Shrimpsvoices

It's been officially confirmed that £6 million of the city council's cash (well our cash I suppose) was invested in KSL (Kaupting Singer Friedlander) as well as two other Icelandic banks, which are now bankrupt.

If it's not recovered, and Mark Cullinan, Chief Exec of Lancaster City Council, thinks we'll get it back (although how he's so certain seems a bit bizarre), it will gulf the Blobby losses, and could result in cuts in services and increased council tax.

The chief finance officer of Kent County Council said that £50 million (their potential losses and the biggest in the UK) out of a budget of £2.2 billion (or 2.27%) wasn't a lot (a crazy comment when talking about such a large amount of money).

Yet Lancaster's potential losses of £6 million compare with an annual budget of just £39 million in 2007/08 (or 15.38%).

Staggering.

http://www.lancaster.gov.uk/Documents/F ... 007-08.doc

there was somebody from one of the councils on the radio this morning (R4) saying that at the time the banks had the best credit rating, and were offering the best rates. surely the people managing the council finances have a duty to get the best returns?

personally i don't think it's fair to make this a political issue (at the local level!) as the problem was with the ratings agencies etc. which is still a political issue (ie lax regulation) but not at the local level.

People are just using it as a stick to beat councils with which is grossly unfair. They're purely victims of a global issue, just like everyone else who invested in Icelandic banks.

wonder shrimp wrote:there was somebody from one of the councils on the radio this morning (R4) saying that at the time the banks had the best credit rating, and were offering the best rates. surely the people managing the council finances have a duty to get the best returns?

personally i don't think it's fair to make this a political issue (at the local level!) as the problem was with the ratings agencies etc. which is still a political issue (ie lax regulation) but not at the local level.

I dont see any political statement in Posh's post. Just reporting on the situation.

granted there wasn't an explicit political statement, but i think comparing it with blobbygate certainly suggests a political spin and i think i'm right in thinking that posh often posts about local politics (might be wrong).

to be honest though i was really accusing him of making a political issue out of it, just that others are and i suppose at best i was getting a pre-emptive strike on this thread before it descends into cheap (and boring!) political point scoring.

I was wondering if it would effect us as I hadn't seen us named on the lists of councils I have read so far.

I was reading today that a childrens hospice had money in on of these accounts and they have just started work on building/extending the hospice and now don't have the money to pay the contractors and work has come to a stop.

P/T Indie wrote:I was wondering if it would effect us as I hadn't seen us named on the lists of councils I have read so far.

I was reading today that a childrens hospice had money in on of these accounts and they have just started work on building/extending the hospice and now don't have the money to pay the contractors and work has come to a stop.

It will affect us if the money isn't recoved! It's not on the medias list becasue it doesn't seem a massive ammount compared to some councils but because we are one of the smallest council authorities in the country, compared to our overall budget it's alot! it WILL mean either servce cuts or council tax rises.

I won't be the only one that finds this whole situation bizzare. we already pay more taxes than anywhere else in europe and now our tax money is being used to bail out banks who in turn will be able to lend the money back to us at a rate of interest and get mega bonuses to boot.

Central Government need to get these council deposits guarenteed so that the tax payers don't foot the bill. They also need to ensure that when the banking system re-stabilises that the bail out deals have been done in a way that means the governments investments come back multiplied and not just replenish the coffers but make the country some money back so we have a period of tax cuts. I can't see that happening though as its all to easy for Mr Brown to pander to the city fat cats and sell us taxpayers down the river just like he did when he sold half the gold reserves for next to nothing!

What my question is:-

Why have we got 15.38% of our annual budget tied up in foreign accounts - surely this is going to have a fantastic effect on our services not only over the coming months but surely for years to come

super-red wrote:What my question is:-

Why have we got 15.38% of our annual budget tied up in foreign accounts - surely this is going to have a fantastic effect on our services not only over the coming months but surely for years to come

The Finance controllers within councils are supplied with ratings for banks so they can calculate the risk factor when investing the money. This bank was rated very highly and deemed as a very low risk. Im guessing that they also provided a decent rate of interest too.
It just goes to show how volatile the situation with the financial sector is at the moment when banks that were very stable only months ago and in no way linked to the Sub-Prime mortgage market can find themselves with desperate cash flow problems.

