many hold auditors at least partially responsible for the ensuing debacle.

For some audit firms, the time of reckoning seems to be approaching fast. However the degree of their concern over legal action will depend on where the firms are operating, and global or US-based firms are at greatest risk of coming under close scrutiny in the courts of law.

Read the rest of this entry »

If anyone had thought that credit crunch has faded in significance, had been replaced by a deepening – and now acknowledged – global recession, but that basically things were back to some sort of known territory where we’ve been before and know how to get out of it eventually, this morning we were reminded that this was not the case.

Clearly, we are very, very far from being out of the woods, with banks continuing to be on the brink of disaster and still struggling to quantify the extent of their losses.

The new £50bn plan: The new bailout plan, announced in the UK this morning, will allow the Bank of England to buy up to £50bn of risky assets directly from any company (not just financial institutions) that agrees to enter into a voluntary insurance scheme for its expected losses on specified toxic debts. In return, banks have to pay for this insurance – typically with cash, but possibly also their shares. The scheme aims to insure companies against 90% of their losses on specified debts which resulted from the collapse of the sub-prime market and the ensuing global meltdown.

Two bailouts, two stories: This scheme, of course, exists on top of the first bailout in October 2008 where several key financial firms received £37bn as a capital injection to top up their reserves. The second UK bailout, however, has very different features to the first one. Not only the recipients of “aid” are different, but the insurance scheme “twist” is a new one. It is closer, albeit not idential, to the earlier US’s bailout model of buying up bad assets from struggling firms. Read the rest of this entry »

Much has been said over the past few months about the responsibility of regulators in the current global financial crisis. I’ve written about it myself back in September suggesting that they are yet to acknowledge their role and their own failings.

Three months on, it still seems that the regulators are either in denial, or suffering from a debilitating shock of their own past incompetence, as we are still not seeing much positive change from them. Even with the current obvious trend for greater regulation promoted on the government level, there is no clear evidence of regulators stepping up their game.

What do I mean by that, I hear you say? Well, there are two aspects to this. The first one is about acknowledging regulators’ failure to prevent the financial crisis – and in this, I am going to specifically focus on auditors in this post. The second aspect is about regulators changing their attitudes immediately, not at some point in the future. That would be the subject of another post.   Read the rest of this entry »

Here is something that did not surprise me at all today.

The UK government, it appears, knew perfectly well that the Icelandic banking system was heading for a meltdown – as recently as March 08. But it did nothing to help out some of the UK savers.

Back then, the Icelandic government was seeking help for its banking system as the confidence was starting to collapse and it needed money. Mervyn King, the governor of the Bank of England, commissioned several reports to assess the state of the Icelandic banking sector, and refused to help out when the results that came back were – predictably – not very reassuring.

Failure to act: Discussions earlier on in 2008 on the possibility of turning UK operations of Landbanksi, the now-collapsed bank, into a UK subsidiary, did not reach any conclusions. This means that whilst the UK government was aware of the impending danger to Landbankski’s UK savers, it failed to negotiate a status change for this branch which would have meant savers would have been covered by the UK deposit protection scheme when the collapse inevitably happened. It failed to act to aleviate the inevitable fallout.

Liberal Democrat treasury Vince Cable is now calling for an inquiry to understand the extent of UK government’s knowledge about the forthcoming crisis.

The government has recently confirmed that it will back private investors’ money, but this leaves charities and local councils at risk of losing all their money.

The savings debacle: Now, a huge amount of charities and public sector bodies have their money locked in collapsed Icelandic banks. Here is the quick list of councils that caught out in the meltdown.

Some councils have been warned: It appears that many did have a prior warning about the impending danger. Landsbanki, Glitnir and Kaupthing bank were all downgraded in Feb – March 2008 by credit rating agencies. The confidential advice to move savings elsewhere was passed to many councils by their advisor, Sector Treasury Services.

Some acted on this advice and moved the investments; some could not, as money was locked in long term deposits. Others – and this is the shocking bit – continued ignoring financial advice and even increased deposits made. This, unfortunately, just confirms some council’s incompetence in financial management.

Read more details here.

So, tell me something I did not know? The UK government that is wilfully closing its eyes to the inevitable and refusing to act early, and UK councils that do not competently manage their money. What a shambles.

