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Welcome to its-YOUR-money, the independent site that is dedicated to helping YOU make better use of YOUR money!

2012 - Doom and Gloom... (again)

As if the weather isn't enough, we have to hear more about Greece and the chances that it may have to leave the Eurozone, to say nothing of Spain and Italy. Well, the Euro was always a triumph of hope over common sense, and the strains are showing. As we all know, countries don't show uniform economic development. In the UK, we have for years seen London and the SE effectively subsidise other regions, and the same is true for the US. Within Germany, the same will be true. A common currency will inevitably lead to either cross subsidisation (the wealth-creating countries helping the poorer ones) or it will all end in tears. It's not enough to give Greece a few bungs of a few billion every now and again.There has to be a coherent development plan which means that jobs as well as money move from the rich north to the less developed southern regions.

Will it happen? Personally, I think it will take a major disaster: Greece being forced to jump ship and Spain coming under immense pressure - before Germany accepts that an action replay of their problems with reunification is an inevitable consequence of the Euro adventure.

Will it hurt us in the meantime? You bet it will.

2011 - Bank Profits and Bonuses

To me, the only surprise about banks reporting profits - and paying bonuses - is that anyone finds it surprising! It has long been an axiom amongst listed companies, and banks in particular, that if you are going to have a bad year make sure it will be a VERY bad year! In other words, during the banking crisis, the banks made sure that they made every provision they could conceivably get away with - and probably quite a few that even the auditors were unhappy with. Once you know your bonus is stuffed, you have nothing to lose by reporting a total disaster. A year or so ahead, and some worst-case provisions are brought back to add to the profits - and Bingo! we're in the money again!

Banks charge arrangement fees for loans (they always did) and the higher the risk the bigger the fee. These fees are added to the amount being borrowed, but are also added to the bank's profits and contribute to bonuses. So the bank lends you the money to pay them a fee which adds to the bonus that the person who negotiates the loan will subsequently receive in their pay-packet. Neat, don't you think?

During the run-up to the crunch, mortgage brokers and lenders were receiving huge arrangement fees for giving 100% plus mortgages on self-certified borrowing criteria to borrowers who arguably couldn't repay the loans. These arrangement fees were added to the loans.

The banking crisis was a disaster just waiting to happen, and it makes you wonder why we have regulators (Treasury, bank of England, FSA) and what the hell they were doing whilst all this was going on. This isn't hindsight - I was warning about this long before it happened, and if I (and others) could see it, what about the experts?

A friend of mine, a senior exec in A Big Bank, told me that he and his colleagues were worrying about RBS long before it went belly-up. The worry now is that I haven't seen any evidence that anything has changed or is about to change any time soon.

Inflation and Base Rate

Inflation is high and rising and there are mutterings in the BoE about interest rates. This raises the question of what causes inflation and why should higher interest rates bring it down again? Let's look at the causes: high energy costs (middle-east issues, world-demand, priced in dollars), VAT (a one-off hike), rising food and commodity prices (world-demand, exchange rates). Despite mutterings from trades-unions wage inflation here is subdued, consumer demand is weak.

Rising interest rates should strengthen the £ and help reduce exchange-rate-sensitive prices but at the cost of increasing demand for imports and damaging export prospects. Although we don't like inflation (it makes us all poorer) it reduces our debts in real terms. And of course, higher interest rates increase costs for borrowers, which is another source of inflation. I don't see any need to raise the base rate - but it looks as though the BoE might go in that direction over the next few months.

Mind you, these are the people who sat on the sidelines in the run-up to the crunch...

February 2011

Previous posts...

Bank Rate now at 2%...

The Bank of England has today cut the bank rate to the lowest level ever seen since the BoE was established in 1694. (It has been 2% previously, most recently in 1939). It will be interesting to see if it is cut again in January. The government and the BoE seem to be having a Corporal Jones moment, shouting 'Don't panic!' having gone from arrogant complacency into total meltdown in just a few short months. So how serious is it?

The banking sector, on which a great deal of UK prosperity depends, is in real trouble but I doubt if anyone knows exactly how much. The banks have lent vast amounts of borrowed money to each other and to hedge funds, private equity, developing countries, sub-prime individuals, and property companies, all of whom were betting on the good times lasting forever. Now the music has stopped, everyone is rushing around looking for a chair, and we don't know yet who will be leaving the game. Soundly financed companies and individuals will probably be OK - we have had recessions before - but those who are over-borrowed will struggle.

What we can expect (and have started to see) is a large scale cut in company dividends. Even profitable, cash-rich firms will cut their dividends on the assumption that everyone else will. Dividends have been far more stable than share prices, but there have been (a few) years when the total amount of dividends paid out by all listed companies has been lower than the year before, and this will be one of them. However, interest rates for savers will be lower, thanks to the bank rate cuts, and lower dividends won't have that big an impact on share prices. In the short term, the stock market will continue to suffer the fall-out from hedge funds and banks having to liquidate their holdings. [4 Dec 08]

The Pre-Budget Budget, a non-event or what?

With sales and discounts in every shop, how will a couple of pence in the pound make any difference to consumer spending? Well it won’t, of course. The retail and housing booms in recent years were driven by easy credit. Now that credit is no longer quite as easy, and people are in fear of losing their jobs, we are more inclined to pay off some of our debts rather than run up even more. Having been accused (rightly) of irresponsible lending in the past, banks are likely to err the other way for a while. Whatever the government says or does, the credit squeeze will continue for some time.