From what I understand with bail out the Goverment should get all our monry back from the Banks but we will only get a small fee paid back like you say North Stand I would a nice big intrest rate on as that is wht the banks would do to us.

On the council front it wont just be us though it would be most of the country and we would all be in the same boat where as Blobby was just down to our council been daft. If people were to slag the council off for it then they are also having ago at the person that runs the charity previously mentioned.
Times like this the parties should work together instead of using it to gain an advantage on each other.

and its now time Gordon Brown showed us what he is made of and got us the money back. The finance side is meant to be his speciality so we shall see.

One major risk investing in overseas banks is you have to abide by their rules. Iceland chooses not to cover money invested from overseas, they've got every right to make that decision and we have to live with it. It should have been taken into accout when they were graded AAA.

North Stand Shrimp wrote:we already pay more taxes than anywhere else in europe

i don't want to get all 'factsy' but that simply isn't true.

according to this table we have the 14th heaviest tax burden in the OECD and it's mainly european countries above us.

as p/t indie mentions we should be getting all the bail out money back, and if we don't it will because things are completely knackered, in which case it won't matter anyway as there will be a war/revolution etc.

In hungry they pay about 60% of their wage in tax.

Although they do get certain perks like free child care and 3 years maternity leave!!!!

Iceland is bankrupt. The three banks that have gone under this week will have a huge knock on effect. It will be an amazing turn of events if the council get the money back, and if they do get it back, it's unlikely to be from Iceland.

North Stand Shrimp wrote:I won't be the only one that finds this whole situation bizzare. we already pay more taxes than anywhere else in europe and now our tax money is being used to bail out banks who in turn will be able to lend the money back to us at a rate of interest and get mega bonuses to boot.

The tax levels comment has already been corrected. I think that unless the government (or more to the point, governments world wide) try and prop up the banking industry, we are all screwed. Money itself is based upon confidence. If banks go under, confidence in the system collapses. No money lent out to businesses will see businesses fail or unable to expand. Pensions are worth nothing. People with life savings, who rely on the interest suddenly have nothing. If people lose confidence in banks, they don't want money. So what happens if everyone starts to save gold? Money is actually worth the paper its printed on... nowt. The government have no choice but to try and prop the system up but if they screw up and get it wrong, like the Icelandic government have, we're all buggered.

North Stand Shrimp wrote:Central Government need to get these council deposits guarenteed so that the tax payers don't foot the bill. They also need to ensure that when the banking system re-stabilises that the bail out deals have been done in a way that means the governments investments come back multiplied and not just replenish the coffers but make the country some money back so we have a period of tax cuts. I can't see that happening though as its all to easy for Mr Brown to pander to the city fat cats and sell us taxpayers down the river just like he did when he sold half the gold reserves for next to nothing!

In the case of KSF I think the UK government acted very quickly to minimise the damage (however, in doing so they really screwed up Kaupthing, Singer & Friedlander (IOM)) because (as I understand it, 'cause things are far from clear at the moment) the Icelandic government sucked the funds out of the IoM subsidiary back to Iceland as soon as the UK government froze the UK funds of Icelandic businesses, leaving nothing on the IoM. The bank had a AAA rating (the highest possible) and (again as I currently understand it) the Icelandic government were supposed to be under-righting the bank, so investors, from individuals to councils are likely to believe it was a 'safe bet'. Their interest rate though was high enough to set alarm bells ringing in some places. The charity I work for have a fund for supporting disabled people on the Isle of Man which had over £100,000 invested in Singer & Friedlander (IoM) until our finance manager decided that it was 'too risky' and moved the money from an account that returned 12% to one that paid about 5%. Back to the point, as I said, Iceland is effectively bankrupt. That's the entire country! So even though there appeared to be a government backing, it isn't worth it because the country can't afford the compensation. The Irish & Jersey governments have both said they will compensate 100% of money lost if their banks go under but neither can actually afford that promise.