 

Copyright 2008 by CuriouslyInspired

As the global credit crunch and deterioration of confidence is starting to bite Russia harder, Russian banks are experiencing panic deposit withdrawals. Add to this the rapidly falling stock markets – and you have a dangerous cocktail of financial instability.

Customers want their money back: Last week, Russian bank Globex banned depositors from taking their money after a run on its deposits sparked by crumbling confidence. It is the first bank to suffer this problem in 2008 – but undoubtedly not the last. A number of other banks also experienced an unexpected rise in people withdrawing their money and closing their accounts. Long queues of investors desperate to have their cash back are starting to form outside smaller banks. Many failed to get their money as bank operations were suspended. So this crisis is not doing anything for the average consumer who is now seriously worried about losing their hard-earned money.

In the last couple of months, three banks have been forced into mergers because of the liquidity crisis brought on by the global credit crunch. There is anecdotal evidence that banks are being bought for nominal sums, one of them quoted to have been sold for $5,000.

Bailout Russian style: The Russian government’s financial bailout package of $120bn is aimed primarily at large captive state-controlled institutions such as Vneshtorgbank (VTB – the Bank for Foreign trade) and Sberbank (the Savings bank). The government also intended to spend a portion of it on shares purchase to support the tumbling stock market, but not so much at lending activities. Overall however, there seemed to be insufficient detail and transparency about the total package which caused the market a lot of concern.

The package itself is an astronomic size of money in terms of its size relative to Russia’s GDP. For comparison, US’s $700bn bailout is around 5.5% of its GDP (US GDP is approx $14trillion), whereas Russia’s bailout is about 10% of its GDP (Russia’s GDP is approx $1.2trillion). Since the bailout has been announced in September, it has had little impact on the Russian stock market, which fell down around 60% from its high in May 2008.

The crash of Russian stock market has been the most dramatic event of all the world’s stock markets collapses in 2008.

Market correction: In itself, the Russian crash is a huge adjustment back to the shaky economic fundamentals. Russian economy is still set to grow by about 7% in 2008 according to the IMF. However, the foreign investors who were attracted by speculative expectations of high returns in Russia are all gone and the money is gone with them, making the huge market bubble go “pop” spectacularly quickly.

Financial outlook: This is tricky as there are a few moving parts. Oil is a key one, but I am not going to touch upon it today, only noting that a fall in world oil prices is causing major concern to Russia. 

From the point of view of banking, we are seeing the start of consolidation of the Russian banking sphere, and there is a fear, which the government will strongly deny, that the financial situation is pretty grim: the major concern is that widespread bank failures will spark panic. Still, the population is pretty pleased about one thing – that a bunch of super-rich Russian oligarchs will lose their ill-gotten money in the stock market crash. That’s some consolation, isn’t it?

 
Copyright 2008 by CuriouslyInspired

The UK Government has now unveiled the plans for a £37bn bailout for key British banks, as the BBC reports today.

Terms of the UK Bailout: The key features is that the Royal Bank of Scotland (RBS), Lloyds and HBOS will get cash injections of £20bn for RBS and £17bn between the two latter banks. This money will be used to recapitalise these banks, ie strengthen their reserves in order to withstand financial turmoil and market volatility we are facing at present. However in return the Government is effectively part-nationalising these three banks by taking a large or controlling share in them as these banks sell its shares to the Government in exchange for money.

The objective of part-nationalisation, apart from taking more control in the banks’s affairs now, is to also get income back to the Government and the UK taxpayer once the banking system does recover and shares go up in value.

Banks management changing: On the strength of this effective humiliation, the heads of RBS (Fred Goodwin and Tom McKillop) and HBOS (Andy Hornby and Lord Dennis Stevenson) are resigning, stepping down, or retiring. The UK Government is keen to see proven people with strong and relevant industry experience step into their shoes.

Banking bonuses curbed: One of the conditions of the UK Bailout is that there will be no bonuses to senior executives this year, and a move towards paying bonuses in shares not in cash in future years. However these restrictions do not impact those banks that are not part of today’s headline £37bn bailout proposal.

Barclays route: Barclays has opted to raise the money it needs without Government’s help. It needs £6.5bn. It seems that one of the reasons Barclays is trying to make it on its own, apart from avoiding the humiliation of the bailout, is that it will remain free to set banking bonuses as it sees fit.

