Bank of England "gives" banks £50 billion.

Yesterday the Bank of England announced it would give UK banks £50 billion in exchange for mortgage backed securities.

It was a move designed to put more money into the financial markets.

However it is somewhat of a u-turn for the Bank of England & its governor Mervyn King who denied it would not do anything liek this a few moths ago. The bank has basically bought assets that nobody else wanted on the financial markets.

It should be noted that the big 5 banks made profits of £30 billion in the last year despite making some rather large mistakes.

Bank of England lowers Interest Rates

The Bank of England yesterday lowered interest rates to 5%.

Will this mean lower mortgage interest rates?

Hmmm...it depends

1 Lenders had priced in the likely decrease into new tracker/discounted mortgages. it's like when supermarkets put up drink prices in November to claim a massive drop just before Christmas
2 Some organisations are not passing on the full 0.25% drop, with Nationwide you may only get a 0.12% drop.
3 Other banks are "reviewing rates within the next 2 weeks"

100% Mortgages Withdrawn

Abbey became the final large lender to withdraw 100% mortgages this week.

Prior to the credit crunch, borrowers were able to borrow up to 125% of the property value. Like other riskier types of borrowings such as sub-prime mortgages, product providers have removed these loans from their books.

it will casuse probelems for 2 types of lenders

1 First time buyers who don't have a deposit.
2 Buyers who took out 100% mortgages in the good times and now won't be able to get a new remortgage deal especially those on interst only mortgages. Their mortgages are likely to increase considerably.

What happened at Bear Stearns?

Bear Stearns was the 5th largest US Investment Bank. It encountered difficulties and had to be bailed out by the US Federal reserve the equivalent to the Bank of England) and is the subject of merger at a ridiculously cheap price by rival JP Morgan.

How did all this occur?

The company had exposure to bad (sub-rime) mortgages in America. The mortgages were sold on using quite complicated financial products. Rumours began circulating that it also had problems with its prime (normal) mortgage investments.

With the rumours & a lack of action to deny them, investors began withdrawing money from Bear Stearns giving it sever cash flow problems and a spiralling crisis.

What is an Investment Bank?

Investment Banks have been widely discussed recently. Bear Stearns is one, as is Lehman Brothers. It begs the question, "what is an investment bank?"

Investment Banks don't offer services to normal retail customers like you or me nor do they have branches on the high street.

Basically they operate in 2 ways,

1. Helping companies and governments raise money by issuing and selling shares in the organisation or debt such as corporate bonds.
2. They also provide advice on mergers between companies & acquisitions

What are Sovereign Wealth Funds?

There are lots of stories circulating about Sovereign Wealth Funds. So what are they?

They are government funds from counties like the oil rich Arab countries & emerging markets like Singapore & China. The Chinese one is worth $1.46 trillion! ($1 460,000,000,000 ) The money is generated by the export of natural resources such as oil and gas in the case of the Gulf States and Russia and manufactured goods in the case of China. The Sovereign Wealth funds are buying assets to safeguard the financial future of their home countries these might include shares in large companies, government stocks or commercial property. One example in the news recently is Dubai International Capital owns budget hotel chain Travel Lodge and has been interested in acquiring Liverpool Football Club.

The funds have become increasingly important in Western financial markets, bailing out US banks hit by the credit crunch. British Banks such as Royal Bank of Scotland & Barclays have seen investment from Qatar and Singapore respectively.

An interesting issue is that will the funds demand a greater say in the running of companies perhaps based on political reason? Some of the US banks bailed out by Arab money have issued special share classes to accommodate the new money without the usual voting rights.

Revenue buys stolen information about tax haven

It has come to light, that the tax authorities (HMRC) have paid £100 000 for information about bank accounts in Liechtenstein. They aim to potentially get back £100 million in tax avoidance from UK residents who have stashed money there to avoid UK tax. They bought the disk with stolen data from a disgruntled former employee of the Liechtenstein Global Trust (LGT).

The German tax authorities previously had paid 5 million Euros for information about German tax payers. Tax inspectors there are going through the finances of 900 people based on the information they received.

Lichtenstein is a major financial centre with 75 000 registered companies but only 35 000 residents. The LGT offers “wealth management to individuals and companies with the promise of absolute confidentiality.”

HMRC have the power to pay informants for information and have been investigating offshore investment in tax havens like the Isle of Man & the Channel Islands. Whether the payments for the stolen data is legal will be a big question. Finally as Mickey Clarke of the Evening Standard noted, “hopefully they won’t lose the valuable disc!”

Spot the Dogs: Poor Investment Funds

Every year Bestinvest name & shame the worst performing (dog) investment funds ; those underperforming the benchmark in each of the last three years and down on the benchmark by 10% over the same period.

Scottish Widows were quoted as ‘gone to the dogs’, with over half the group’s funds underperforming.

The worst culprits in different categories were

• UK – £13m Marlborough UK Equity Growth, down 37%
• European – £355m Melchior European Opportunities, down 37%
• International – £60m UBS Global Optimal, down 14%
• North America – £9m Invesco Perpetual US Aggressive, down 27%
• Tech – £37m Jupiter Global Technology, down 11%
• Japan – £66m M&G Japan Smaller Companies, down 28%
• Emerging Markets – £59m Lloyd George Emerging Markets, down 19%
• Asia Pacific – £232m Invesco Perpetual Hong Kong & China, down 25%

Invesco Perpetual have star manager Neil Woodford but as you can see are home to 2 dogs.

Share picking, potentially dangerous for your wealth.

One area the Sunday newspapers love is share picking, it is also beloved of sites like the Motley Fool.

The problems include:

• Newspaper journalists are not investment professionals. There is no comeback on their “advice”
• They don’t consider attitude to risk or things like the need for emergency funds.
• Do you have the investment knowledge? Is the share a cheap because they company is a basket case or merely unfashionable? Can you predict Northern Rock style crises?

The solution

Invest in a good mutual fund, you eliminate a lot of the risk. A professional manager looks after your money and can taken action on your behalf in the event of a Northern Rock style crisis or take advantage of low market prices

Which ones? Speak to your financial adviser, discuss your needs, risk and how much you can realistically invest.