British Politics’s Blog

The ravings of an individual, UK voter frustrated with our politicians

Posts Tagged ‘credit crunch

Have the bank directors failed in their fiduciary duties?

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Whilst doing my rounds today, I came across this article which points out that all directors have a legal duty of care or, if you prefer, a fiduciary duty. The author then asks why it is, that bank directors have been allowed to resign, rather than be sacked, given the government are suggesting that these bank directors have failed? It is a compelling argument.

Theoretically at least, if any director failed in their fiduciary duty, acted recklessly or without due care then, not only could they be sacked, but they could find themselves liable to a civil action. That notwithstanding, it is clear to me, that if ‘trust and confidence’ is an integral part of a fiduciary’s duty, then there has been a failure.

I cannot argue with the sentiment, so lets be clear, one government minister after the other has been heard to repeat the term used by Gordon Brown, that there must be “no reward for failure“.  Similarly, there must be no amnesty for anyone that has failed in their fiduciary duty or that has acted recklessly or without due care.  The author goes on to say;

These individuals have either failed or they have not, ministers must be careful in making damning statements, yet failing to back them up with appropriate action.

Surely government ministers understand that if they are going to step up the rhetoric, then they need to follow these statements with firm action? Anything less would be unacceptable to the general public who are now massive stakeholders in these banks. Moreover, if I were a former bank director, I would welcome the opportunity to clear my name, assuming of course, that I had a defence to the charge.  The article is pretty well summed up as follows;

I am not qualified legally or otherwise to determine whether or not any individual director has failed in their fiduciary duty. Therefore I am not suggesting anyone (bankers or otherwise) has acted improperly, I am relying only on the governments own words, that there should be no reward for failure, which implies that there has indeed been a failure. However, in the “court of public opinion” I would like to state for the record, that I believe there is merit, perhaps even a duty, for the government to seek legal advice on this matter, because they, as a majority shareholder in these banks, have their own fiduciary duty to the shareholders, you and me!

I agree! So lets see some action from government ministers instead of hot air.

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RBS Pension scandal or attempt to divert attention

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Perhaps it is the cynical side of me, but, I can’t help wondering whether the release of Sir Fred Goodwin’s pension entitlement is a bit too convenient. Bear with me if you will.

Sir Fred has complained that his pension arrangements have been made public. Now lets face it, given the scale of the losses at RBS, it is not inconceivable that this particular obligation could have been ‘lost’ in the malaise, but it wasn’t. Why is that? At time of public anger over bankers, a nice juicy pension to a former banker was bound to get the blood pressure rising, with the masses venting their anger at the recipient. Yes, yes, the government must have known about it, but they have got away with other issues in relation to due diligence, so why not this. Added to which, the government will have known that the public, for the most part, would target the recipient not them. Then there is media commentators, the vast majority of whom have fallen for it, stating that the if the government did know and released the details then, it must have been an own goal. But was it?

Take a look at the headlines and you can get a feel for what has captured the public imagination. Not the fact that RBS is about to receive another £13bn of taxpayers money (on top of £20bn last year);  not the fact that a bank that is 70% owned by the tax payer has just announced losses of £24bn, 70% of which is ours; not the fact that we, the taxpayer, are about to underwrite £325bn of ‘toxic assets’ in return for a premium of just £6.5bn; and not the fact that our ownership of this company is now likely to rise to 84% in economic terms, if not voting shares (75%).

You would expect something of this magnitude to lead the news stories, but is has not, instead, in a classic New Labour ‘smoke & mirrors’ game designed to dupe the public, our attention is turned to Sir Fred Goodwin and his obscene pension. The bailout of the banks, the underwriting of inter-bank loans and the public guarantees on toxic assets have all but bankrupted this country and here we are kicking up a big fuss about Sir Fred’s pension arrangements. Instead of Gordon Brown having to defend the fact that he has just spent way in excess of our expected tax receipts for this year, he could go on television and say that the government were considering legal action to challenge Sir Fred’s pension entitlement, in other words, he (Gordon Brown) could appear to be in tune with the public mood.