The UK government has I believe, bought shares in the banks that they will be bought back when the banks recover and will hopefully be worth more than they are now. Of course, if the bank collapses, then the tax payer will have huge bills otherwise, it could be a good move.

Firstly, who pays 10.52% income tax?
Secondly, The fact that KSL had such a high rating and the fact that they offered such a large return should've made alarm bells ring (even in corporate baking "if it sounds too good to be true.....") but to put 15% of the council funds into an unknown quantity reeks of stupidity.
The comment about getting all the money back, I believe, is incorrect. the council should get a percentage back but I'm pretty certain that they'll not get it all. I think I'm right in that it's "normal folk" who are eligable to get it all back, in part from our Government and also from The Icelandic government. I'm certain that Mr Posh will correct me though!

wijit wrote:Firstly, who pays 10.52% income tax?

ooh, ooh! please sir... (although that .52% is a bit higher)...

wijit wrote:Secondly, The fact that KSL had such a high rating and the fact that they offered such a large return should've made alarm bells ring (even in corporate baking "if it sounds too good to be true.....")

as far as typos go, that's possibly appropriate...

wijit wrote:The comment about getting all the money back, I believe, is incorrect. the council should get a percentage back but I'm pretty certain that they'll not get it all. I think I'm right in that it's "normal folk" who are eligable to get it all back, in part from our Government and also from The Icelandic government. I'm certain that Mr Posh will correct me though!

Q: What's the capital of Iceland?






A: About £4.50

Neither 'normal investors' or councils will get money back from Iceland because Iceland hasn't got enough money to cover it's debts, something like a GDP of £8 billion and a banking debt of £80 billion (not 100% sure of those figures).

Simple. I saw it all coming 3 years ago when I was desperate to bail out of Cyprus. Thing is I'm just an arse-hole, but not a greedy one. That's what it's all about in'it - greed!
Market Forces, where are they at now?

Peter wrote:Simple. I saw it all coming 3 years ago when I was desperate to bail out of Cyprus. Thing is I'm just an arse-hole, but not a greedy one. That's what it's all about in'it - greed!
Market Forces, where are they at now?

A true market forces economist would argue that you leave the situation alone to sort itself out. The problem is that takes out lots of people's jobs, homes and pensions, but it is one theory. Banks were over valued, lending had been out of control, house prices at crazy levels.

The thing is Peter, I also saw this coming from about three or four years ago. A friend of mine & I have been discussing this for that long. It's part of why I bought property off shore rather than sticking loads of money into a pension scheme to try and catch up. We closely read the news and watched the markets. And neither of us are in the slightest bit surprised by this situation.

Which begs the question, if you, him & I could see this coming three years ago, how come the politicians and bankers couldn't see it? Or could they see it but have other reasons for not doing anything about it?

Oil US$140 a barrel a few months back, US$80 today. Petrol prices went up rapidly but haven't come down much. Record profits for oil companies again next year?

How did you people see it coming? What were the signs? I can understand why councils invested in Icelandic banks because they were advised to split their finances between different investments both here and abroad. They would be looking to get the highest return for their money with the least risk, thereby hopefully keeping council tax increases down. What signs would they look for to know to get out before the collapse? What can they learn from this to avoid anything similar in the future?

When I worked in the finance industry 20 years ago we never would have dreamed of situations like we have today. Banks collapsing were something out of tales of the old west.

well the 'if something sounds too good to be true it probably is' for starters. As I mentioned elsewhere, our finance manager said that she wasn't happy with having £100,000 of the charity money in an account that was paying 15% return. How is that a sustainable business model unless they are making loans at 18%? So there were 'clues'. She followed those clues and moved it to a lower risk bank... thankfully!

