Taxpayer to make £5bn profit from protecting RBS loans
Asset protection scheme likely to make £5bn in less than three years,
according to new projections
Jill Treanor - The Observer
The taxpayer could make a £5bn profit on the asset protection scheme in as little as two and half years, according to draft projections being drawn up by the managers of the scheme.
Set up at the end of last year to oversee the £282bn of troubled Royal Bank of Scotland loans being insured by the taxpayer, the Asset Protection Agency is thought to be confident that it will generate a profit for the taxpayer.
Until now, ministers have only forecast that the taxpayer will not lose out from the complex insurance being provided to RBS, which has admitted it would not be able to continue operating without the scheme. In December, the Treasury said: "The direct cost to the taxpayer from the APS is expected to be nil."
The APA would be able to produce a £5bn profit on the basis of two factors. The first is the £2.5bn of fees being paid by Lloyds Banking Group as a result of its decision to withdraw from the scheme, which provided implicit backing for the bank's bad debts through most of 2009.
The second is the £2.5bn of fees that the APA expects to be paid by RBS before it withdraws from the APS, possibly in two and a half years' time.
RBS has to pay £700m in fees each year for the first three years and £500m a year afterwards to pay for the insurance for its most problematic assets.
Under the terms of the APS, RBS will absorb the first £60bn of losses, similar to the "excess" in a standard insurance policy. Losses will then be shared by RBS and the government, with the taxpayer taking 90% of the losses.
The APA, led by chief executive Stephan Wilcke, is tasked with ensuring the APS operates so that the assets it insures can achieve their maximum value for the taxpayer. The majority are from overseas companies and individuals. Only £114bn of the £282bn of assets covered by the scheme are exposed to UK individuals and companies, with £75bn exposed to other EU countries, £43bn to the US and £48bn to other countries, including Australia and Japan.
Of the assets insured, some £80bn are traditional loans, £55bn are consumer finance loans and there is a further £39bn each of derivatives and commercial property. Residential mortgages comprise £15bn of the total, with the remainder in leveraged finance, structured finance, bonds and lease and project finance.
The APA has been handed powers by the Treasury to ensure RBS complies with its rules to reach maximum value for the taxpayer. The body can intervene directly by appointing "step in" managers to handle the loans or stop the sale of those in default if it deems the prices are too low.
Documents released last year when RBS agreed to the terms of the APS after a year of tough negotiations, show the APA must publish an annual business plan in the coming weeks, although no publication date has yet been set.
The APA refused to comment while the Treasury said: "We have designed the asset protection scheme – along with our interventions – to position the taxpayer for profit."
In return for the insurance, the government has demanded a veto over the size of the bonus pool at RBS, which is due to publish its results later this month. RBS has also been forced to make commitments to lend to households and businesses to meet the aims of the scheme which was to ensure banks had enough spare capital to lend out.
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Spanish PM's crisis talks to bolster economy
Margareta Pagano - Independent
Investors are on stand-by for another rocky day when world stock markets open tomorrow after last week's sharp falls in bonds and shares. There are fears that the eurozone could be split by the growing financial crisis in Spain and Greece, pushing Europe back into recession.
Spain's Prime Minister, Jose Luis Zapatero, was working around the clock this weekend to put together an emergency package of labour reforms announced on Friday to help revive the ailing economy and soaring unemployment rate, but also to win back credibility among international investors.
Shares on Spain's bourse fell sharply last week with some of the country's biggest banks, such as Santander which owns Abbey, Bradford and Bingley and Alliance and Leicester, suffering big falls as investors worried about their exposure to the construction sector.
Unemployment in Spain hit four million last week, some 20 per cent of those available for work. In a last ditch attempt to restore confidence, Mr Zapatero is working with trade union leaders and business bosses to temporarily reduce working hours to preserve jobs; introduce ways of improving employment among the young and other measures to help reduce its benefits bill which is set to reach €30bn this year.
Worries that Spain would soon join Greece on Europe's sick list prompted the international sell-off which saw the Dow Jones crash below the 10,000 mark at one point last week. By Friday's close, the US and UK markets had recovered some of the losses although the FTSE 100 was still off £30bn.
One trader said: "Investors want the politicians – in all the weak eurozone countries – to reassure them that they are getting to grips with their deficits."
