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Wednesday, 13 November 2013

Royal Bank of Scotland faces further fines over sub-prime mortgage crisis

UK Financial Investments outgoing chairman says RBS has been forced to hold more capital because of potential penalties

Royal Bank of Scotland is still facing potentially painful penalties from the US authorities over the sub-prime mortgage crisis, the Treasury select committee of MPs was warned on Tuesday.

Already hit by a £390m fine for rigging Libor and in discussions with regulators over an investigation into potential currency rigging, the bank has been forced to hold more capital by the Bank of England because of the possibility of further fines, MPs were told by Robin Budenberg, the outgoing chairman of UK Financial Investments (UKFI).

Budenberg, who was challenged about the influence the Treasury has over the body which was set up look after the stakes in the bailed out banks, said mortgage trading was one of the outstanding issues RBS faces. He made reference to JP Morgan, which has paid £8bn to settle a number of regulators' claims it missold mortgages. "We've asked them where they feel their exposures are and clearly there are a range of regulatory issues that are pending," Budenberg said.

Earlier this month RBS admitted it was holding more capital and putting £38bn of its most troublesome loans into an internal bad bank after a review commissioned by George Osborne ruled out a full-blown standalone bad bank.

Budenberg admitted he had accelerated Stephen Hester's departure from RBS in September. The MPs were told that UKFI had not seen opportunities for a sale of the 81% government stake in RBS in the last two years – which appeared to contradict remarks by the bank a year ago when it raised the possibility of sale in 2014.

Budenberg's successor, James Leigh-Pemberton, indicated that the average price at which the taxpayer bought its stake in RBS – 502p – would not be the only consideration when deciding whether to sell anyshares. "It is difficult not to take it into account but it can't be the only consideration, because when we make our recommendations we also provide it in the context of whether there is an opportunity to realise fair value or more than fair value ," he said.

Leigh-Pemberton said it was "very, very difficult to say with any precision" when a sale of RBS could begin, and it would not be before the £1.5bn dividend access share, which allows the government to receive dividends before other shareholders, is removed.

To demonstrate UKFI's independence from Osborne, Budenberg said he had resisted deep cuts to bonuses suggested by the chancellor on the grounds the reductions were not "commercially acceptable". Budenberg also cited UKFI's influence in convincing Osborne not to force RBS to sell off its US arm, Citizens, too quickly. Citizens is to be spun off next year, probably through a stock market flotation.

"Our view has always been that we need to give Citizens time to recover in terms of its financial performance, and now is a time to begin that process," said Budenberg.

He is to leave at the end of the year after overseeing the sale of the first part of the stake in Lloyds – 4.2bn shares worth £3.2bn – in September at a price of 75p a share. Budenberg said the government could raise another 0.5p per share, or £21m, if more short-term investors, such as hedge funds, had been allowed to participate in the sale.

Budenberg said that UKFI wanted to show it was a responsible seller and that it does not "just sell to the highest bidder".

Further details would be released by the National Audit Office, Budenberg said.

Article Source : http://www.guardian.co.uk
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Tuesday, 12 November 2013

Elizabeth Warren challenges Obama to break up 'too-big-to-fail' Wall St banks

Amid speculation that she might run against Hillary Clinton in 2016, firebrand senator attacks regulators for multiple failings

Senator Elizabeth Warren cemented her growing reputation as a darling of the political left on Tuesday with a wide-ranging speech challenging the Obama administration to take on Wall Street and break up its biggest banks.

Amid renewed speculation that she might challenge Hillary Clinton for the 2016 Democratic nomination, Warren appeared at a congressional event to attack regulators for failing to tackle the problem of financial institutions that are "too big to fail".

"We have got to get back to running this country for American families, not for its largest financial institutions," said Warren, who said the issue was an indictment of how little had changed since the 2008 banking crash.

The four biggest Wall Street banks are 30% larger than before the financial crisis, she said, while the five biggest institutions hold more than half the bank assets in the country.

Warren claimed this amounted to an $83bn-a-year taxpayer subsidy for some Wall Street institutions, because they were so large that they could safely rely on a government bailout in the event of a future crisis, and were therefore able to take bigger risks than rivals. She also cited research suggesting the crash had cost up to $14tn, or $120,000 for each American household.