Please people, stop falling for these classic New Labour, cynical moves to wrongfoot the public, they are laughing at us and in a way, we deserve it. As for the political commentators that have fallen for this trick, they should hang there heads in shame. Before anyone accuses me of supporting Sir Fred’s pension arrangements, I will state for the record that I firmly do not, I just believe that this government has used the pension to divert our attention and boy, has it worked!

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27 February, 2009 at 3:59 pm

1929 stock market is history repeating itself

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I read an interesting article over at the political blog Power to the People, about the similarities between the 1929 stock market crash and our current economic situation and I am finding it difficult to fault the parallels. Clearly many of the problems we are experiencing today are similar to those during the 1929 crash, except, as the author points out, back then it was shares and today it is property.

As the author makes clear there were some people in power in 1929 that were rightly concerned about the possibility of the whole pack of cards falling down, but elected to do nothing.

The people of America felt rich, lifestyles improved after the austerity of the first world war and few people raised any doubts, those that did, such as President Hoover, tended to keep it to themselves, rather than be see as the Cassandra.

Surely Gordon Brown knew there were real risks that the property bubble could burst, particularly given the property crash of the 1990’s, he must have been aware that the economy was being fueled by cheap and easy credit and above all, that the massive profits being reported by the banks were not from their high street activities alone. Yet, he chose to do nothing, now he is puffing his chest out and telling us how he is going to save the world. Personally I think that there is something morbid about allowing the same person who threw us in at the deep end to then jump in, ignoring his own culpability and receive backslaps for his vain attempt to save us.

During the 1929 crash, millions of people were destitute, having lost all their saving. Today, with millions of people investing in pensions, the fall in key stocks means that their pensions are worth considerably less than they were 18 months ago. Perhaps by as much as 50%! Those that have saved for their retirement, will be punished with low or non-existent interest rates, resulting in a reduction in their standard of living, even though they may not have been benificiaries of the largesse that caused these problems. Of course, most civil servants do not have to worry about such anomolies, because their final salary schemes are paid out of future income and as such, are guaranteed.

But the lessons of history havent been learnt, as the article goes on to state;

After the 1929 stock market crash, Hoover introduced the Securities & Exchange commision to regulate US markets, this had the desired affect. However, over the past 20 years or so, the rules and regulations have been relaxed, seen as no longer necessary and much of what we witness in the United States today can be attributed to the easing of those regulations. Similarly, the much vaunted deregulation of the City was also a pre-cursor to the problems we all face today. Light regulation and a hand-off approach by government and the regulators has allowed the banks to enter very high risk transactions which many people struggle to understand.

This government has a lot to answer for. Mr Brown promised an end to boom and bust yet, in spite of his promise, we are actually in one of the most dire economic positions ever experienced by this country, even though the warning signs were there all along. They were just conveniently ignored for political expediency and no doubt, because Gordon Brown, whilst basking in the glory of being described as the ‘iron chancellor’ didn’t want to be a party pooper. Shame on him, he was in the best position to know the risks and to do something about them, but he did nothing. In my view he is either incompetent, inept or reckless.

And…I couldn’t agree more with the statement made on this posting…

In my view, government ministers and bankers must be called to account because they have demonstrated what appears to be a reckless disregard for the interests, respectively of the people of this country and the interests of their shareholders.

We must all demand that all those in position of power or responsibility that have played an active part in this economic mess be made to accept responsibility. Further, anyone that has been reckless, irrespective of whether they are in government or commerce, must be brought to book. We, the people will automatically have to pay for any mistakes we have made (as well as those we haven’t), why should politicians and senior business executives get away scott free?

Stop banks from carrying forward losses to offset future profits

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Most analysts forecast that most, if not all of our high street banks will shortly announce record breaking losses, as many re-value their assets and take the write-off’s on the chin. In fact, informed pundits are suggesting that this will continue for another 2-3 years. Well, there is little or nothing we can do about that.

