Weekly Financial News Roundup
The week opened with the news that, in a reversal of Government policy, Northern Rock is to resume mortgage lending with an additional £14 billion of taxpayers' money. Chancellor of the Exchequer, Alistair Darling was quoted on the BBC website saying "It's repaid about £18 billion of the loan the government made and I said in January this year that because of the problems the mortgage market faced, instead of looking to wind down its business it would be better for Northern Rock to maintain lending." Northern Rock itself revealed that it made losses totalling £1.4 billion, but that salaries would be frozen at 2008 levels and no bonuses would be paid to senior staff, other than that already agreed contractually. Mr. Darling added that the plan for Northern Rock was just one of a series of measures designed to rebuild the banking system in the wake of the banking crisis.
As testament to the poor state of the automobile industry in Britain, Gaz, the Russian parent firm of van manufacturer LDV announced on Monday that the firm was "literally running out of money". LDV employs 900 people in the United Kingdom but suspended production in December and has asked the Government for a £30 million "bridging loan" to cover its costs pending a management buy-out. Gaz Chairman, Erik Eberhardson, hopes to lead a buy-out in due course but falling sales have left LDV in a precarious position and potentially placed thousands of jobs at its suppliers at risk.
Similarly Vodafone which employs 10,000 people in the United Kingdom announced on Tuesday that it is to shed 500 jobs – 170 at its headquarters in Newbury, Berkshire and 330 elsewhere – although it did also state that no retail staff would be involved. A spokeswoman for Vodafone was quoted on the Sky News website saying "Vodafone UK has today announced reductions to its operating costs in order for it to compete more effectively in the UK market. As customers look for best value in their mobile services, Vodafone intends to reduce its cost base whilst continuing to invest in new products and services to meet changing customer needs." Vodafone first announced plans for reducing costs in November and hope that the job cuts will save the company £1 billion as the recession deepens and market conditions worsen in the UK and elsewhere.
Timely advice – or too much too little too late, depending on your point of view – from Prime Minister, Gordon Brown, on Tuesday when he told bankers that they must be stewards of rather than speculators with our money and requested a return to traditional, prudent lending with a ban on 100% mortgages enforced by the FSA ("Financial Services Authority"). Mr. Brown also claimed that Europe, as a whole, was united in its policy towards the financial crisis but was widely criticised for not advising the same level of prudence 5 years ago, when as Chancellor of the Exchequer – and with 5% of mortgages actually over 100% – he was warned of the risk of "boom and bust" by his opponents.
Current Chancellor, Alistair Darling, added his own timely advice on Wednesday urging banks to "clean up their balance sheets" and sign up to the Treasury's latest £500 billion toxic asset insurance scheme without delay. There had been much debate regarding how much of the cost of the plan would once again be borne by the British taxpayer and Mr. Darling, amongst others, was keen to see the plan finalised before the announcement of huge losses – if the consensus of opinion was to be believed – by Royal Bank of Scotland and Lloyds Banking Group later in the week. The Treasury had offered to underwrite £250 billion of toxic assets in each of the partially nationalised banks.
Elsewhere, housebuilder Barratt Developments followed its rival Redrow – which announced a 58% fall in revenue for the second half of 2008 on Tuesday – by reporting a pre-tax loss of £592.4 million compared with a pre-tax profit of £192.4 million for the same period in 2007. Redrow has written down the value of its land, and whilst it said that there were "some signs" of a recovery in the housing market, it added that depressed mortgage lending was in turn subduing the market for new homes.
It was not exactly a "Eureka!" moment on Thursday when RBS did in fact announce annual losses in excess of £24 billion, eclipsing the previous British record – £15 billion by Vodafone in 2006 – by a considerable margin. Poorly performing assets – not least the Dutch bank ABN Amro acquired by RBS in 2007 and responsible alone for £7.9 billion in underlying losses – were responsible for £16.2 billion of losses. RBS Chairman, Philip Hampton, blamed what he described as "unprecedented turbulence" in global financial markets and added "We owe our continued independence to the UK government and taxpayers and are very thankful for their support" according to the BBC website. British taxpayers will no doubt be delighted to hear that RBS is placing £325 billion of so-called toxic assets into an insurance scheme, particularly in light of the row surrounding former Chief Executive, Sir Fred Goodwin, who is already drawing a pension of £693,000 per annum despite being only 50 and despite leading RBS to its record loss.
Neither was it any great surprise on Friday when Lloyds Banking Group – formed by the hastily arranged merger of Lloyds TSB and HBOS in January which resulted in the Government taking a 43% stake in the Group – announced a pre-tax annual loss of nearly £11 billion in its HBOS division. Profits at Lloyds TSB too fell by 80% during 2008 and the Group announced that it, like RBS, is in talks with the Government regarding toxic asset insurance. Share prices in Lloyds Banking Group plunged 22% during morning trading on the London Stock Exchange on Friday.