AIG bonuses come under the spotlight

In the US, questions are being asked about bonuses paid out by Insurance giant AIG in the light of government assistance in the order of $170bn received.
AIG are planning to pay out $200m in bonuses to keep it's employees from rushing out of the door to find more secure employment. Congress are calling AIG directors to explain their actions and justify individual payments which range from $1000 to over $6m per employee.

Like the RBS pension debacle, these deals were concluded shortly before the government stepped in. Last year the US government appointed Edward M. Liddy as chairman and CEO of American International Group Inc. and he has found that there is little he can do to prevent these payments.

This follows on from another recent report that AIG had paid out over $90bn of government money to institutions that had receieved their own bailout cash. AIG and Liddy could be set to become the US scapegoats in the same way that RBS and Sir Fred have in the UK. AIG has become the single largest recipient of government aid, and as such will be under the microscope of government and the public for some time to come. Windfall taxes are now been considered to recoup money that has been paid out from bailout recipients.

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The poll is now closed..

I ran a poll on this website to find out what people thought about Sir Fred Goodwin and his proposed £703,000 pension from the Royal bank of Scotland - his 'reward' for leading the bank to the very brink of bankruptcy...
And the result is that of the 13 votes received:

Six voted for the £20,000 pension, ie: what he would have got if the bank had been bankrupted, nobody thought he deserved the full pension, two were favouring a compromise and five were adamant that he should get nothing at all..


Whilst I sympathise with those who gave him nothing, I feel justice would be served if he got a very moderate pension such as the £20,000. However, I do think that a compromise will be reached and I would not be surprised to see him walk away with the $416,000 that he would have got if he were sacked. You can draw your own conclusions, but I guess that means that those that voted for the £20,000 pension reflect the majority view. One thing is certain, and that is that there is probably nobody out there who believes Sir Fred should get his full pension. It remains to be seen exactly what steps the Government is going to take to claw it back.

I will move the closed poll to he bottom of the sidebar so that it is still public, but leaving room at the top of the sidebar for my next poll whatever that might be..

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Negative equity looms..

The credit cruncher dot com has already nailed it's colours to the mast when it comes to property prices - industry predictions have been conservative, but the drop over the next year or so could be very significant when you study the steep rise in house prices over the last decade.
Whilst many may be 'enjoying' the savings afforded by the drop in interest rates, it is worth mentioning again that negative equity is going to be a reality for many, not just those that have bought property when the market was at peak, but also the many thousands of homeowners who have realised some of their equity capital when remortgaging.

Of course negative equity is not a huge problem in the short-term as long as you can afford your mortgage repayments, but a dropping market coupled with high unemployment, is bound to take it's toll.
In short, negative equity refers to the value of the property compared to the remainder of the mortgage. Where the remainder of the mortgage exceeds the market value of the property, the homeowner is in negative equity. If the homeowner fails then to repay the mortgage, they risk losing the property and having nothing to show for it - or even worse, losing the property and having a debt remaining.

It is currently estimated that four million UK homeowners are in negative equity, this is certain to rise over the coming months and years, but as long as you have the means to pay your mortgage and don't need to move, it should not present a problem. If negative equity is looming for you, you could consider overpaying your mortgage (easier if you are currently benefiting from low interest rates) as this will eat into your debt. The latest house price index from Nationwide indicates a drop in house prices of 17.6% in the last 12 months.

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Marx was right!!

Hard to believe that this was written one hundred and forty two years ago:

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized and the State will have to take the road which will eventually lead to Communism.

Karl Marx, Das Kapital 1867

Whilst I would not be overly eager to be associated with communism in any form, I recognise that we are currently pursuing a road which if left unchecked will take us straight to communism central... Whatever you may think about Marx, you have to admit that the above is a pretty astute summary of the current crisis.

Now the question remains, if Karl Marx had worked this out nearly 150 years ago, how did we end up in this mess. Assuming that someone in the UK labour party (a nominally socialist organisation) has read Marx at some point, either they didn't believe him, or they actually thought that this would be a good outcome..

(Thanks to Tim for the quote)

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Investigation into RBS launched

After announcing losses of more than £24bn for 2008, Sir Fred's 10 year reign at RBS is coming under close scrutiny. This will put more pressure on Sir Fred to give up part of his £700,000 pension.
The government have sworn to legislate if necessary to prevent him walking away with his bumper pension, and may well be looking for a way of digging up proof of some wrongdoings that would make him ineligible for the pension. They are reportedly going to be paying special attention to the sports sponsorship that they have been involved in and have instructed a major law firm to investigate the conduct of Sir Fred and his colleagues with a view to possible prosecution.

The probe will be extended to HBOS and Lloyds, but you can bet that RBS will be the investigation most eagerly and diligently pursued.