Although I wasn't specifically talking about identifying banks that would go under, it was more that once the sub-prime toppled, the knock on effects would be global. You can actually trace this back to legislation passed by Bill Clinton that encouraged the lending of money to people who couldn't afford it, to increase home ownership in the US. House prices here were massively over inflated. Once you reach a point when first time buyers are taking out loans over a lifetime just to get a foot-hold, it was all going to go horribly wrong. Expect huge numbers of repossessions again over the next four years as those first time buyers who pulled out all the stops to get that first property, move into massive negative equity. It's okay if you can ride it out for the next five to seven years, but what happens to the first time buyers who have a £220,000 mortgage on a property that is going to be worth £150,000 if they get divorced? Would you sell up at say 25 years old, divorce, then walk away with £35,000 debt each (plus credit cards, bank loans, etc) or would you just throw your hands up and let the bank sort it?

Scary times for the next seven years.

The Port Macquarrie council on the Mid North Coast of NSW got sacked for incompetence.

Just thought I'd mention it.

Keith wrote:The thing is Peter, I also saw this coming from about three or four years ago. A friend of mine & I have been discussing this for that long. It's part of why I bought property off shore rather than sticking loads of money into a pension scheme to try and catch up. We closely read the news and watched the markets. And neither of us are in the slightest bit surprised by this situation.

With all that regular unpredicatable weather isn't buying in the Dominican Republic a bit of a high risk? Out of interest do you get your Title Deeds on completion over there?

Keith wrote:Which begs the question, if you, him & I could see this coming three years ago, how come the politicians and bankers couldn't see it? Or could they see it but have other reasons for not doing anything about it?

No need to answer those questions is there!

Peter wrote:With all that regular unpredicatable weather isn't buying in the Dominican Republic a bit of a high risk?

The north coast very rarely gets hit by hurricanes so they shouldn't be a problem. As for global warming and raising sea levels, I'm confused as to where all the extra water is going to come from to cause this to happen? Isn't the ice shelf floating? If so, then Archimede's Principle suggests that the whole lot could melt and the sea level won't rise... unless I'm missing something? (I did wonder if the planet spinning may result in the water level rising more around the equator?)

Peter wrote:Out of interest do you get your Title Deeds on completion over there?

Yes, once everything is completed and sold, a government official comes and checks it all and the government collects a tax for doing so, then the individuals get their title deeds. Hopefully we'll get ours in January at the condo owners meeting. Nothing happens quickly out there! www.royalresidence.org for anyone wondering what we're talking about! Cheap deals for anyone who reads shrimpsvoices! £400 for two weeks, sleeping up to six, that's less than £70 each for two weeks... even students could afford it! Flights from about £350 to £450 return including taxes, perfect for that winter get away!

Keith wrote:Which begs the question, if you, him & I could see this coming three years ago, how come the politicians and bankers couldn't see it? Or could they see it but have other reasons for not doing anything about it?

No need to answer those questions is there![/quote]

For once our mutual cynicism comes in line!

I was originally going to reply with a fairly tame answer but a couple of comments and a bit of reading over the weekend has changed my mind.

Firstly to respond to a couple of comments.

wonder shrimp wrote:i don't think it's fair to make this a political issue (at the local level!)

I think that shows a bit of ignorance on your part. Firstly I made no political points. The Blobby comment was purely to put the scale of loss into context. Investment decisions by local authorities are made by employees and are very rarely overseen by elected politicians. Finally on this point Lancaster City Council is currently being run as a coalition by all five parties - so hardly easy to make a political point even if one was to be made.

marky wrote:People are just using it as a stick to beat councils with which is grossly unfair. They're purely victims of a global issue, just like everyone else who invested in Icelandic banks.

Originally I agreed with you that Lancaster City Council was a blameless victim. However with time I've come to disagree. We're not talking about a small sum of money. Surely the person responsible for investment decisions must be accountable or at least be able to justify passing the blame to another person or institution.

The excuses I'm sure we'll see in next week's papers will go along the following lines.

1. 'Hey we're just one of 100 local authorities to get done. Surely it can't be our fault if loads of other authorities made the same investment decision?'

This of course is bollocks. Just because lots of other organisations made an incredibly poor decision doesn't forgive you making a similar one.

