Weekly Financial News Roundup
Economic uncertainty and turmoil in the financial sector, in particular, shook investor confidence once again on Monday. On the London Stock Exchange, the FTSE 100 index briefly touched its lowest level since 2003, whilst in New York the Dow Jones Industrial Average dipped below 7,000 points for the first time since late 1997. The falls were attributable largely to unfavourable trading statements released by the biggest bank in Europe, HSBC, and troubled U.S. insurer, AIG. HSBC announced that its pre-tax profits for 2008 were down 62% at £6.5 billion compared with 2007 and that it was seeking to raise £12.5 billion from its shareholders through a rights issue in the U.K.. HSBC Chairman, Stephen Green, said that the additional funds would help the company through uncertain times economically and also ruled out any cash bonus payments for 2008. HSBC share prices fell by 19% on Monday afternoon dragging down the prices of Lloyds Banking Group and Barclays amongst other banking stocks. AIG for its part revealed a record loss of nearly $62 billion in the final quarter of 2008 and that it required a fresh bail-out of $30 billion from the U.S. Government.
On the subject of the U.S. Government, Prime Minister Gordon Brown arrived in Washington on Tuesday for his first meeting with President Barack Obama. Mr. Brown was to hold brief personal talks with Mr. Obama on Tuesday – the first European leader to do so since Mr. Obama was inaugurated in January – before becoming the fifth British Prime Minister to address Congress on Wednesday.
Back at home, Northern Rock revealed losses of £1.4 billion in 2008 but according to Chief Executive, Gary Hoffman, who was quoted on the BBC website "Northern Rock has made good progress against the business plan objectives laid out in March 2008." This includes repayment of the £26.9 billion which Northern Rock borrowed from the Government, of which it has already repaid £18 billion. The bank also confirmed that it is to offer a total of £14 billion in mortgage lending over the next two years. Repossessions, however, leapt by 63% – from 2,215 at the end of 2007 to 3,620 at the end of 2008 – during last year and the number of mortgage borrowers in arrears also rose.
Commercial television broadcaster ITV was the focus of the financial news on Wednesday after the company was forced to reduce the book value of its broadcasting and online assets by a huge amount. Overall, ITV reported an annual loss of £2.7 billion for 2008 but even excluding the write-down its profits were down 41% at £167 million when compared with 2007. According to the BBC website, ITV plans to make "significant" savings by cutting a total of 600 jobs and reducing its programme budget by £65 million in 2009. Several hundred "back office" jobs in London will be lost along with a further 150 in Leeds where the Kirkstall Road studio is to close. ITV is also to sell its social networking website, Friends Reunited, which it bought for £120 million in 2005 but which has since been eclipsed by the likes of Facebook, Bebo and MySpace.
There were two major pieces of financial news on Thursday; the first an expected cut in the Bank Rate from 1% to 0.5% – a fresh record low in the history of the Bank of England – but the second the announcement of the introduction of "quantitative easing" by Chairman of the Bank of England, Mervyn King. Quantitative easing is the process of increasing the amount of money in circulation but it does not involve printing new banknotes per se. Instead it involves the purchase of Government securities or gilts and corporate bonds by the Bank of England, to effectively create an additional £75 billion in circulation initially. It is hoped that the availability of money in the wider system, rather than to banks alone, will help to revive lending. Mr. King was quoted on the Sky News website, saying that the approach – although previously untried in the U.K. – would "eventually work" although he also admitted that he did not know how long it would take for any effect to be seen. Chancellor of the Exchequer, Alistair Darling, has granted the Bank of England to extend quantitative easing up to a total of £150 billion if need be.
The controversial decision to proceed with quantitative easing saw the price of Government bonds increase by the largest amount since 1992 on Friday but financial analysts remained wary of the ploy. John Raith of RBC Capital Markets, for example, was quoted on the Reuters website, saying that the Bank of England "was playing a dangerous game that could lead to inflation".
In other news, it was announced that Prime Minister Gordon Brown is to propose a new "global code" for the payment of salaries and bonuses to executives in the financial sector. Although not necessarily legally binding, Mr. Brown hopes to promote "best practice" through the regulatory system, with a view to moving away from the culture of short-term profit and remuneration – which he believes was responsible at least in part for the financial crisis – to one where success over a period of years is rewarded.
Elsewhere, the latest house price index from Halifax revealed that housing pricing in the U.K. fell by a further 2.3% in February, taking the price of an average house close to that last seen in August 2004. Those looking to move home and first-time buyers in particular may take a crumb of comfort from the fact that house prices are more affordable than at any time in the past six years – as the result of falling prices and interest rates – but the lack of availability of finance continues to hinder significant recovery in the sector. Colin Ellis, economist at Daiwa Securities, was quoted on the Financial Times website saying "Many house builders are in intensive care as they wait for confidence and sales to return to the housing market which will probably require some degree of price stabilisation."