The first-term senator from Massachusetts, who led the congressional taskforce overseeing the bank bailout, has repeatedly denied she has presidential ambitions, but growing talk of her potential candidacy has ensured that even is she doesn't run, she will act as a counter-weight to Wall Street financial backing for Clinton.

In her speech to the Roosevelt Institute and Americans for Financial Reform, Warren did not mention wider political ambitions but focused on proposed legislation launched over the summer with Republican John McCain to break up large banks and build on the 2010 Dodd-Frank reforms.

"Where are we in making sure behemoth institutions on Wall Street can't bring down the economy again? And make wild gambles that suck up all the profits in the good times? And stick the taxpayer with the bill when it goes wrong?" she demanded.

"Three years since Dodd-Frank was passed, the biggest banks are bigger than ever, the risks to the system have grown and the market distortions continue."

She said current regulators do not give "much reason for confidence" and added: "It is time to act: the last thing we should do is wait for another crisis."

Warren's remarks came as the White House confirmed that a relatively unknown Treasury official Timothy Massad would replace former Goldman Sachs banker Gary Gensler as chair of Wall Street derivatives regulator, the Commodities and Futures Trading Commission.

Announcing the appointment, President Obama defended what he called "historic Wall Streets reforms" that had already "put in place smarter, tougher common sense rules of the road."

"The markets have hit record highs and there is no doubt our financial system is more stable," said Obama.

"Tim's a guy that doesn't seek the spotlight," he added.

Monday, 11 November 2013

RBS chairman reveals employee lobbying over banker bonuses

Sir Philip Hampton describes 'out of body experience' over one banker's complaint about £4m payout

The chairman of Royal Bank of Scotland described on Monday how he felt like he was having an "out of body experience" when a banker protested to him that his £4m pay deal was unfair.

In a rare insight into the pressure top employees try to put on boards over their pay levels, Sir Philip Hampton said he had been contacted "quite a lot" by bankers wanting bigger pay deals via email and in face to face meetings.

Since becoming chairman of RBS after its £45bn bailout five years ago – it is now 81% owned by the taxpayer – Hampton has had to fend off repeated criticism of the bonuses paid to investment bankers and to former chief executive Stephen Hester. But the 60-year-old admitted to being surprised by the demands made by some staff.

"I can tell you I've had some completely out of body experiences in recent years where I was talking to somebody about potentially getting a £4m pay package. And outrage coming across the table from the other side because they know that somebody doing a comparable job at another bank is getting £6m. This is absolutely outrageous to them, that somebody is getting 50% more," he said.

Speaking at a debate in London organised by the High Pay Centre, the Freidrich Ebert Stiftung foundation and the Guardian, Hampton did not name the banker who had been disappointed by the £4m deal. On an intellectual basis he could understand the argument, he said, if not the feeling about the size of the payment.

It illustrated "part of the different world that can be inhabited", said Hampton, who attends meetings of the remuneration committee but does not have a formal seat on the board committee that sets pay. He receives £750,000 a year.

Hampton, who started his career as an investment banker at Lazard and became finance director of British Steel in the mid 1990s, said that in banking, expectations of bonuses had become "deeply embedded".

He said it was part of banking culture to work for your bonus, but considered that the power of bonuses to motivate staff was "overrated". However, he did not oppose bonuses as a way to pay staff because they were effective in aligning them with shareholders – especially as payouts could be clawed back if performance turned out not to be as good as it first seemed.

In 2012, he said, bonuses in the investment bank were 80% lower and the top 10,000 staff did not get pay rises.

The culture of bonuses being paid regardless of performance led to the EU capping them at a single multiple of salary – or twice with the approval of shareholders. The government is challenging the bonus cap, which regulators fear could push up fixed salaries. Barclays has been discussing the possibility of handing its bankers an allowance to make up for lost bonuses and Hampton would not disclose RBS's proposals for pay once the cap comes into force on 1 January.

"There will probably be some inflation of base pay," Hampton said. But, he warned, the impact could be to increase fixed costs for the bank. Some aspects of bonuses had encouraged unwanted behaviour, he said, citing incentives to sell payment protection insurance that have left the industry with a £20bn bill to compensate customers. "It is absolutely possible to have incentives that are disastrous. That was the case with PPI."

Blockbuster and Barratts enter administration, threatening 3,000 jobs

Film rental chain's brief revival under Gordon Brothers withers, while shoe retailer failed to attract £5m investment needed

More than 3,000 retail jobs are at risk just weeks before Christmas as the film rental chain Blockbuster and shoe shop Barratts announced they were going into administration.