Tories in talks with National Express over rail franchises
Transport group likely to be allowed to bid for contracts in two years' time
Dan Milmo - The Observer
The Conservative party has signalled that it will let National Express re-enter the rail franchise market in two years' time after a period of purdah in the wake of the £1.4bn east coast debacle.
The Labour government has vowed to banish the group from the rail market after it relinquished the contract to run trains on the London-to-Edinburgh route. However, with the Tories favourites to win a general election that must be held by 3 June at the latest, it appears that National Express has wasted no time in attempting to rebuild bridges.
The group's chairman, John Devaney, is believed to have met members of the Conservative transport team to discuss the rail franchising market. A Tory spokesman indicated that National Express had been given qualified encouragement to begin restoring its battered reputation in a few years.
The spokesman said the bus and coach giant would have to sit out the next round of franchise awards but would be allowed to bid for the batch of contracts that became available in 2012 and 2013, including the west coast, Scotrail, northern and trans-Pennine deals.
"The east coast debacle certainly doesn't make it easy for National Express to make a rapid return to the franchise market at the next round. They will need to work hard to rebuild their credibility," said the spokesman.
He added: "That said, the Conservatives certainly don't have any dogmatic determination to keep them out of the industry. As with any other operator, we would view their franchise bids objectively, taking on board both the merits of their proposals and their record as a transport operator."
The comments mean National Express is effectively barred from rebidding for the three franchises it lost over the past year: east coast, East Anglia and c2c.
It has expressed an interest in rebidding for the East Anglia and c2c contracts, which expire next year. However, industry sources said the group would almost certainly be thrown out of the race in the early vetting process.
A National Express spokeswoman said: "It is encouraging to see that the Conservatives would take an objective approach to any future franchising bids."
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Miners optimistic about Chinese iron ore price talks
Greg Walton - The Independent
Mining giants BHP Billiton and Rio Tinto will update the markets on their financial performance this week against the backdrop of difficult talks with China over iron ore pricing.
Analysts are cautiously optimistic that the setting of iron prices will come at an opportune time for the two as a result of high global demand. BHP and Rio recently announced plans to merge iron ore operations in Australia which is also expected to increase profit margins.
However, analysts remain concerned about the response of the European regulator to the deal after the west Australian authorities imposed an extra annual levy of A$300m (£166.6m) on the pair.
Rio's recent appointment of a Mandarin speaker to the company's top job in China is expected to ease negotiations with the Chinese authorities.
This year's negotiations are taking place in neutral Singapore after last year's disastrous discussions which resulted in the arrest of four Rio negotiators on corporate espionage charges.
BHP is expected by analysts to announce weak unadjusted earnings of US$7.9bn for the last six months of 2009, down from $13.9bn for the half year to the end of 2008. By contrast, analysts expect Rio to post unadjusted earnings of $7.3bn for the six months to the end of 2009, compared to $6.1bn for the first half of the year.
Insurers 'paying too much commission to win pensions business'
Independent expert warns that bidding war to win corporate contracts from commission-based intermediaries will make much of the business won unprofitable
Phillip Inman - The Observer
Major insurers are spending millions of pounds of cash reserves to win a larger share of the corporate pensions market, despite evidence that much of the business will prove to be loss-making, according to a leading insurance-market expert.
Independent analyst Ned Cazalet warned yesterday that several major firms were locked in a costly race to sell group personal pension plans to employers by offering big commissions to the advisers handling the transaction, ahead of rules banning such commission-based sales. He warned that such huge commissions would undermine the insurers' ability to make a profit.
His view was backed by analysts Bernstein, which said last week that the UK insurance market was "harmed" by its relience on "expensive and disruptive" financial advisers to sell their products.
Some rebel insurers that have already pulled out of paying commissions to advisers say their rivals are using commission payments to gain an advantage. They say investors should be concerned that these insurers are registering big sales increases at the expense of future profits.
Cazalet said a report written by his consultancy three years ago warning of problems in the insurance industry was being ignored by firms including Aegon, Scottish Equitable and Aviva, the UK's second largest insurer. He said the report concluded that some insurers were paying commissions for group personal pension (GPP) plans that would require customers to keep up payments for at least 15 years for the plan to be profitable. However, the average GPP plan lasts only four years before being re-sold by a commission-based adviser to a rival provider.
The main City regulator, the Financial Services Authority, plans to ban commission-based sales for group personal pensions in 2012. It argued in a strongly worded consultation paper that the "current commission-based market model is not sustainable. Those product providers offering initial commissions are subsidising these payments from their own funds, and, if scheme and member persistency levels continue to be poor, will not achieve economic returns on their GPP business."