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Lloyds take the toxic plunge

Lloyds bank have decided to opt into the Government scheme to underwrite so called 'toxic investments' in return for a majority shareholding. This adds £260bn to the funds underwritten by the UK government, taking the total 'value' up to way over the £500bn mark. There is now serious speculation that Lloyds could join Northern Rock in becoming totally nationalised.
This moves gives stability to the bank, but the cost to the taxpayer is uncertain, the UK leads the way in supporting it's financial community, but the taxpayer could be paying out for years to come.
The principal of the deal is that Lloyds allows the government to increase it's stake in the bank from 43% to 65%. In return the government covers £260bn of debt that may turn out to be too high risk for the bank to handle. In effect, the UK taxpayer will take the risk on behalf of the bank.

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Interest rates down to 0.5%

The Bank of England cut it's base rate to 0.5% today, leaving just 0.5% to play with and personally I don't see that this is going to make a load of difference. True, my tracker mortgage is already below £100 per month, but I won't be spending the difference - I will be over-paying my mortgage as long as the rates are low.
The danger of spending this welcome bonus is that when interest rates rise again (as they must), it will be harder to do without the extra money. I have already set up a standing order to overpay the mortgage, all I have to do is ring up my bank to adjust it if the rates start to rise.
Banks are now threatening to start charging for current accounts, trust the banks to find a way to squeeze the little guy to pay for it's own errors of judgment...
Meanwhile the Treasury is embarking on it's 'quantitive easing' plan which is more plainly known as printing money, £75bn over three months to be precise. This is uncharted territory and could easily be a disaster. I can see exchange rates taking a knock and the stock exchange, both of these markets will be sensitive to what is a radical step by any standards. We await the outcome, but I am not at all convinced that these measures are going to miraculously kick-start the economy overnight.

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Treasury runs out of ideas....

It looks like the treasury is getting set to boost the money supply and finally cut the bank base rate to 0%. This is the last throw of the dice and a year ago these extreme measures would have been unthinkable.
I can't help feeling that this is all a knee-jerk reaction, and has all happened too quickly... There has certainly been no let-up in the decline of the economy with each new measure that has been introduced. Whilst I am happy that my tracker mortgage will become very manageable, I am not sure that there was any point dropping the base rate so quickly as it does not seem to have improved things, and no there are no moves left...
My fear is that boosting the money supply through printing money will be the only move left, and that has to impact on an already weak pound. I believe the government has under-estimated the public's resolve to curb their spending whatever measures come their way due to a complete lack of confidence in the economy.

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Full pension revealed at £703,000

The full extent of Sir Fred's pension has now been established and recorded as being a staggering £703,000 pa - The reason that he is 'entitled' to this money (in law) is that he was asked to stand down, rather than having his contract terminated.
If his contract had been terminated with 12 months notice, his pension would have been £416,000 pa, and may have only started in ten years time when he reaches retirement age of sixty. In effect, if this pension were payable until, for example aged 75 Goodwin would have received a total of (15x£416k) £6.25m over fifteen years. As it stands now, he could receive (25x£703k) £17.5m by the time he reaches the venerable old age of 75 - naturally the longer he continues to draw pension, the more this spirals...
The fact remains that failure by the government to step in to bail out the bank would have meant a mere £20,000 a year pension - which is still not bad for a fifty-year-old who has steadily guided a major financial house over the brink of self-destruction.
Sir Fred would do well to offer to hand back his rights to his current contracted pension, and offer to swap it for the £416k deal as if he had been sacked - this would surely take the wind out of the governments sails and make them look like they are seeking a scapegoat if they didn't accept? However the smell of £703 guaranteed for the next 10 years and beyond in retirement is possibly clouding his judgment (assuming he still has a degree of judgment). I would still be more than happy if he got the £20,000 but that's just sour grapes, in reality he could turn this around very quickly by standing down from his current position. He could earn some support if he decides to take on the government, but it looks like a fight he can only lose. In fact the worrying thing is that he, the treasury and the wider government could ALL come out of this very badly if he decides to take Gordon on...

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No benefits for Sir Fred

The Government are not going to allow Sir Fred to take his outrageous pension of £693,000 a year, vowing to take 'any measure' to prevent this happening.
Sir Fred Goodwin thrashed out his pension deal in October when bailouts were being worked out, and at 50, would be very nicely set up for early retirement having just led RBS to the very brink of collapse according to government ministers. In reality, Sir Fred is being held up as a bit of a scapegoat as he is cannot be held personally responsible for the credit crunch. However, allowing a former banking chief who's recent track record cannot by any results-oriented measure be called 'successful' to walk away with effectively millions upon millions of public money is not acceptable.
Beyond that, having no problem with walking away with all that money, and being able to see it as one's entitlement is the attitude that is going to make Sir Fred public enemy No.1 in no time at all. Last night Commons Leader Harriet Harman stated that even if the pension could be upheld in a court of law, it certainly would not be held up in the court of public opinion. Leading the way for ministers to confidently predict that come what may, Sir Fred would not be allowed to live out the rest of his life on a 'state' pension that would exceed the expectations of almost an entire government department never mind an individual... A special Act of Parliament would be formed and invoked as a last resort if legal recourse is not successful.

