The thing about useful stuff is

London Scottish Bank closes Monday, December 01, 2008

Over the weekend, London Scottish Bank was forced to close as it no longer met the FSA's threshold conditions for authorisation.

The Government has announced that no depositors will lose any money regardless of the size of their deposits, including those over the deposit protection threshold.

Labels: Deposit Protection Scheme, Financial Services Authority

posted by John Wilson @ 1:46 PM Permanent Link ,

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Inconsistencies in asset protection schemes may cause flights to safety Monday, October 06, 2008

With national Governments in Europe independently determining investor protection schemes on the fly, worries are rightly being raised about regulatory arbitrage causing flights to safety e.g. money being switched to Germany or Ireland, who are reportedly offering 100% protection, from countries like the UK with capped schemes.

Oddly, yet to come into the spotlight is the differential on protection that is offered between banks and other financial institutions that are holding investor wealth such as Stockbrokers, Insurers and Independent Financial Advisers.

When the spotlight of the mainstream press turns on this, it may cause similar investor panic and force a widening of the guarantees being offered by Governments.

Labels: Deposit Protection Scheme, Federal Deposit Insurance Corporation, Financial Services Authority, Financial Services Compensation Scheme, FSA

posted by John Wilson @ 9:35 PM Permanent Link ,

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Structure of Bradford & Bingley's nationalisation is clever Monday, September 29, 2008

The manner in which taxpayers have been protected from Bradford & Bingley's ["BAD"] demise deserves applause.

The Financial Services Authority ["FSA"] deemed that the Bank no longer met the conditions for operating as a deposit taking institution, which invoked the provision of the Financial Services Compensation Scheme [ "FSCS"]. This scheme is funded by the banking industry and is designed to protect the first £35,000 of a customer's net deposits with an organisation, which I discussed previously here. This prompted a payout of £14bn to protect the assets of retail depositors to enable the deposits to be transferred to Abbey National plc. In addition, the Government backed up its' promise that no money will be lost by retail depositors i.e. unlimited guarantee by adding a £4bn to the pot that wasn't covered by the FSCS.

However, rather than drain other banks of cash to fund this payout, the Bank of England has lent the scheme the money on which it will charge interest [one-year LIBOR + 30bps], which will be converted into a three year loan by the Treasury. The Government also affirmed it stands behind the FSCS in meeting claims.

Hence shareholders will have borne the brunt of the collapse, followed by subordinated debt holders. Thereafter, the FSCS will absorb any shortfalls on assets, which the banking industry will be on the hook for. Only after each of these is exhausted, will the taxpayer be exposed.

Sadly, I haven't as yet figured out why they couldn't have done this with Northern Rock.

The Treasury statement can be found here.

Labels: bank of england, Bradford and Bingley, Financial Services Authority, Financial Services Compensation Scheme, FSA, FSCS, northern rock

posted by John Wilson @ 9:49 AM Permanent Link ,

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Short Selling - the witch hunt continues Monday, September 22, 2008

I despair!

When even people within the industry jump on the "short selling is evil" bandwagon without offering any supporting facts, you have to have some sympathy with people who question the high salaries paid to City folks.

Today, a former City practitioner writing here on the Finextra website condemned short selling which is "being used by some very unscrupulous individuals and banks to manipulate the share prices that are bring down the great and the good in the market."

Unfortunately, the facts [missing from the Finextra article] don't support his case, as my recent posts have tried to illuminate with thanks to Data Explorer and Charles Stanley & Co. Moreover, HBOS has justifiably been under the spotlight for over 6 months amidst concerns about its' funding and mortgage book and the FSA found no case to answer re short selling.

But worse, the article goes all soppy and sentimental

"No more fine banking institutions should be murdered because of the ability of the few to use the many short selling derivatives instruments to create a false market."

Could it be that some of those institutions were "murdered" [or I suppose, more accurately, commited suicide] by their own use of derivatives in the first place, creating huge dents in their balance sheet and causing credit lines to be withdrawn? Might it be, for others, that their own profligate lending on ridiculous LTV ratios was at fault exacerbated by over exposure to an inflated property market, whilst running a challenging funding profile?

I'd have been delighted to add such comments to the Finextra article, but it apparently restricts those that may contribute to the discussion on the site.

I'm eagerly awaiting the follow-up article on Fixextra covering insider trading ala "Mail on Sunday" which headlined with City sharks made £190m killing in minutes before BBC report on HBOS takeover , a story quickly debunked here and which highlighted the ignorance of the popular press. As one comment on FT alphaville aptly put it in a related piece which I have modified for the purposes of the pubic at large, "STOP ....... forming so called "informed" opinions based upon READING THE DAILY EXPRESS, DAILY MAIL OR ANY OTHER PUBLICATION THAT CONTAINS, OR HAS CONTAINED AT ANY TIME A PICTURE OF A BIG BROTHER CONTESTANT.

Labels: Data Explorer, Financial Services Authority, HBOS

posted by John Wilson @ 8:29 PM Permanent Link ,

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Bradford & Bingley swaps bowler hats for tin hats

Hmmm, do you think the news that the FSA is preparing contingency plans for Bradford & Bingley ["B&B"] will increase confidence in the Company's future?

Having recently raised £400m extra capital and boosting its' Tier 1 capital ratio to 9.1%, you would think B&B would be in good shape. However, at issue is its' sizeable exposure to the UK mortgage market and more specifically mortgages that are considered most susceptible to bad debt e.g. buy-to-let market and self-certification mortgages.

