Tag Archives: LIBOR

Barclays Bob

Some may be wondering about the timing of Bob Diamond’s decision to “walk” from what is the best-paid and most high-profile banking job in the UK. Some may believe that he was hounded out by the banking establishment.

I reckon that he walked in order to free himself-up ahead of the ridiculous inquisition by the Treasury Select Committee. I sincerely hope that they leave their briefcases on the table in front of them and remember to wear tin hats – because Barclays Bob is going to give them hell. They will be forced to listen to a few home truths about the conduct of not-only Barclays but the entire politico-banking establishment.

Believe me, Bob knows where ALL the bodies are buried and he’s the first guest at the Wake.

As usual, we’ve had the puerile Punch and Judy exchange between the Prime Minister and the Leader of the Opposition. Both have diminished themselves through their conduct over the last wee. (If that was at all possible)

Meanwhile, the media (and I include the Social Media) have seen an outpouring of hysteria by individuals who hadn’t heard of Libor before last Wednesday. Mob hysteria at its worst.

Mind you, that is so typical here in the UK. First we “denounce”, then the Inquisition, followed by the Inquiry and then it’s back to normal as we look for the next victim.

If there have been transactions which have inflated profits, I hope that in their haste, government Ministers have not forgotten that there may be billions in the Exchequer which will have to be repaid if tax has been generated on illicit transactions.  Inflated bonuses have also been subject to millions in taxation.

It’s not only the banks who are going to have a lot to unravel – but of course, these days no-one thinks before they act.

Starting with the baying politicians and media, a breathtaking lack of understanding of complex banking processes has clearly been demonstrated. The same lack of understanding which was exhibited by the Directors of Banks prior-to, during and certainly after the last bank crisis.

Make no mistake both the Bank of England as well as the Financial Services Authority have been complicit. Those pre-Lehmans LIBOR deals, probably saved the British Government from having to bail out Barclays and as other banks have also doubtless been guilty of the same misdemeanours, the Government will have saved billions on the 2008 bailouts.

(What I mean to say is that the banks were bailed out  – but they weren’t bailed out enough. The last four years of  “rebuilding balance sheets”, non-lending etc have clearly demonstrated that as usual, the government only did half of the job)

It is the Bank of England, the Financial Services Authority and the grubby British Bankers Association which should be standing shoulder-to-shoulder in the dock and hopefully after Bob Diamond has said what he really thinks and knows, they’ll be lined up and taken down.

Today, Mr Diamond, I’m on your side.

Show them Hell!

Barclays out of CONTROL?

A few years ago, I moved away from teaching and coaching the “soft” skills of management and have been concentrating much more on the “hard” skills.

One of the hard skills of management, which everyone running a department or process should know,  is one which appears to be missing in MOST businesses. It is the art of Business Control.

It is very straightforward: POPS.

POPS is a very simple but effective method of structured management thinking.

If the POLICY, ORGANISATION, PROCEDURES, SUPERVISION Business Controls had been applied to the Banking Industry, we would never have had a financial crisis.

“POLICY” is the high-level control and is the responsibility of the Board and Senior Management. They not-only put together the Policy but their duty is to ensure that everything which happens within the organisation is in keeping with Company Policy.

For instance, if  traders fiddle with interest rates and interest rates have been fiddled-with for years without anyone being brought to book – they may be forgiven for assuming that fiddling with interest rates is part of the bank’s Policy and culture.

“ORGANISATION” is about the people. Are the right people doing a particular job? Have they been trained? Have they been communicated with? Do they know what they can and cannot do? Is there a good Management Structure which can report up to Board level?

“PROCEDURES”  : For instance, is a trade or block of trades recorded and checked? Are there “snap” checks and audits designed to check that company Procedures are being adhered to.

SUPERVISION is a day-to-day control (so is the Procedures Control).  This control is the responsibility of the “one-up” manager. The one who is there not the one at meetings. Very often , things happen without day-to-day supervision. For instance, if a trader makes a few dodgy deals, a good manager’s responsibility is to (at least) make the trader know that he could be caught.

Here’s an example of how a thorough Management Audit which looks at specific Business Controls can unearth the REAL cause of an issue. It is also surprising how many breakdowns and corporate crises are the result of a bad or non-existent high-level POLICY control.

In 1987, the car-ferry, The Herald of Free Enterprise sank in Zeebrugge Harbour and 193 people died. There appeared to be a very simple explanation for the “accident”.   The loading doors at the front of the boat (through which cars entered the boat) had been left open.

However, a proper structured  investigation  designed to identify the Root Cause of the disaster was needed.

The doors were left open because one man was asleep when he should have pressed the button to close the doors. Therefore, the PROCEDURES control had broken down. The procedure was that when the boat was about to move, a button would be pressed on the bridge. That would trigger the man to press the button to close the doors.