US v UK Bailout compared: There are some distinctions between the US and the UK Bailout proposals. Some are driven by the fact the two banking systems have different features – for instance, in the US there are many more banks in existence making individual targeted action possibly more difficult to achieve. Read the rest of this entry »

I don’t have any answers. And today, I feel the weight of fear and uncertainty over the impact of the Global Meltdown on people closest to me. The government measures do not seem to be working to stop the systemic panic that has taken hold of everyone. Markets are in freefall across the globe.

Lehman’s CDS settlement: Part of the reason’s for today stock market crash is the fear surrounding the need to settle Credit Default swap (CDS) protection on Lehman Brothers’ debt. This is due to happen today. The size of financial contracts under settlement is $400bn.

CDSs are a type of financial insurance policy (loosely speaking) written by a financial institution to protect the holder against the risk of a specified party (in this case, Lehman Brothers) going bust. Now that Lehmans is bankrupt, the holder will want this policy paying out. If the payout does not happen, the holder of the policy is at massive risk as it does not get the money it was counting on. The payout might also not happen if the writers of the policy do not have enough cash to pay all obligations. If things go sour, this will impact banks which have so far not been in the spotlight being the writers of these contracts, or the holders of these contracts – such as JPMorganChase.

There is uncertainty that this settlement can take place today, given the state of world’s markets and absence of liquidity. If it goes wrong, this might kick off a further chain reaction of negative events. 

Gloomy thoughts of the day: Going back to the economy, here is what I fear might happen – and I do feel quite negative today – we can check how close or far off the mark I was later this year:

  • Lower limit of indices: Only 2 days ago I speculated (at home) that FTSE 100 will stop before crashing through the 4000 psychological barrier. This has already taken place – it’s trading below 4000 – so the reality is worse than my fears. So should FTSE 1000 at 3000 be the limit?
  • Markets shut down for weeks: We have already seen Iceland and Russian markets closed. Will US and UK and other major stock markets follow suit in an effort to curb panic?
  • Sweeping reforms: There might be major reforms taking place in the economy and finance. I cannot discount the possibility of drastic steps such as freezing all savings as reforms are carried out. Your money might not be safe wherever it’s held. Our Governments have guaranteed savings so far – but will they be able to stand by that guarantee? I fear they could abandon it if they really had to.
  • Pensions and Investments: Any stock-market reliant savings held in funds, have already lost a massive chunk of their value. My own savings held in funds are down 25%. People close to retirement are going to struggle to live on what is left. Savings are not safe wherever they are. If there is something akin to a currency reform, then all savings can be taken away anyway as part of that. How much faith do we have in the Government’s guarantee on existing deposits? I would not trust it 100%.
  • More bank failures: I am sure we’ll see a few more of these, causing problems with existing savings lost or frozen
  • Recession: Fears deepen about entering a major recession akin to the Great Depression of the 1930ies. The IMF is speculating this might last until the end of 2009. Could it be longer? Could it be years of hardship for people who worked for decades on end to secure their future?
  • People take to the streets: Wouldn’t you – if things got very bad? It’s the likes of you and I who can topple governments, if we are truly p*ssed off.

Because at this stage, no-one seems to really know what to do next.

 

Copyright 2008 by CuriouslyInspired

As the BBC reports,

Iceland has suspended trading on its stock exchange in an attempt to prevent further panic spreading throughout the country’s financial markets.

Iceland’s stock markets will be shut down at least until start of next week. The reason for this unprecedented move is to give the government some breathing space to decide what to do next, and attempt to take the panic out of financial markets by simply keeping everyone away for a while.

This leaves Iceland in “good company” with Russia, whose stock markets were shut most of Wednesday due to huge falls in share prices, and for at least an hour on Thursday. In contrast to Wednesday, Russian stock markets were temporarily closed due to massive gains. Lucky them (but will it last?)

Collapsed banks update: Iceland is in a total financial mess with all its top three banks either nationalised or in receivership. Glitnir, which the government was aiming to part-nationalise earlier, is now in the hands of liquidators, as the government realised it was in too much trouble for the state to take on. Now Kaupthing, the largest bank of the three banks most in trouble, has been nationalised in addition to others.