A spokesman for the FSA said the regulator was unaware of any insurers increasing commission rates to outbid rivals or adopting aggressive tactics ahead of the ban. He said officials would be extremely concerned if it became aware of firms deploying large amounts of capital to pay upfront commissions.
The FSA wants financial firms to retain large capital buffers to defend themselves against another credit squeeze. EU rules demanding higher capital levels are also expected over the next couple of years as part of the new "Solvency II" regime covering the European insurance industry.
Cazalet said the main concern was that investors were presented with a distorted picture of financial health by insurers that paid commission.
He said the commission system encouraged advisers to churn policies to rivals as a way of earning higher incomes.
Standard Life, Friends Provident and Scottish Life, the pensions arm of mutual insurer Royal London, have over recent years all ceased paying commission to win new business from employers.
But Aviva chief executive Andrew Moss defended his firm's position. He said Aviva was more efficiently run than rivals and able to make profits even when the costs of commissions were included in the overall bill.
A spokeswoman for Aegon said: "We are comfortable with our position. We look at each bid on an individual basis and price accordingly."
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Bonus storm as losses hit £7bn at Royal Bank of Scotland
Iain Dey - Sunday Times
Royal Bank of Scotland is about to announce losses of more than £7 billion for 2009 but will still hand out enormous bonuses to its investment bankers.
State-controlled RBS is in the final throes of negotiations with the Treasury over its bonus scheme. The talks are expected to conclude within 10 days, ahead of the publication of the bank’s full-year results.
The Treasury is expected to approve a total bonus pool of about £1.3 billion despite the expected losses. The move will spark a fresh furore over payments at banks that were bailed out by the taxpayer.
RBS is 84%-owned by the state thanks to huge injections of government funds. It is also being supported by a government-backed insurance scheme, which has helped to restore market confidence in the bank.
Analysts think RBS’s losses will total £7 billion after a £14 billion hit on bad debts. Huge losses have been suffered on loans to businesses, on property deals and on complex derivatives. Once exceptional items are taken into account, these should be cut to £5 billion.
The only part of the bank expected to do well is its controversial investment-banking arm, which is on track to make billions of pounds in profits.
The profits are one of the key factors that will allow the bank eventually to be returned to the private sector, say analysts.
The return of bonuses across the City in recent months — Goldman Sachs, the American investment bank, handed its chief executive Lloyd Blankfein $9m (£5.8m) on Friday — has heaped pressure on RBS to make big payouts to its investment bankers to stop them being poached by rivals.
RBS has lost more than 1,000 of its top performers to rivals in the past year. It has also sacked hundreds more associated with the worst of the record losses of £28 billion the bank racked up in 2008.
Stephen Hester, chief executive, has said he will pay investment bankers “the minimum we can get away with”. Hester’s own pay package is under review by shareholders trying to tighten incentive targets that could have seen him earn up to £10m over five years.
A number of banks, including Barclays Capital, UBS and Morgan Stanley, have raised salaries by as much as 100% for some staff in exchange for reduced bonuses.
Hester has told UKFI, the body that handles the government’s investment in banks, it should stop comparing the level of bonuses RBS pays out with rivals. He wants it to compare total pay levels instead.
RBS is expected to pay about 30% of its investment-banking revenues to staff, compared with 36% at Goldman Sachs and 50% at many other banks.
Consevative party to torpedo Tesco growth plans
Jenny Davey - Sunday Times
Tesco is facing a double blow from proposals by the Conservative party to shake up the planning system.
A leaked Tory document revealed that the party will support a competition test for planning proposals, which will make it easier for Tesco’s rivals to open where it is already dominant and harder for Tesco to expand.
If they win the general election, the Tories will also look at reintroducing a needs test to force developers to prove there is demand for any new project. This was scrapped by the Labour government at the end of last year.
Tesco, which has 2,362 UK stores, has campaigned fiercely against a competition test and hoped the Tories would scrap the idea, recommended by the Competition Commission and accepted by Labour.
The Conservatives said their proposals, contained in a green paper due to be published this month, would put a brake on out-of-town development and protect town centres.
They also plan to scrap national building targets for new homes and hand decisions to councils and local residents, which has raised fears that housing development will be stifled by “nimby” councillors.
The Conservatives said the proposal would speed up development and streamline the planning system.