The direct SUPERVISION control was  was non-existent because the man who should have pressed the button was managed by a senior man who was only in charge of ferry car-parking and not door-closing.

In addition, there was no PROCEDURE for anyone to confirm to the bridge whether the doors were closed or not. It was assumed that once the “close the doors”  button had been pressed, that the doors were closed.

The ORGANISATION control is about the people involved in the process. In this case, the organisation consisted of just ONE lowly manual worker who, on this occasion, was asleep. The  First Officer who pressed his button, immediately assumed that once he had pressed it, his job was over.

The last Control is the highest-level  – POLICY. This control is administered right at the top of an organisation –  by the Senior Management and the Board of Directors.

One may be forgiven for thinking that there is absolutely no way that such a high-level control could possibly have anything at all to do with someone forgetting to close the loading-doors on a ferry.

However, the Root Cause of the Herald Of Free Enterprise disaster WAS a breakdown in the POLICY control.

The Company’s POLICY was to turn the ferry around in 15 minutes.

Consequently, the man who should have pushed the button was tired because he had not slept properly for two days and was already asleep when the boat had docked.

As is often the case, the ultimate responsibility for the sinking belonged to the management.

Today, Barclays banks has a very similar situation in respect of its traders who are alleged to have manipulated LIBOR for purposes of profit!

Was there proper SUPERVISION? Were PROCEDURES in place to guard against improper behaviour? Was the ORGANISATION right? Were the traders only (as far as they understood) acting within Barclays’  POLICY? Did Barclays have a “SELL, SELL, SELL!!!” Policy which encouraged short-cuts and cheating?

A measured, thought-through approach is needed.

The reaction by the media and politicians already suggests that instead, there will be a free-for-all, accusatory, disorganised  non-process, preceded by the customary witch-hunt and a Lawyer Benefit in the shape of an inquiry.

What is REALLY NEEDED is a Management Audit delivered by a team of sceptics NOT PAID FOR by Barclays.

That is to say –NOT Pricewaterhouse Coopers and certainly NOT those Muppets at the Financial Services Authority.

Arrival of the “Suits”

Some commentators are saying that  here in the United Kingdom, Margaret Thatcher’s policies and the 20 year-old deregulation of the markets have finally unravelled. It is not policies or rules that cause catastrophes – it is people. In this case it is the ineptitude of those running the banks and building societies.

Guess what? Apart from the four sacrificial lambs that were offered up a couple of weeks ago, the same senior executives are still running the banks – or should I say should be running the banks.That is, if they weren’t hiding behind the sofa with their hands over their ears.

Here’s a good Mastermind question: Who was the last bank CEO or Chairman to give a TV interview?

We have been regaled by the rather fatuous argument that the executives who are still in place are the ones who understand how the business works and if we trashed them then we would be in even more trouble.

That is nonsense.

I have worked for a Building Society, several large insurance companies and a large (the largest) American bank. The root cause of what has been happening in the last year-or-two is the total lack of senior technical and managerial talent within the industry. It is not a new phenomenon.

In the good old days, the lending of money  to an individual was never  a profession – it was more of a “trade” because it was simple. Consequently, the money-lending business (nowadays it is called “banking”) was run by ordinary honest folk who could gradually work their way to the top of their organisation – usually through a combination of hard graft and company loyalty.

The directors would make sure that they kept the bank or building society well within the liquidity rules, they would vary interest rates when instructed  to do so by the Bank of England and they NEVER went bust because it was nigh on impossible to go bust. I recall just one occasion many years ago when the Chelsea Building Society was forced to revalue its assets but otherwise – no problems.

There were no executive bonuses because the word “profit” was not in their dictionary – but they would strive to make a small surplus. Likewise, there were no golf days, coventions or any other executive freebies.

Then laws were changed and the “suits” came.

Directors of lending institutions used to be a crustily venerable lot of old duffers who tended to be unqualified businessmen who strangely enough, were more entrepreneurial than the MBAs that are running the show these days. Typically, they were senior partners in accountancy companies, estate agencies or solicitors. They were men in their 50s and 60s who were REAL businessmen and who had created their own wealth.

That is where the seeds of destruction were planted – in the panelled boardrooms of provincial England. The Old met the New and were dazzled by the following: (perm any two from six) MBA, Oxford, Cambridge, Harvard, Degree and Insead.

The rheumy-eyed, pipe-smoking unqualified old directors were dazzled and seduced by the shiny new boys with MBAs and incomprehensible management jive talk. They all wanted one!

It was in 80s  USA that the cult of the “corporate entrepreneur” had been born and transplanted rather uncomfortably into the gut of the UK’s financial industry.

The phrase CORPORATE ENTREPRENEUR is like “Police Intelligence”, ” Microsoft Works” and “Friendly Fire”. It is an Oxymoron.