B&B was downgraded by Moody’s last week, leaving its credit rating one notch above junk status. This downgrade would automatically cause other banks to reduce B&B credit lines. Most banks set internal credit limits to counterparties that are linked to ratings. Hence a downgrade reduces the credit line. Multiply this by each counterparty that B&B deals with in wholesale markets and this contracts the liquidity available to B&B to finance its' activities.

Yet the news will most probably cause retail depositors to be nervous or perhaps panic, regardless of the deposit protection scheme. This can only exacerbate problems facing B&B and drive it to seek safety with a buyer.

B&B management will be swapping bowler hats for tin hats this morning.

Labels: Bradford and Bingley, Financial Services Authority, FSA

posted by John Wilson @ 8:59 AM Permanent Link ,

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Did John Mack, HBOS and FSA cry wolf? Sunday, September 21, 2008

Never let facts get in the way of a good story.

Paul Kedrosky highlights the extent of shorting on Morgan Stanley as a percentage of the market value of the company, using data from Data Explorer - I cannot attest to the accuracy of the numbers.

July 2008: 7% (peak)

Sept. 1, 2008: 2%

Sept. 16, 2008: 2.8%

Likewise, the FT also reports Data Explorer's data in relation to HBOS and highlights that bank’s market cap on loan this week was actually less than 3 per cent - nowhere the July high.

source Data Explorer

Finally, UK stockbroking firm, Charles Stanley has provided a table of shorting in UK.

Hmmmm. So where is the huge volume of shorting the drove financial stocks down? Might holders of the shares actually have been dumping the stocks in fear and the glut of sell order depressed prices? Evidently we need a new FSA rule to stop people selling for less than they paid for the stock and a market circuit breaker that precludes prices falling.

Better yet, perhaps the FSA could publish the numbers on which they based their rule change, or is it good enough that the market jumped by its' highest percentage gain ever to justify the change?

Labels: Financial Services Authority, FSA, HBOS, Morgan Stanley

posted by John Wilson @ 8:02 PM Permanent Link ,

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Did I really say that or was it the other Gordon Brown Friday, September 19, 2008

Image via WikipediaGordon Brown is on the case with Global Financial Meltdown, promising to sort it all out with proposals to his global counterparts. He will undoubtedly be tough on instability, and tough on the causes of instability.

However, he was the minister responsible for financial regulation in the UK for the last 10 years prior to becoming Prime Minister. Hence he has a clear line of accountability for any failings in the regulatory environment that may have contributed to present issues.

Just in case anyone worries that he might change his tune, several newspapers have helpfully reprinted some of his past Parliamentary comments

“The FSA have been regulating for solvency and done a good job” (Hansard, 26 March 2008)

“We are better protected than other countries from financial turbulence” (Financial Times, 26 March 2008)

A spokesman insisted that Mr Brown believed the FSA was “a world class regulator” (Telegraph, 7 June 2005)

“The financial services authority is responsible for regulating hedge fund managers in the UK and has put in place a rigorous regulatory framework to mitigate the risks associated with hedge fund activity.” (Hansard, 8 May 2007)

“I am confident that the simpler system we are proposing will reduce compliance costs, and increase public confidence in the regulatory regime… The UK financial services industry needs a regulator which can deliver the most effective supervision in the world. You cannot ensure the success of British financial services in the 21st century without modernising arrangements for the protection of investors. My reforms are essential to ensure the future confidence of investors large and small, and the future success of the increasingly integrated financial services industry on which so many British jobs rely… The current system of self-regulation will be replaced by a new and fully statutory system, which will put the public interest first, and increase public confidence in the system.” (Hansard, 20 May 1997)

That must have been the other Gordon Brown then.

Labels: Financial Services Authority, FSA, Gordon Brown

posted by John Wilson @ 8:28 AM Permanent Link ,

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FSA Short Selling rules - a route to making money Wednesday, June 25, 2008

FSA's headquarters, 25 The North Collonade, Canary Wharf, London, E14 5HS

Image via WikipediaUnder new rules introduced by the Financial Services Authority last Friday, all short positions of more than 0.25% taken in a company during a rights issue have to be disclosed to the market by 3:30 p.m. the following day.

Widely believed to have been introduced by the FSA to assist banks during their fund raising exercises via rights issues, it has already failed to prevent the share price of HBOS failing below its right issue price. Indeed the new rules may have contributed to the fall. I make this assertion since one of the investors forced to disclose a material short position in HBOS was Harbinger Capital, who are well regarded. As a consequence, other investors may well have been prompted to follow their lead.

So, as to the title of this post. Assume you are are well-regarded fund or investor. You could benefit from a shorting a position in a company with a rights issue, having that advertised via the disclosure rules, waiting for other investors to follow your lead thus sending the price even further down and then closing your position at a profit - note the new rules only require disclosure once and so subsequent changes up/down need not be made. As a consequence, your investment "prophesy" is both fulfilled and performance achieved, thereby re-enforcing your pre-eminance as a wise investor.

Odder still is that whereas before talking down a bank stock might have gotten you in trouble with the FSA, now you can simply say nothing, short a stock which is a fairly clear signal of your views and use the FSA as your publicist.

Might this count as market abuse - better introduce another knee jerk rule change then!