City bonuses have also been cited as causing a bonus culture in private and public operations throughout the UK. It has been revealed that many Council Leaders are receiving three times the renumeration that the Prime Minister gets for running the entire country... These will no doubt become the next targets of the fact cat bonus witch-hunt... Salaries and bonus packages in excess of £600,000 have been recorded, one council leader receiving a £600,000 package even after being kicked out of office!

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How long will this last?

What caused the global financial crisis? and...
When will it end?
Unsurprisingly, this is still one of the most prominent questions concerning the current economic crisis. The Credit Crunch has given way to the Global recession, and so it is the longevity of the recession that I will attempt to address, along with the other crucial question about it's causes.

Causes:
There are probably numerous directions in which we could point the finger of blame, but our propensity to spend without proper accountability both in micro and macro-economic terms, is I feel, at the root of the crisis.
There has been an over-growth of the worlds economies funded by debt, secured largely on property. If you take a look at the rise in the price of property over the last 10 years
(there's a graph of UK property prices here:)
The steep rise between 1995 and 2005 is blatantly unsustainable, but neither home-owners nor politicians really wanted to face up to it. This period heralded an unprecedented drive to convert this property capital into cash by re-mortgaging. This capital was then released into the economy as if it were revenue (which is was not!), by this I mean consumers spent it as if it were pocket money.
The result was bloated profits throughout the economy funded in the main by the over-inflated property market. Retail companies were taking these funds through their tills assuming that this level of retail was sustainable and therefore could be built on as a revenue-model for future growth. These profits were channeled into buying out companies and expanding, expanding, expanding until...BANG! the property market stalled and the bubble burst.
Suddenly all this expansion (built on a wing and a prayer so to speak) had over-exposed some big companies, in turn the banks were exposed (they funded the expansion) and the growth that was meant to continue, not only stopped, but has begun to go negative (recession = sustained shrinkage of GDP).
During this giddy growth period, the banks had indulged in some extremely suspect activity to amass 'assets' in the form of debt - in particular sub-prime mortgages which they bought with little thought of whether they had any real worth - these mortgages were only good whilst the market was growing (as the houses could be sold to recoup the debt). In a falling market, these 100% mortgages were losing value hand over fist, the banks' reserves were decimated leaving them calling in loans. Many of these loans were in the form of a normal operating overdraft for many of these expanding companies - removal of these operating funds left them looking for cash quickly. Exposed companies that had over-stretched themselves now had to sell off assets to pay the banks or risk going into administration.
A massive hole developed in the banks funds (I have lumped all banks together for ease of reference) and a lot of big companies fell into that hole, many of them having to sell out, make masses of redundancies and in many cases cease trading (even some of the banks got pulled into the same vacuum).

How long will it last?
A big, big question, which in truth, no-one knows the answer to - anyone who thinks they have an answer to this question is just guessing (me included), after all if this is deeper than recessions we are used to seeing, then we don't have a model against which to measure.
The crisis will continue until the world economies stabilise and can start to show some small amount of growth again - many commentators believe this will be at the end of 2010, beginning of 2011. Governments and trade associations have consistently underestimated the recession and have tried to 'talk it up':
The truth is somewhat more depressing, there will be a lot of knock-on effects until all the knock-ons are exhausted.
EG: If the motor trades collapse (they will certainly suffer), then the dealerships and garages suffer - the toolmakers suffer, the trade suppliers for plastic mouldings, air conditioning, upholstery, bulbs, sat-nav systems etc.. etc.. all suffer. Each local economy that is supported by large factories in any of these areas collapses taking all the local traders down (food outlets, clothing outlets, electronics retailers etc....) The down-turn in lots of individual areas takes down national retailers, big food chains, fast food outlets, media retail companies - the list is endless... When all these houses of cards have fallen, it will be up to the remaining industry to show an upturn, needless to say the deeper the recession the harder it will be to show any sort of upturn. If you can comprehend these facts then you should be able to see that this is not going to be resolved quickly.
In short: Two years - if we are not out of the woods in two years, we should at least have a good idea of when we will be on the road to recovery... we have never experience this type of recession (which may well end up being identified as a 'depression' in the fullness of time), in the advanced global financial markets that we have in place today - the market has changed out of all recognition since the last recession of this magnitude was upon us, therefore we wait and see...

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Survival through frugality...

Frugality is set to become a watchword over the coming months as more jobs are lost and belts are tightened. Recycling is already established as a growing concept, so combining the two makes perfect sense in the current economic crisis.
We are used to the idea of replacing our furniture nowadays almost as often as we change the bedsheets. Furniture companies flood the market with the latest trends, hoping that you will feel the need to get a newer, better sofa, but the quality of these 'fashion' items, like fashion clothing must be questioned.
Save Our Sofas aims to provide an alternative to purchasing low quality sofas, proving sound information on renovating your old sofa to give it a new lease of life. They provide information on buying new sofas, buying 'previously enjoyed' models and if the worst comes to the worst... how to effectively dispose of your old sofa.
These are the kind of concepts that will be embraced by those who are setting themselves up to survive the recession - buying a new low-quality item might give you satisfaction for a few weeks, but in the long-term, recycling represents money in the bank.