Both retailers have failed before. Blockbuster was among a string of well-known high-street brands to go bust at the beginning of the year, while it is the third time Barratts has fallen into administration in less than five years.

There were also further job losses at regional airline Flybe, which said it was cutting 500 jobs in an attempt to save £26m a year, having struggled in a downturn that disproportionately affected economies outside London.

The retail collapses reflect ongoing troubles in the economy as inflation has continued to outstrip low wage increases, whittling down consumers' spare cash. This year has seen the failure of a string of retail casualties, including music retailer HMV, Jessops camera shops and bed specialist Dreams, all of which were later rescued by buyers who took on at least some of the stores and employees.

But both Barratts and Blockbuster face an uphill struggle to survive after falling out of step with the fast-changing habits of shoppers.

"Consumers and the retail market have moved on," said Maureen Hinton, research director at retail analysis firm Verdict. "The economic downturn has only speeded up the exit of weaker players that would have found it difficult anyway."

She said the Barratts brand and its products were not strong enough to compete with clothing retailers such as Primark, New Look and the supermarkets, which now sell footwear as well as clothing. Blockbuster, meanwhile, is based on an "outdated concept" that has been overtaken by downloads and TV subscription services.

Philip Duffy and David Whitehouse of Duff & Phelps, joint administrators for Barratts, said they hoped to sell the business as a going concern but that store closures and redundancies could not be ruled out.

Barratts, which employs 1,035 people at 75 stores and 23 concessions in the UK and Ireland, had sought additional investment after a period of difficult trading but the offer of a £5m cash injection was withdrawn on 7 November.

"In view of the financial position of the company and withdrawal of that equity offer the directors were left with no choice but to appoint administators," said Duffy.

The appointment of administrators at Blockbuster comes just a month after the retailer's owner, Gordon Brothers, admitted that its turnaround strategy had not worked because of a rapid switch to renting films online or via TV subscription services.

The restructuring specialist bought about half of Blockbuster's original UK chain in March and promised to invest substantial sums in a revival plan to protect around 2,000 jobs. But Gordon Brothers was unable to secure a licensing deal with Blockbuster's parent company in the US, which also recently filed for bankruptcy, to launch an online business.

Nick O'Reilly, a joint administrator, said: "Gordon Brothers found the marketplace had changed quite dramatically. A lot of people want to rent online, while the price of DVDs on places like Amazon is so cheap – why rent for £3?"

Blockbuster's 264 stores will remain open while the administrator, Moorfields Corporate Recovery, looks for a buyer. But O'Reilly admitted it would be a tough job to find a new owner for Blockbuster in its current form given that Gordon Brothers had already spent weeks seeking a buyer.

Joint administrator Simon Thomas said: "This is obviously a difficult and upsetting time for everyone involved at Blockbuster, in particular employees, who have endured a stressful period since January this year."

"We appreciate that staff and customers will want a speedy resolution, however, we must ask people to be patient over the coming weeks."

Flybe had already cut 490 jobs under its previous boss. Its new chief executive, Saad Hammad, said it had been clear the cost savings were necessary, but the company needed to do more and do it immediately.

He said jobs would go "across the ranks: pilots, cabin crew, engineers management. It's unfortunate it needs to be done to be relevant and viable. We've got to secure the business – it's the lesser of two evils."

The Unite union said it would scrutinise the business plan to limit job cuts. National officer Oliver Richardson said: "Cabin crew have already been through one major reorganisation at Flybe only recently and they will be angry that once again they are on the front line of more cuts.

"Over the coming weeks, the union will scrutinise every inch of the company's business plans in order to protect as many jobs as possible and to avoid compulsory redundancies."

University economics teaching to be overhauled

Move follows criticism over 'limited and outdated' curriculum and failure to include how financial markets can undermine stability

An overhaul of university economics teaching will begin next year in answer to critics who argue that economists failed to spot the 2008 crash because they ignored the impact of financial markets and relied on outdated theories.

A new first year curriculum will be available from the start of the 2014 academic year which will include an in-depth review of economic history and a look at the way financial markets can undermine economic stability.

Wendy Carlin, an economics professor at University College London, who heads the project, said several universities had expressed an interest in adopting the new curriculum, including Sydney, Warwick and UCL.

Speaking at a conference hosted by the Treasury, Carlin said students needed to debate conflicting theories of how economies work and understand that while markets often are successful, they sometimes fail.