A corporate entrepreneur is a man who has a salary, takes risks with other peoples’ money and is rewarded for his “bravery” through the medium of the exec-bonus.

A proper entrepreneur takes risks with his own hard-earned cash whereas the boys who run our banks are just overpaid bluffers with a shelf life and a permanent hard-on.

As a result of their corporate games, our Government is now forced  to take a shortcut which is the reciprocal of what  happened in China and the old USSR.

The Russians and Chinese flipped from state control to capitalism but we appear to be heading  in the opposite direction. If the government takes on any more banks, it ought to  be reported to the Competition Commission!

For the time being, the markets will bounce along, floating on occasional short-term  waves of faux-euphoria.

We are whistling in the dark.

Soon we will all wake up and realise that if we are really seeking a new banking direction – it is the drivers and not the cars that have to be changed. The government is the short-term relief driver but new drivers need to be found from within the banking industry.

There are scores of very talented senior  “solid citizen”  gems within banking who are dependable and honest but who do not have the need  to constantly spray testosterone and arrive in helicopters. We need service-driven bank managers and directors and not self-serving ego-driven scalp-hunting prima donnas with over-funded pensions.

These corporate hidden gems have all the knowledge and experience needed to reawaken the banking system from its torpor.

They are also the ones who know where some of the bodies are buried.

Methinks that it may be  time to line up the current bank executives and perhaps introduce them to the concept of the exit interview.

(If you are not familiar with the phrase CORPORATE ENTREPRENEUR, please enter the phrase in Google, see the various Management Models, the smug mugshots………………and weep)

Lower “Swap Rates”

panic.jpg  

 

“Don’t Panic!”

“Moneyfacts.co.uk is claiming there is a “faint glimmer of hope” that the fixed rate mortgage market is returning to some sort of normality.

It says that new mortgage borrowers are now finally benefiting, as lenders pass on a string of welcome interest rate cuts on their popular fixed rate deals.

Darren Cook from Moneyfacts.co.uk, said: “Moneyfacts.co.uk has used a key barometer of the average two-year fixed rate over the past few months to analyse the trends of the overall fixed rate deals against the volatility of the swap market, the borrowing fixed rates used between financial institutions. The average two year fixed rate peaked at 7.08% on 11 July ’08, its highest in over a decade after swap rates also peaked at 6.52% on 16 June ’08, reflecting the lag time for swap rates to reach the mortgage market is normally around two to three weeks.”

Cook notes that several lenders, such as Halifax, C&G, Nationwide BS and HSBC have trimmed their mortgage rates over the past two weeks, which has resulted in the average two year fixed rate dropping to the current 6.95%.

Halifax, C & G, Abbey, Nationwide and HSBC , which supply the majority of overall mortgage lending, have a collective average two year fixed rate currently at 6.76%.

He added: “It is encouraging that, at long last, lenders are responding to the easing in wholesale borrowing costs and passing a discount on to the consumer. There is a sense that competition is finally returning to the fixed rate mortgage market, which will benefit the borrower. “Two year swap rates are continuing to fall and yesterday’s closing price of 5.74% is the lowest since mid May of this year, when the overall average two year fixed rate was 6.63%. If these downward trends continue unabated, we will see further fixed rate cuts by our top high street lenders in weeks to come, which just might be that glimmer of hope that we are all endlessly seeking.”

Buy to Let Rents begin to stabilise

Buy-to-let yields remained stable at 6.4% for the second consecutive month in June, according to Paragon Mortgages’ latest Buy-to-Let Index.

Average UK rents, which had been rising rapidly, have stabilised just short of £1,000 a month, and remain 9.3% higher than a year ago.

Regions achieving the highest yields in June were Wales (7.6%), the North (7.4%) and the North West (7.3%).

Over the coming months, the buy-to-let market will be a vital source of stability in an uncertain housing market. Returns remain attractive and strong tenant demand encourages landlords to retain property, whilst also looking for opportunistic purchases. The average portfolio gearing is less than 40% – giving landlords plenty of room to free up equity for further investment. 

The  managing director of Paragon Mortgages, said:  ‘For the vast majority of landlords, a slow housing market is nothing new. They recognise the counter-cyclical nature of buy-to-let and many landlords have held property through previous housing cycles. Falling prices are spooking first-time buyers and they are delaying house purchase, with tenant demand at high levels as a result.”

He added:  “During the downturn of the early 1990s we witnessed mass possessions because there was little alternative to house purchase and young buyers had borrowed above their means. Today’s modern and vibrant private rented sector provides people with a viable alternative to owner occupation and buy-to-let provides housing for young people who would otherwise have little choice but  to buy and be financially stretched.”

True Git

darling1.jpgQuestion:  “What is the collective noun for Bankers?”

Answer:  “A  Wunch.”