The green paper says that developers will have a strong incentive to design buildings in a way that does not adversely affect neighbours or to “reach voluntary agreements that recompense neighbours for any loss of amenity in return for their support”. Critics have warned of serious potential for corruption.
Liz Peace, chief executive of the British Property Federation, said: “With the housing market now at the start of the cycle, we must avoid any delay in getting Britain building again. The key to making any new proposals work will be an ongoing, direct conversation with the industry to ensure that what looks good to voters is truly workable in practice.”
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G7 warms to idea of bank levy
Anna Fifield - Financial Times
Finance ministers from the world's most advanced nations have begun to coalesce around the idea of imposing levies on banks to help insure the global economy against future financial crises, officials said on Saturday at the end of a Group of Seven meeting in northern Canada.
The G7 ministers will seek support for such a levy, which could take the form of a transaction tax or a fee on deposits held, among the members of the broader G20 before they meet later this year.
But progress remained elusive after the two-day meeting in the town of Iqaluit, just south of the Arctic circle, which was billed as an informal gathering and did not result in a final communique.
Timothy Geithner, the US Treasury secretary, and Alistair Darling, his UK counterpart, were among those who voiced support for a forward-looking levy on banks considered “too big to fail”, the officials said on Saturday.
“We discussed in the longer term whether or not it would be appropriate to have a levy on the banking industry to reflect the costs that have been imposed as a result of what has happened. It's early days but...we agreed to work together on this,” Mr Darling told reporters after the meeting.
“We were very clear that we needed to continue to work together on this [regulatory reform]. Of course different countries have different systems. But... the one thing that really came up again and again was that all of these problems require global solutions,” he said.
Mr Geithner earlier said that all the G7 ministers had agreed to work towards implementing a new set of capital requirements for large global institutions by the end of this year.
“The United States is very committed to making sure we again put in place a strong multilateral level playing field across these global institutions and across these global markets,” Mr Geithner told a press conference after the meeting.
“We're going to design this framework with great care and... we're going to do so in ways that don't undermine prospects for recovery," he said.
The Obama administration has already proposed a backwards-looking levy of 0.15 per cent on any bank balance sheet of more than $50bn (€36bn, £31bn), aimed at recouping $90bn used to bail out banks on the brink of collapse during the recent financial crisis.
Some countries have suggested such a fee should be levied not just once, but on all systemically important banks as a matter of course.
Officials said that G7 ministers, notably Mr Geithner, had come around to the idea, which would need to be applied on a global basis in order to be effective, so that banks could not go and set up “in some tax haven in the Caribbean,” one delegate said.
However, such a complex system, even if agreed, would take some time to institute. “We can not take our eye off the ball, off the things that we need to fix in the next year or so,” he said.
As banks that were bailed out during the financial crisis return to profit and start paying out eye-popping bonuses, regulators in Europe and the US are considering measures for stopping them from taking excessive risks of the kind that led to the crisis.
But the countries seem to be diverging from the pledge made at the G20 summit in Pittsburgh last summer, when they promised to co-ordinate regulation along the lines of agreed international rules of capital, liquidity, accounting standards and pay.
Some analysts have called the differences of opinion “irksome” and have warned that banks could take advantage of different rules by moving their headquarters to the least restrictive regulatory environment.
In addition to the bail-out levy, the US is considering forcing “too big to fail” banks to separate their commercial and investment banking arms, and imposing what has become known as “the Volcker rule” because it was proposed by the former Federal Reserve chairman Paul Volcker, that would ban banks from proprietary trading.
In the UK, Mr Darling has imposed a one-time 50 per cent tax on bankers' bonuses and has suggested creating “living wills” that would enable banks to be easily dismantled in the event of another financial crisis.
Other ideas include the introduction of contingency capital planning, which would put bondholders at risk of conversion into equity if a bank’s capital strength falls below a pre-defined level, using so-called contingent convertible instruments, or CoCos.
Mr Geithner on Saturday played down the differences in approach.
“We all have somewhat different systems and these common standards we put in place are going to have to be complemented by slightly different approaches at a national level,” he said.
“What you saw today was not a divergence of approach but a strong commitment to work together to try to make sure we put in a place strong reforms that will prevent these kinds of problems from happening again.”
Separately, Jean-Claude Trichet, president of the European Central Bank, said he was confident that Greece had its budget deficit crisis under control.