Councils such as Brighton & Hove have minutes showing they looked at the ridiculously high interest rates on offer and went along the lines if ‘if it looks too good to be true then surely it is’. Similarly every one of the UK’s 10 largest charities did not invest in Icelandic banks because alarm bells had sounded and made the informed decision not to invest in banks there because of the systemic risk in the Icelandic economy. Iceland has been in economic meltdown for nearly 12 months.

It is a contemptible excuse from people looking after millions of our money.

2.

north stand shrimp wrote: The Finance controllers within councils are supplied with ratings for banks so they can calculate the risk factor when investing the money. This bank was rated very highly and deemed as a very low risk.

This is being widely used by local authorities as their ultimate excuse to get off the hook – blame the credit rating agencies.

Firstly to clarify the point above, the Icelandic banks didn’t have very high ratings. AAA is the highest and in my time working in the City only two ever achieved it – Rabobank and Deutsche Bank. The Icelandic banks weren’t junk status but they were only A+ and AA-, sounds good but not quite.

Additionally even a quick look at credit ratings agencies there are really only three - Moody, Standard & Poors and Fitch – shows that these companies whose sole job is to rate the creditworthiness of companies and financial institutions have failed whenever the pressure is on.

Below is a few points I raised with a journalist last week as I believe the credit ratings agencies need to be completely reformed or be an agency of government or the World Bank.

Corporate market

The rating agencies seem to constantly dip under the radar when trouble arises and don't get censured because there are bigger fish to fry. In the case of Enron the agencies knew there were problems (obviously not the full scale due to the illegality) but did little to warn investors http://query.nytimes.com/gst/fullpage.h ... A9649C8B63.

The impact of a downgrade for corporates could be so substantial that corporations investor relations departments have been accused of putting adverse pressure on ratings agencies. It could be said that the agencies are far too close to the corporations and banks themselves to be able to operate independently.

Asset-backed market

Ultimately the whole issue with the credit crunch comes back to the risk-spreading from sub-prime mortgages in the US. When a bank securitised a package of mortgages as a CDO the rating agencies just slapped a AAA-rating on it which ensured investors viewed them as safe securities to invest in. They never seemed to go back and look at the underlying collateral and when whether in the event of large-scale mortgage default whether the bonds themselves would stand up. http://www.nytimes.com/2007/11/02/busin ... ref=slogin. http://www.ft.com/cms/s/0/fac2a61a-51d9 ... fd2ac.html

Oligopoly

It is almost impossible to enter the ratings market. As a result the three firms operate as an oligopoly (Moody's profit margins are very high at +50%). It also means they're comfortable, insistutionalised and free from pressure. http://timidscholar.wordpress.com/2008/ ... -agencies/. https://www.donfishback.com/blog/2008/0 ... s-trading/.

On-going failures

There has been a lot of criticism of the ratings agencies http://www.guardian.co.uk/business/2008 ... editcrunch http://www.efinancialnews.com/usedition ... 2450501649 plus investigations yet the issue doesn't seem to go away - perhaps they haven't learnt. The issue with the Icelandic banks opens the ratings agencies to yet more criticism.

Yet what else have we got? Investors need some sort of independent monitoring of creditworthiness - including sovereign debt. If institutional investors, sovereign wealth funds etc. don't trust the ratings agencies then who else have they got to trust? If we're unblock the frozen money / debt markets then nervous investors need support and re-assurance the markets need the ratings agencies but surely not as they currently operate.

Basically Lancaster City Council could have done what I’ve done and looked at the issue.

Either heads should roll or those responsible and their bosses should be forced to go in front of democratically elected politicians and be asked to justify their actions.

At the moment losing £6 million seems to be something that is no one’s fault and almost like we should be feeling sorry for the poor council officials put into this position. Yet, in my view, this situation was entirely avoidable albeit in extraordinary times.

Keith wrote:In the case of KSF I think the UK government acted very quickly to minimise the damage...

http://www.iomtoday.co.im/latest-nation ... 4583638.jp

Some good news for the councils and individuals who invested in KSF as a result of that quick move. Still leaves Iceland screwed. As you can imagine, lots of clenched buttocks over here where the economy is so dependent upon the banking industry still being here after the current problems are resolved!