There are mutterings about deflation. In reality we have had deflation across a whole raft of consumer goods (especially electronics) for many years. The fact that we know prices for the latest laptop will be lower tomorrow doesn’t stop us buying today. The gratification for the purchase now outweighs the prospect of the better deal if we wait. Much of our spending though is not discretionary (fuel, energy, food, mortgage, rent, council tax, interest) and will continue to increase, so inflation overall is unlikely to reach zero or go negative, except perhaps for a short-term blip. I don’t believe that a Japan-style long period of deflation is likely to happen here, but the prospect of even lower prices in property and consumer goods combined with a desire to reduce our personal debts will continue to damage the high street and the housing market for some time yet.

[26 Nov 2008]

Base Rate Cut 1.5%...

As we said a month or so ago, a 0.5% cut in base rate then was too little, too late. The Bank of England has at last woken up to the fact that inflation that is predominantly driven by external forces (eg oil prices) is not going to be affected by UK base rates, and that their focus must be on the UK economy - and recession. The good news is that the Bank has cut the base rate to 3%. The bad news is that as long as the banks are trying to rebuild their balance sheets to make up for the write-offs they are having to make against previous stupidities, they will screw borrowers for all they can get. They are also competing for savers, so don't expect your overdraft rate to come down by very much. [7 Nov 2008]

The banking crisis goes on...

As we expected, there was more bad news! The government, to its credit, has at last stepped in to support the UK banking sector and by implication has guaranteed in full the savings of private investors (the position of businesses is less clear). The Bank of England has also cut 0.5% off the base rate - welcome but almost certainly too little too late. So what next?

The base rate cut is small in relation to the actual rates being charged to borrowers, and it is hard to see how this will stave off a deepening recession. Mortgages, although slightly less expensive, will remain scarce and available only to home-buyers with good credit ratings and big deposits.

The risky 'covenant-lite' loans for private equity deals will also be harder to negotiate, and we are likely to see some failures amongst PE owned companies. Depending on the length and depth of the recession, the extent to which banks have lent to the PE sector could put them under further pressure over the next year or so. PE firms will find it hard to offload their companies as long as stock markets remain weak. [9 October 2008]

Another bank bites the dust...

So HBOS has followed Northern Rock. Don't expect it to be the last - my guess is that there will be more. Should we be worried? Well, yes and no. I don't believe the government will allow a major bank/building society to fail - having bailed out the Rock and nodded HBOS into the arms of Lloyds TSB, it would be political suicide to allow any UK bank to go down leaving depositors in the lurch. On the other hand, I can't see our government acting as decisively as the US government in trying to bring some sense back into the finance sector. The smart-arses in the investment banks created mortgage-backed securities which have proved impossible to value in a falling housing market - with the added uncertainty of some uncreditworthy home-owners. The damage will only be quantified when house prices settle, which could take quite a while. Unless the government steps in and underwrites these so-called toxic securities, the banks will continue to struggle and the crunch will go on...

Crunch-time for borrowers...

We are hearing a great deal about the credit crunch, the implications for mortgages, and the effect on the housing market. How serious is it? The problem is that banks and building societies created the house-price bubble - with a nod and a wink from a government that enjoyed spending the income from stamp duty and inheritance tax.

Now, unless you have a rock-solid credit rating, are not trying to borrow more than about 75% of the property value, and can comfortably afford the repayments, you will find it difficult and expensive to get a mortgage. The effect will be to lower the price of houses in those sectors that depend most on mortgage availability - first-time buyers and people on relatively fixed incomes. There is likely to be a knock-on effect in other sectors too. However it's misleading to talk of the 'housing market' since houses are not commodities and the market in them is not homogenous in the way that the stock-market is. The prices of some houses and locations will always buck the trend.

... and for the lenders!

As we said at the time, Northern Rock was unlikely to be the only casualty and so it has proved, with almost the entire banking sector reporting huge write-downs on mortgage backed assets and many banks having to ask for new capital from shareholders. Our view is that the pain has only just started. The private equity sector has also relied very heavily on syndicated loans that were provided too easily and too cheaply by the banks. High interbank lending rates and a slowing economy will lead to an increase in failures amongst private equity (PE) owned businesses - and more damage to the banking sector.

For every winner on the money wheel-of-fortune there is a loser. In the case of PE, the winners were the partners in the PE firms - the losers are the banks and their shareholders. Over a year ago, your editor gave evidence to the Treasury Select Committee on Private Equity in which he said that the abnormally high returns enjoyed by PE arose from uncompensated risks on the part of the banks. And we don't even charge for these gems!

Poetry comes to finance...

We like to introduce an element of humour into what can be a pretty boring subject. Our editor has penned some short poems that you might find amusing - and thought provoking. Read them here: Storecard Sally; The Independent Financial Adviser, Sex in the City. We hope you enjoy them!

Financial Advisers... does not provide financial advice. To do a proper job, an adviser must know quite a lot about your particular financial circumstances and objectives. Without the right knowledge you could make some expensive mistakes, and it is in your best interests to seek the help of a qualified Independent Financial Adviser (IFA). You might find this link helpful. (opens in a new window)

New Downloads

Try this way of managing your bank accounts using a spreadsheet such as Excel (TM). The difference is, this one adds up instead of down! It must have been done before but we've never seen it. Try it here.



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