However, any bank that has been in receipt of state aid, support or taxpayer sponsored insurance schemes must not be allowed to benefit from a double whammy. That is to say that, whilst the taxpayers of this country take on much of the risks associated with their recklessness, the banks carry forward these massive losses, to allow them to offset past losses against future profits. That would most certainly rub salt into the wound. Under current taxation rules, business can carry forward past losses, to set against future profits. This concession made sense for most businesses that have a difficult year or two, or those that are in a start-up phase. It should not be used to reward banks and their shareholders, when they have had to rely on a state bailout or support programme to allow them to survive intact.

Government ministers and opposition parties must provide the assurances, here and now, that the banks will not be permitted to carry forward past losses, to offset against future profits where these banks have been in receipt of any state aid. A failure to do this will allow banks and more specifically their shareholders to receive handsome ‘tax free’ rewards at the very time that the taxpayers will being having to accept higher taxes as a direct conseqeunce of the banking crisis and the largesse, or indifference of our government and ministers. This would be completely unacceptable. If the banks were not so integral to our economic well being, they would not have been treated as a ‘special’ case and received such massive state aid. But they are and they have been. MP’s must now undertake to identify the banks as a special case in the future, given the racing certainty that they would, under existing rules, be rewarded with future tax breaks/concessions.

Once we come out of the other end of this recession, taxes will rise and if the past is anything to go by, the public will be expected to pay the lions share through direct and indirect taxation. This country will need banks and industry to pay their fair share. We cannot afford any bank or any business to use 2 or 3 years of losses to offset against the following 2 or 3 years profits. Everyone needs to make a contribution. If business, such as the car industry are in receipt of state aid, then they must also be prevented from offset past losses against future profits, similarly, if these businesses are not registered in the UK for tax purposes, then they must undertake to do so before any taxpayers funds are advanced and for a period beyond, to make sure that taxpayers benefit in the future. Now is the time to be negotiating tough terms and looking ahead in terms of these banks and businesses making a real and tangible contribution in the future. A failure to do so will result in a massive public backlash in the future.

UK Economy, can the future be so bright?

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It doesn’t really matter who you listen to, everyone seems to believe that we will come out of the recession leaner and stronger, with most arguments centering on how deep and how long the recession will be. There are also varying estimates as to the level of debt UK Plc will have and also how long it will take to reduce this debt mountain via increased tax revenues. Maybe I am cynical, naive or just plain stupid, but I can’t for the life of me see what we are going to be left with when the recession does actually end.

We know that after the last recession, our manufacturing industry was virtually decimated, not only did many people lose their jobs, but an industry dating back to the Victorian times disappeared virtually over night. Therefore, even if the pound is weak, surely we cannot rely on manufacturing to provide jobs and tax revenues.

So what of the financial services and banking industries? As we all know, this particular recession has been brought about, for the most part, by poor lending decisions of the banks. In addition, much of the profit derived from The City was via ‘manufactured’ trades of bundled mortgages, securities and so on. The financial services and banking sector have now had their fingers burned. In addition, one of the main attractions of the UK was light regulation, and there is every indication that the UK authorities will now start to tighten the rules. Taking all these things together, it is most unlikely that the UK banking and financial services sector will ever look the same again, nor will it offer the same levels of GDP contribution, jobs or tax revenues. Added to which, with many financial institutions and banks harbouring massive losses, it is quite likely that they will not have to pay any corporation tax for a good few years to come.

As our manufacturing base declined, our GDP was propped by the banking and financial services sector, given the above, do we really have any hope of a strong recovery from any of these sectors? I think not. On top of everything else, before the recession, the government were steadily increasing corporation tax as well as red tape. As a direct consequence, the UK was no longer the land of milk and honey from a tax perspective. So in recent years we have seen more and more companies registering their businesses abroad for tax purposes. Southern Ireland is a case in point, where their tax regime is considerable more attractive than our own. This will lead to a further loss of jobs and more importantly in the current debt climate, a loss of tax revenues.