She said some academics argued that reforms should take the form of "nicer, smarter, cooler examples of the real world", but a more fiundamental overhaul was needed to give students a deeper and broader understanding of the subject.

Much of the syllabus is being written by academics and economic consultants on a voluntary basis with technical support from Azim Premji University in Bangalore. The course materials, plus supporting teaching materials, will be available at "no cost to participating institutions".

The project, which was launched last month, is backed by the New York-based Institute for New Economic Thinking, which was created in 2009 with financial backing from the financier George Soros.

Some academics have argued that economics has become locked in a time warp, teaching theories that ignore the advent of the internet, the end of the Cold War and the threat of climate change.

Juliet Schor, a professor from Boston College said economics teaching needed to illustrate how a rise in fossil fuel consumption can cause damage to others thousands of miles away. "Humans share a biosphere and it is possible for people to cause huge harm to others on the other side of the world, she said, adding: "We should include environmental and carbon footprint accounting alongside GDP."

An element of environmental economics is included in the new curriculum.

But Carlin refused to answer concerns that the project will be of limited use unless some of the largest universities adopt the new scheme.

There are fears that the dominance of mathematical modelling in the current economics syllabus will be defended by senior figures in academia because it supports candidates who want to make a career in banking and finance.

Students at Manchester University, who formed the post crash economics society earlier this year, have complained that their course is dominated by mathematical modelling based on out-dated theories.

Professor Michael Joffe, an economist at Imperial College, said space could be made in the curriculum if academics could admit that many theories were "plain wrong" and should not be taught.

Co-op replaces £8m Christmas dividend with food vouchers

Organisation says half-year payments to members unjustifiable in light of near collapse of banking arm

The Co-op has unveiled a new rewards scheme after being forced to abandon its usual pre-Christmas dividend for seven million members.

The UK's biggest mutual organisation told delegates at a meeting in Manchester on Saturday that £8m in half-year payments to members could not be justified in light of the near-collapse of its banking arm.

The full-year dividend, which last time amounted to more than £100m, is likely to go the same way after the group made a loss of £559m in the first six months of 2013. A final decision will be made early next year.

Chairman Len Wardle said at the group's half-year meeting: "Our decision not to pay an interim dividend was not one that was taken lightly. But it was viewed by the board as a necessary one, given the challenges facing the group at this time."

The Co-op has announced details of a separate rewards scheme that will see members offered 10% vouchers that can be saved and used as a cash equivalent in the group's 2,800 food stores before Christmas Eve.

If a Co-operative member spends £30 they will be given a voucher worth £3. Vouchers can be collected between 18 November and 15 December.
Chief executive Euan Sutherland said: "Technology now allows us to offer these more immediate rewards, which we are confident our members will appreciate in the run-up to festive period."

The Sunday Times said that a review of the Co-op's donations to the Labour party will form part of a strategy rethink being undertaken by Sutherland as he also attempts to reduce the group's £1.3bn debt pile.

He said in an interview with the Sunday Times: "Part of our strategy work, and we will come back with it next May, is to ask, where and how should the Co-op movement be contributing to local society and to community movements?"

He added: "Being a mutual is not an excuse for not making money. My intention is to make decent profit out of the Co-operative Group. What we then do with that profit is different."

The Co-op bank's rescue plan announced last week will see around 50 branches close and bond investors including US hedge funds given 70% of the business, leaving the parent Co-operative Group with a 30% stake.The controversial move comes after a £1.5bngap in finances was discovered following the purchase of the Britannia Building Society and abortive plans to buy hundreds of Lloyds branches.

The Co-op business also includes supermarkets, pharmacies and a chain of funeral parlours.

Sunday, 10 November 2013

Why central bankers' composure is pure theatre

Federal Reserve, European Central Bank and Bank of England know extricating from stimulus policies is fraught with danger

Central bankers like to project a sense of serenity. The markets may be traumatised and the politicians may be panicking, but nothing fazes the technocrats in charge of our money. They are headmasterly figures: slightly detached but with their fingers on the pulse.

That's the image. In reality, the central bankers are in a funk about the health of their nations' economies and the challenge of extricating their institutions from the stimulus policies that have been responsible for what has, so far, been a tepid global recovery.