Yesterday, the Chancellor was snubbed by the bankers.

Several of the biggest players in the banking system were invited to come along an talk to the Chancellor about how they were going to help the poor borrowers who are unable to repay their mortgages.

Would he manage to persuade them to lower their interest rates or maybe tell them to be gentle with borrowers in arrears and not throw them out of their homes?

When the meeting finished, the follow-up publicity from the Treasury PR machine was very muted. It was muted because effectively, the Chancellor had been told to bugger off.

The banking fat-cats are untouchable plus Alistair Darling had made a very basic negotiating error. He had already asked the Bank of England to arrange a £50 billion handout and then expected something in return. What he should have done is to have had the meeting with some sort of “ace in the hole”. For instance:

” Listen guys – you lower the rates, give the “genuine hardship” mortgage borrowers a short payment holiday and I shall arrange to bail you out and   promise to pay off your collective gambling debts.”

Instead, this former Edinburgh Solicitor, up against some of the biggest sharks in commerce gave them the help that they needed and then thought that he could appeal to their good nature. It was a no-contest.

The wunch knew that the Government could not afford another U-turn so they went into the meeting with the Chancellor knowing full well that he would not risk the threat of withdrawing BoE support. They had him by the shorts.

Mr Darling was told it will take ‘quite some time’ for the BoE rescue package to make a difference.

and  ‘For now, mortgage pricing will remain high. If anything, it will increase in the short term.’

The ‘stubbornly high’ cost of raising money in the money markets was blamed.

This was from the guys who make the money markets.

Let’s get one thing straight – LIBOR is the London Inter Bank Offered rate and is the rate at which the Banks borrow money from each other. The rate is set by the British Bankers Association. It is a rate which is controlled by the banks and could be changed at any time. Once again, they have stitched-up the Chancellor.

Alistair Darling said he hoped that lenders would ‘continue to take their responsibilities towards customers seriously’.

While Alistair is “hoping”, the  fat-cat banker is lighting up another Monte Cristo as the houseboy counts the bonus. The banker is not thinking how he can help Mr “In the Shit” Borrower. He has far more important things on his mind. Those share options are not looking as attractive as they did a few months ago. Perhaps he should wait before cashing them. After all , once this free gift from the BoE takes effect, the share price should rise quite nicely……….

Crunch or Squeeze?

“Credit Crunch” is one of those phrases which has gone into common usage but in common with “learning curve” “carbon footprint” and, believe it or not “interest rate”, it is a phrase that is often used but not always understood.

The Credit Crunch is a new phenomenon. In the old days, we had a credit “squeeze” which simply meant that credit was only available to those who did not really need it – those with a gilt-edged credit rating. In other words, you had to have a near-perfect credit rating in order to obtain credit. The tap was on but only slightly.

When the tap is turned off, it is a credit crunch. It means that for whatever reason – the banks will not lend to you. By that definition, we are NOT in a credit crunch – we are in a severe credit squeeze. That is because you can still borrow money – you just have to look harder and maybe pay more.

The banking system is a bit of a con. You may be surprised to hear that your money is not kept in a shoebox in your bank’s safe. If you go to your bank today and ask to see your investments, they will not be able to show them to you because they do not physically have them. Your investments are abstract as is your overdraft: “Can I see my overdraft, please?”

Everything is a paper transaction.

Banks borrow money from each other in order to lend to you and me. Hence another mnemonic that you have seen and wondered what the hell it meant- LIBOR.

Libor is the London Inter-Bank Offered Rate. That is the rate at which banks borrow money from other banks so that they can lend to you and me. When we borrow from a bank, we have to produce some sort of collateral. The Banks are the same. Their value is also measured  in terms of  the assets that they own. 

The Americans who started the collapse of this very unstable house of cards lent money to people who had very little chance of repaying the money. These are the so-called NINJA mortgages: (No Income, No Job or Assets).

Nowadays, it is quite common to “securitise”  mortgages. That simply means that a whole bunch of the mortgages are packaged into one large financial lump .   Because a mortgage not-only has a value which is backed by the value of the bricks and mortar, it also produces an income (or cash-flow) it represents an ideal investment. All assets can be securitised so long as they are associated with a  cash flow.

The cash-flow in the case of securitised mortgages consists of the mortgage repayments that are made by the borrowers.  If the borrowers “en masse” are unable of unwilling to make the repayments, the value of the securities falls very sharply.

Many of our own banks invested in these  securitised mortgages so they now are holding investments which are nigh-on useless because those investments are no longer producing the income generated from those American mortgage repayments.

The next stage is simple. The properties which contained these NINJAS have to be sold so that some losses can be recouped. At the same time, lending has slowed down which means that the only way that the properties can be shifted is for them to be sold so cheaply  that they cannot fail to sell.

That is just one of the ways that  house prices can be driven downwards.