Then their is our carbon emissions targets. Our government has committed to a reduction of 80%, this is not empty rhetoric, they intend to make it legally binding. Similarly, a reduction in carbon emissions is not incentive driven, instead is uses a stick rather than carrot approach, meaning higher ‘green taxes’. These taxes will hit not just business, but individuals as well and of course the price will have to be paid both at the tills and in the way of fewer jobs. What this means is that is that any UK business will be subject to higher direct taxes and higher indirect taxes via ‘green’ initiatives. Now, because the UK is one of the few countries taking carbon reductions seriously, it means that companies operating in the UK will be subjected to a competitive disadvantage when compared to other countries.

Then look at what has been driving sales over the past 10 years, the so called “credit bubble”. The economy has grown as a direct result of easier credit, low interest rates and rising house prices. The latter has made people feel more wealthy, leading to a release of equity through remortgages or secured loans, the ‘easy’ money has than been spent in th High Street, on consumables, cars and nice holidays. In a harsher climate, with less money available to consumers, a stagnant housing market, higher taxes and fewer people in work, it is difficult to see how or when we can expect a return to ‘business as usual’.

So, whilst I know the politicians hate to paint a picture that is considered too negative or gloomy, I would like to witness them share their thoughts on just how everything is going to be fixed and over what timescale. Becuase, in all honesty, unless I am missing something, the future does not look too bright.

Mortgage assistance for struggling homeowners

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Although the government has yet to provide the ‘small print’ for their help for struggling homeowners, some details have emerged. According to the government, the following mortgage providers have agreed to support their plan, HBOS, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, RBS and HSBC. These companies account for some 70% of the domestic mortgage market.

Currently, people who are on a Job Seekers Allowance, or income support, can apply for taxpayers money to help repay the interest on their mortgages. Previously, the government stated that the maximum value of the mortgage where interest would be paid was going up from £100k, to £175k, this will now be £200k. Those claiming JSA will see this support limited to two years and borrowers that have a working spouse or partner, or savings of over £16,000 will not qualify for this support.

The new plan sees many of the major mortgage companies agreeing to extend the minimum period before they action repossession proceedings from around 3 months to 6 months. This is fairly significant, but I will come back to this point later. Another part of the plan, which currently lacks any detail is support for people that have suffered a significant loss of income, perhaps a loss of overtime, one partner having been made redundant, or the borrower having to accept a lower paid job. Here, borrowers with mortgages of £400,000 or less, will be able to defer interest payments, which will then be added to the capital. The Treasury will then underwrite the additonal ‘risk’ normally borne by the lenders. This programme is designed to complement the existing mortgage support provided to those on income support or a Job Seekers Allowance.

However laudable the scheme, there is a very limited benefit to those that have taken out some type of ‘secured’ loan and subsequently default. This is because, not surprisingly, the government are not prepared to underwrite secured loans. The problem here is where a borrower has defaulted on a loan that is secured against their property, the lender can apply to the court to have the property sold, in order that they can recover their money. Now, many people have taken out these types of loans, rather than re-mortgaging their properties, to fund lifestyle purchases, extensions, cars and so on. Therefore, irrespective of the good intent of the mortgage companies or the government, their plans are at risk by the actions of any third party with a second charge. But there is something else that I believe is far more scandalous and that is the way lenders who have provided unsecured loans can seek to get a charge on a borrowers property, let me explain.

The borrower takes out an unsecured loan from a credit card company and subsequently default. If the card company believes that it will cost more to service or collect the debt than it is worth, they will often sell on the debt to a specialist company than collects debts. These organisations often pay only 10-15% of the face value and may purchase hundreds of millions of pounds worth of bad debt. They then employ very aggressive tactics to collect the money. If these don’t work and the debtor is a homeowner, the debt collectors invariably apply to the court to have the debt secured against the property and in most cases, this application is granted. Now the debtor will have the loan and any associated collection, legal and court costs added to the original debt.