Why else would the Federal Reserve have bottled a decision on gradually winding down its bond-buying programme? Why else would the European Central Bank have surprised the markets with a cut in borrowing costs last week? Why else would the Bank of England feel the need to reassure the public that the 0.5% bank rate that has been in force since early 2009 would remain in place until unemployment came down to 7%, barring some unforeseen inflationary shock?

Mark Carney will face the press this week for the first time since he outlined Threadneedle Street's forward guidance in August and the governor will have the job of explaining why unemployment is now expected to come down faster than the Bank predicted three months ago.

On the face of it, this is an easy gig. Carney could stand up and say it is a jolly good thing the economy is doing better than expected and, therefore, interest rates can start to return to more normal levels a little earlier than planned. This, though, is the UK, and here there are really only three economic moods: periods when there is concern that the economy is not growing, periods when the worry is that it is growing too fast, and periods when a combination of steady growth and low inflation is considered too good to last.

For now, the UK appears to have moved from fretting about a triple-dip recession to fears about overheating without any intervening Goldilocks period. Accordingly, the financial markets will be focused in coming months on barometers of excess demand: the housing market, the trade figures, earnings and consumer spending.

Carney will have a period of grace before the markets start to demand action. In part that's because those indicators speaking of problems to come – the housing market and the trade balance – are flashing amber rather than red. In part, though, it is because problems are more acute elsewhere.

For the Fed, it is a question of when to taper, not whether. It wants to continue supporting what is a historically modest recovery with low interest rates and quantitative easing, but thinks the amount of new money creation each month should be reduced.

But it wants to do this without causing chaos either domestically or in the broader global economy. When the Fed chairman, Ben Bernanke, floated the idea of a gradual taper to bond-buying back in May, financial markets threw a fit. The laws of supply and demand have meant that bond prices have risen as central banks have bought more and more of them. The interest rate on a bond goes down as the price goes up, and these interest rates (bond yields) affect how much it costs firms and households to borrow over long periods.

Speculation about a Fed taper pushed up bond yields, which in turn made mortgages more expensive in the US. That put the dampers on the recovery in the housing market.

The same laws of demand and supply meant that electronically printing trillions of dollars has driven down the value of the US currency. It has also created a massive pool of funds looking for places around the world where returns were high. This was not in the west, where both growth and interest rates were low, but the emerging world, where growth was strong and borrowing costs much higher.

Even the threat of a Fed taper was enough to put this process into reverse. Money came flooding back out of emerging markets, putting pressure on their currencies as growth rates were slowing.

Europe has a different problem. Relief during the summer that the eurozone was at last coming out of an 18-month double-dip recession pushed up the value of the single currency. But a stronger currency means lower inflation because the cost of imported goods falls.

Inflation in the 17-nation bloc as a whole stands at 0.7%, well below the ECB's target of close to but just less than 2%. In those countries worst affected by the sovereign debt crisis it is already negative.

Deflation is not always a bad thing. In fact, if you are a saver it is a good thing because your money goes further. For debtors, though, a period of falling prices means that your debt burden increases. If interest rates are rising, then you can quickly find yourself in a situation where your debt is increasingly unpayable even if your income is going up at the same time.

What applies to individuals applies to countries also. Greece is already in a situation where it will require another bailout to make its debts sustainable and it wouldn't take much to push some other countries on the eurozone's periphery – Italy and Spain most notably – over the edge.

Economists at Fathom financial consultants have modelled what would happen to eurozone debt sustainability given plausible (if relatively generous) assumptions for budget deficits, growth rates and inflation. They found that if primary government budget balances (excluding debt interest payments) and growth rates were set at their long-term average, debt sustainability hinges on what happens to inflation.

At an inflation rate of 2%, the level of debt to national output (the debt to GDP ratio) declines for every country in the eurozone, including Greece. At 1%, and assuming a Fed taper leads to an increase in long-term interest rates of 1.5 percentage points in the next two years, debt becomes unsustainable for the peripheral eurozone countries. At zero inflation, even without a taper, debt sustainability is a problem for the core of the currency zone as well.

This threat explains many things. It explains why ECB head Mario Draghi moved so quickly to cut ECB interest rates last week. It explains why there is a lot of nervousness about the upcoming asset quality review of Europe's banks, since they are awash with eurozone bonds. It explains why the Americans, who know a taper is coming, are openly frustrated with Germany's failure both to reflate and to press ahead with banking union. And it explains why the sang-froid of central bankers is strictly for show.