"Let me reiterate the position of the ECB: the governing council approves of the medium-term goal that has been fixed by the Greek government to get the public deficit to less than 3 per cent of GDP in 2012," Mr Trichet told reporters on the sidelines of the G7 meeting.
"We expect and we are confident that the Greek government will take all the decisions that will permit it to reach that goal that I reiterated," he said.
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Worst is over for global economy but recovery weak: G7
Finance ministers from the world's top seven industrialised (G7) nations who wound up their two-day informal chats in the Canadian Arctic city of Iqaluit admitted Saturday that the recovery from the global recession is still weak.
Though there was no formal communiqué at the end of the 24-hour gathering, the finance ministers and central bank heads from the US, Canada, Italy, France, Britain, Germany and Japan said the worst was over for the global economy.
Expressing cautious optimism over the recovery, they said their governments would continue with stimulus spending to speed up the recovery process.
Canadian Finance Minister Jim Flaherty, who hosted the meeting, said there are signs that the worst is over for the global economy, but the recovery process is still not firmly established yet.
Reading a statement on behalf of the G7 finance ministers, Flaherty said, "The global economic situation has of course improved and is improving. We do not have firmly established recovery yet but there are good signs.
"We need to continue to deliver the stimulus to which we are mutually committed and begin to look ahead to exit strategies and move to a more sustainable fiscal track consistent with continued recovery."
They said their strategies to get out of the economic crisis were paying off and committed themselves to avoiding such crises in the future.
The meeting started Friday with a working dinner on the global economic crisis, followed by a fireside chat on the recovery process.
The finance ministers discussed financial sector reforms and efforts by G7 nations to address the underlying causes of the financial crisis. Later, they held a session on 'Framework for Strong, Sustainable and Balanced Growth,' endorsed by the G20 summit in Pittsburgh last year.
Before the start of the meeting, the host Canadian finance minister had said that "the G7 cannot play the role it once did, but it can and it must continue to lead by example in whatever role it will play in the future.
"The first responders to the recent crisis were G7 members....The group's role in preventing the next crisis must be just as determined, with benefits that go far beyond G7 members themselves. The G7 will continue to evolve in an ever-changing world, while contributing to a more stable and prosperous world for all.''
But the discussion of the global crisis without involving the emerging economies - China, India and Brazil - came in for criticism in the local media.
"At a time when countries such as China, India and Brazil factor in the effective running of the global economy just as much or more than the G7 nations, it made little sense to stake out new strategies or lecture governments that weren't present to defend themselves,'' said the Globe and Mail newspaper.
Canada chose its north-most city in the Arctic for informal chats because of its isolation. With a population of just over 6,000, this isolated city is the capital of Canada's Nunavat territory.
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Income Tax raids create panic in bureaucratic circles in Madhya Pradesh
Mahim Pratap Singh - The Hindu
The Income Tax department raids on the premises of top government and private officials in Madhya Pradesh and Chhattisgarh, that led to the suspension of an IAS couple on Friday, seems to have let the cat among the pigeons.
While there seems to be a general environment of panic and paranoia among the bureaucratic and business circles here, there have been reports of senior bureaucrats not answering their calls, according to unofficial sources.
This newspaper's office also received calls from a PR agency managing ICICI Prudential not to include the name of the insurance company in further reports. The departmental search continued even on Saturday. Residential premises of Seema Jaiswal, the Branch Manager of ICICI Prudential were also raided and irregularities were unearthed by the I-T department.
“Concealed income worth Rs.7 crore has been admitted by those involved in Bhopal and that of Rs.50 lakh has been admitted in Raipur,” Brajesh Gupta, Director General of investigations (IT) for Madhya Pradesh and Chhattisgarh told The Hindu.
On being asked whether the offenders could land up behind bars, he said: “that possibility cannot be ruled out but anything conclusive can be said only after assessment and since we are only investigating the fraud at the moment, I can't say more on the issue”.
Mr. Gupta also said that the IAS couple in question, Principal Secretaries Arvind Joshi and Tinu Joshi, had not admitted any concealed income although over Rs.3 crore in cash were recovered from their residence.
“Naturally, they have not admitted any concealed income. If they do, they will be put behind bars by the State government not only for tax evasion but also for corruption,” said Mr.Gupta.
Reports about lower officials of the I-T department being intimidated and threatened by those involved in the tax fraud were also doing the rounds here. Mr. Gupta, however, expressed ignorance about these, saying “not to my knowledge”.
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