The courts are complicit in this whole process, given some debt companies literally ‘book’ a court for half a day to process these applications. What must be particularly galling for the borrowers, is that the costs associated with this application can add substantially to the original debt, in addition to which, the courts take no account of the fact that the original debt was unsecured and therefore, the interest rate that was charged at the outset would have reflected the lenders additional risk. Having successfully managed to secure the debt, these debt companies will now typically ratchet up the pressure on the debtor, often getting them to agree amounts that they simply cannot afford, which is, arguably what the debt company wants. Because once there is a default, the debt company can apply to the court to have the property sold and that is invariably what they do.

Now the government cannot deny knowledge of this common practice, nor the fact that an obscure 1925 law is being used to achieve the objective of the debt management companies. Gordon Brown was asked about this very issue during his monthly meeting with the press and chose to ignore it, by repeating what the government were doing to help mortgage holders rather tha the legitimate issue that was raised. Yet, for a man that likes to legislate for anything and everything, he did not grasp the nettle and suggest that the government will look to repeal the legislation being exploited by these debt companies.

Now don’t get me wrong. Everyone must be responsible for their own actions and I do not believe in government intervention with taxpayers money, other than what is strictly necessary. But there is a need to distinguish between those that can’t and those that won’t pay. I have no sympathy for the latter. However, those that can’t pay should be treated sympathetically, they should not for example, have to endure the massive hike in the debt as a direct consequence of these debt companies taking completely unecessary legal action to gain security for the loan and/or a forced sale. The courts must be far more sympathetic to the borrower, for example, asking these companies what they expect to achieve by gaining security for what was originally an unsecured debt. Lets face it, unless the debt company intends to force a sale, or use the security as additional leverage, there is no point. No court should allow companies that have purchased unsecured debt, at 10-15% of its face value, to rack up the charges and costs and then secure the debt. Similarly, the government must urgently repeal the law that allows them to make this application, particularly in light of the assistance they are claiming to offer borrowers to minimise the risk of them losing their homes.

The bottom line, is that unless the government deals with this issue, then it can be reasonable argued that they are not serious about trying to keep people in their homes. Because someone that has taken out, for example, a credit card on an unsecured loan basis, could very quickly and quite easily find that they could be losing their home at the instigation of a debt purchasing company that has managed to secure the loan and by default, prevent the borrower from gaining any government support or assistance. These debt purchasing companies are making massive returns on their original investment and they are very effectively exploiting legal loopholes to put people out of their homes in order that they can get a quick return, in what is supposed to be contrary to the government stated goals. The debt purchasing companies are not acting responsibly and need to be tackled. Why, therefore is this government doing nothing to put a stop to it?

Do not bank on the banks

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My attention was turned to an interesting post over at Power to the People which followed on from my own post in respect of a bankers claim that “banks are not charities“. The post that I am referring to relates to corporation tax that banks would normally pay and comes at the whole issue from a perspective I had not considered, but is, nonetheless, very relevant in the current economic climate.

As everyone knows, the high street banks are posting massive losses as they move to write-off questionable assets and large consumer debts. However, under the current HMRC rules, they are entitled to carry over losses to offset against profits in future years. This means, that in spite of the significant risks being borne by the UK taxpayer as a direct consequence of the banking bailout, when things improve, there will be no win for us. In other words, the big banks, will not have to pay any form of corporation tax for some considerable time to come, perhaps, in some cases, for the next 5 years.

This, whilst perfectly legal, is an outrageous state of affairs and in my view, must be treated as an exception to the rule. Gordon Brown must bring in urgent new legislation to prevent the banks carrying forward these massive losses to set off against future profits. The principle of carrying forward losses is a good one, however, in this particular instance, it would leave the taxpayer with a very sour taste indeed. Failing which, the government must advise the banks that they could be subject to a windfall tax equivalent to any loss to the Exchequer in terms of tax revenues. The full article can be read here: Will taxpayers lose out to the banks again?