Cause of troubles: I wrote about the causes of Iceland’s troubles very recently. “Troubles” is a bit of an understatement. People in the capital Reykjavik have already staged one demonstration this week and there is bound to be more civil unrest to come. Iceland might not have money left to import food stuffs for starters, so the collapse of the financial sector will have a very real impact upon everyone.

War of words with the UK: Gordon Brown and the Iceland’s PM Geir Haarde are engaged in a bitter battle of words at present. The UK has large investments in Iceland accumulated over the period of the Icelandic financial market boom. Now that the bubble has collapsed and banks have gone bust, Gordon Brown wants some guarantees that Iceland will honour UK savers’ deposits in collapsed Icelandic banks, as UK taxpayers will otherwise have to foot the bill in addition to bailing out British banks. Usually Iceland would have offered a guarantee of $28,400 per account but this has not been forthcoming in this case for the UK investors. The UK Government froze Iceland’s top bank Landsbanki’s financial assets in the UK. Icesave, the online savings bank with 300,000 UK customers, is a subsiduary of Landsbanki.

Geir Haarde is retaliating by saying, as Bloomberg reported today, that

the U.K. government is to blame for triggering the crisis when it used anti-terrorism laws to seize the assets of Icelandic banks in the U.K.

Iceland is also extremely unhappy that none of its usual Western partners have been forthcoming to lend it any money to help in its current crisis. It has had to look to other partners, including Russia and the IMF (International Monetary fund), to obtain money.

The row between the two PM’s is not serving to calm the panicked markets. The UK share prices is in freefall today and the pound is also falling against many key currencies.

Icelandic Currency collapsing: Iceland’s currency, the krona, was pegged to the euro before the crisis hit, at a rate of 131 krona per euro. Now that the government has stopped attempts to support the falling currency and formally abandoned the peg as unsustainable, trading conditions before markets shut down indicate that the currency is now worth about 255 krona per euro. That is a 91% drop in the value of the krona over the course of less than 2 weeks.

Bankruptcy: What is happening is pretty unprecedented for this country: Iceland is now facing bankruptcy. It is not in a position to repay the debts its banks have clocked up.

 

Copyright 2008 by CuriouslyInspired

Today I feel like I am reaching my own personal point of saturation with bad news relating to the Big Financial Meltdown.

Not that I am about to panic, no way. It’s just that there is so much of it, and it is coming through so fast, that I feel that the initial “edge” has been taken off it. It does not seem quite so appalling anymore. I am coming to terms with it.

I am familiar with this feeling. A long time ago the country I have strong ties with started opening up its archives and started sharing details of its horrible past with its citizens. And we gorged ourselves on the gory details of mass murders, betrayals, poverty and the limitless lust for power of our leaders until we could take no more bad news. We felt low and worthless as a people, and every trouble that was coming to us was just and fair because we deserved no better. People competed in painting their own nation in the blackest colours possible – this became a sick national obsession for a while. Then the information we learnt about our past became part of the everyday life and either faded away, or caused a backlash in aggressive patriotic feeling which is still rife.

So, the Credit Crunch. The Big Meltdown. It’s easy to get obsessive with it. It’s easy to look for someone to take the blame and then kick them. I’ll offer this thought for your consideration: we are all responsible to some extent. Sure enough, many of our governments fanned the fires of irresponsible lending with abandon. Bankers greedily chased quick profits and drove their own employers’ firms into the ground in the process – and I would love to see them in court and their assets confiscated. And regulators failed miserably to spot the rot. Sure, the trust in “government bodies” has gone and might not return for a long time, if ever.

But we all gorged ourselves on consumer credit, plunged our money into investments that were bound to go up-up-up and never-ever stop, buy ever bigger houses etc. We all lost our heads. And no-one really thought that it looked too good to be true and would end. Perhaps we should have. We might all have been, to some extent, part of the problem.

We are where we are and life carries on. So however the meltdown crisis impacts us personally, and I am sure it can be bad and it might get worse, we need to accept it, get on with it and make do as best we can. I’ve read some wonderful thoughts in other blogs putting the current calamity in perspective by considering how people survived the Great Depression. Something similar might yet come – but people lived to tell the tale. We will as well.

And one day future students will be tasked to write an essay “The 2008 Global Financial Meltdown. Discuss the relative merit of available solutions in 2000 words“.

 

Copyright 2008 by CuriouslyInspired

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