Weekly Financial News Roundup
The start of the week produced a glimmer of hope for homeowners, and prospective homeowners, when it was revealed that one of the plans under discussion at a meeting of leading British bankers – held at Chequers, at the weekend – was for the implementation of the Crosby Report, published last November. Akin to the so-called "bad bank" solution proposed by U.S. Treasury Secretary, Hank Paulson – which resulted in the approval of $700 billion, by Congress, for the purchase of "toxic" assets from banks – this includes government guarantees on mortgage securities, and mortgage lending. Potentially good news for business, too, as British Prime Minister, Gordon Brown, was expected to announce talks with business and union leaders aimed at safeguarding jobs, and reducing unemployment, in his opening address to a jobs summit, held at the Science Museum in London, on Monday. Plans were expected to include a payment of £2,500 to employers for each person who has been unemployed for 6 months, or more, they take on. Elsewhere, it was revealed that less than 0.25% of shares in HBOS, and just 0.5% of shares in Lloyds TSB, were taken up by existing shareholders, leaving more than 43% of the newly formed Lloyds Banking Group – which controls 25%, or more, of the personal banking and mortgage markets in Britain – in the hands of the Treasury.
Chancellor of the Exchequer, Alistair Darling, was in defiant mood on Tuesday, repeated refusing to apologise for the performance of the government before, and during, the current economic downturn, in an interview on Sky News. Mr. Darling did concede, however, that, "If you look at what's happened, there are many lessons to learn." Prime Minister Gordon Brown made a reference to "non-bank institutions" earlier in the day, fuelling speculation that the nationalised Northern Rock, or the Post Office, could be used as a source of funding for direct lending to consumers and businesses. In other news, it was revealed that Royal Bank of Scotland (RBS) faces exposure to bad debts of $1.6 billion, through its acquisition of the ABN Amro investment banking operation in 2007, and the bankruptcy of U.S. chemicals company, Lyondell Chemical, for which RBS inherited loans totalling nearly $3.5 billion.
Later in the week, Prime Minister Gordon Brown unveiled a plan to guarantee up to £20 billion in loans to small businesses to help them survive the economic downturn. The government will, effectively, provide insurance for banks against loan defaults – to the tune of 50% of £20 billion in short term loans to businesses with turnovers of up to £500 million, and over 75% of £1.3 billion to businesses with turnovers up to £25 million – in return for a fee. Business Secretary, Lord Mandelson, was quoted on the BBC website, saying that the proposals would target "genuine business needs". No doubt about that, but concerns were raised as to whether £20 billion would actually be enough to stimulate lending at a sufficiently high level; the Conservative Party, for example, called for the government to underwrite £50 billion in loans. They should, perhaps, remember that it is, once again, taxpayers' money that will be used to insure banks against businesses defaulting on their loan repayments.
Further indications of the extent of the economic downturn were revealed on Thursday, with the release of trading figures from some of the largest retail chains in Britain. Home Retail Group, which owns Argos and Homebase, reported falls in like-for-like sales of 7.5% and just over 10%, respectively, for those two chains in the 10 weeks to January 3rd, while DSG International, which owns Currys and PC World reported a fall of 10% in the three months to January 10th. The retail sector continues to struggle as consumers cut back on spending in the face of rising unemployment, falling house prices and general economic uncertainty. There was some potentially good news for long-suffering policyholders with Equitable Life Assurance Society – which all but collapsed in 2000, taking an estimated £4.5 billion of savers' money with it – with the announcement that the Treasury may be prepared to offer compensation to those affected. The Parliamentary Ombudsman called for compensation to be paid to one million, or so, policyholders in the middle of 2008, and a Treasury statement was expected later on Thursday.
More bad news for the banking sector, on Friday, with a run on the Anglo Irish Bank, and concerns about its solvency, prompting the Irish government to abandon a €1.5 billion recapitalisation of the bank, and opt for nationalisation instead. The Irish government and the board of directors at the bank were quick to reassure customers, shareholders and employees that the bank has around €100 billion on its books, shareholder rights, and jobs, would be protected, and that they would work together to ensure the commercial viability of the bank, in the long term. More bad news, too, for Alistair Darling, as the Deputy Governor of the Bank of England, Sir John Gieve, publicly contradicted the Chancellor's optimistic forecast for the future of the British economy in a speech delivered in Manchester, on Friday morning. Mr. Darling predicted – in his Pre-Budget Report, in November – that growth would return to the British economy in the second half of 2009, but Sir John warned that further interest rate cuts, and fiscal stimuli may be necessary, if a worsening of the economic situation is to be avoided. He was quoted on the Independent website, saying, "Therefore, in setting policy, the authorities both here and overseas need to consider whether further action on interest rates, or other monetary measures, or fiscal action is required." Sir John went on to predict a steep fall in GDP ("Gross Domestic Product") in the first quarter of 2009, and the likelihood of further falls, albeit less pronounced, in subsequent quarters.
Finally, Chief Secretary of the Treasury told the House of Commons that, while the government accepted that regulators and other public bodies failed in their duty to oversee Equitable Life, compensation would only be available to those policyholders who felt a "disproportionate impact". What this phrase means, in real terms, is unclear, and the Board of Equitable Life, itself, stated in its news release that it did not understand the phraseology, but could not accept means testing under any circumstances.