Tuesday 27 October 2009

FSA Crackdown


In news this week the Financial Services Authority (FSA) announced planes to ban self-certification mortgages and mandatory affordability tests for all mortgages. It is a good sign that the UK financial regulator is doing something to manage risky credit in the mortgage market. But the question is: Is it the lender's responsibility or consumer responsibility? I think its a balance of both.

Key measures proposed by the FSA include:

  • Affordability tests for all mortgages
  • Bans on 'self-certification' mortgages- do not require verification of borrowers' income
  • Ban on sale of mortgages that contain “toxic combinations”- such as offering a high loan-to-value loan to a borrower with a poor credit history

The FSA should enforce the measures now instead of waiting. It would be in the best interests for banks to act responsibly and for borrowers to act rationally when it comes to affordability.

Statistics provided from the FSA, 45 percent of mortgages issued in 2007 made no checks on the applicants' income. It is very scary considering the amount of money that an applicant would be able to borrow (in some cases more than a 100 percent of the value of a home!) and overstate income. Can the consumer be blamed for overstating their income if it comes down to the home dream they want? There is nothing stopping them.

The Council of Mortgage Lenders (CML) says that mortgages will be more expensive and harder to obtain but the measures are likely to prevent the credit shortage we have now. There has to be a balance to allow credit to flow into the economy but at the same time prevent irresponsible lending practices that fuelled the credit crisis. It will also help to dampen rising housing prices and allow for first time buyers to enter the market.

Banks should be able to lend based on an individual's needs but in a way that they can expect the money to be eventually returned. This includes a reducing high-risk lending practices and tightening credit standards.

The four papers I read this week highlighted the differences in opinion on the responsibilities of consumers and lenders.

The Financial Times headline read “Mortgage borrowers face stricter tests”. The article was objective, factual and straight-forward to read. It reported opinions from the British Bankers Association (BBA), Building Societies Association (BSA) and the CML who would be directly affected by the changes. The BBA and the BSA supported the measures but with some caution and implied that they have acted in a similar manner already.

Bloomberg this week was a longer critical piece than the FT. It had additional quotes from the FSA CEO Hector Sants and mentioned the FSA plans for an extension of their powers. However, I thought that the Binham article was critical to the speed of the review since it was promised since March and the lack of momentum of mortgage approvals.

The Telegraph and The Daily Mail were very different stories but fun and easy to read. Once you read these articles you immediately know that the articles were written to support the home buyer. The Telegraph was more inclined to report the critics of the measures such as the CML and failed to report on the consumer's responsibilities in repaying their debts.

The Daily Mail was the most subjective of the articles which had a headline “Homebuyers forced to reveal how much they spend on alcohol in tough new mortgage tests”. This was an attention grabbing headline and surely got my attention! The Daily Mail wrote more about the affordability test. Not surprising, the Mail used different quotes from the BBA and BSA, focusing on the difficulty for would-be buyers.

As new measures are brought into the mortgage market it is important to consider the implications for lenders and borrowers. The articles I have read provide various opinions on the issue but are ultimately a good way to promote and encourage awareness for banks and consumers. To some extent there must be regulations in place to prevent the consumer from overstating incomes. Consumers must think rationally and know their 'true' limits on repaying loans. But to also be protected from overzealous banks who are willing to lend at a level that would be unaffordable. Banks must also act in a responsible and reasonable manner. Do their due diligence and maybe have some pessimism when it comes to loans being repaid.

Sunday 18 October 2009

U.S Pay Tsar makes a move


From Left: Kenneth Feinburg, Kenneth Lewis
Who would want to work for free? This year CEO Kenneth Lewis from the Bank of America is! It is the first time that Kenneth Feinberg the U.S “pay tsar” has interfered in compensation payments for bailed-out banks and took away an employee's entire pay. Lewis will receive no pay, bonus or any other payments for 2009. This is very good news for the shareholder who has seen the company produce a third quarter loss of $2.24 billion. A CEO's pay should be reflected on the performance of the company. Right? However, financial press this week were more sympathetic towards executives than I thought.

I lack sympathy for the executive who is to pay back $1 million to the company when he can still have a retirement package of a cool $125 million. There should be alternative ways to encourage talent than the traditional method of linking stock options and bonuses to share prices. It encourages risky behaviour and short-term profitability whereby executives fail to represent shareholder interests.

The U.S government is doing the right thing for the shareholder and tax payer. As it will set a precedent for companies that receive capital infusions from the government and hopefully encourage a review of shareholder rights. But I do also feel that the Feinberg's role is retro-active and could effectively rip up existing contracts. Therefore making contact law invalid. Shareholders should also be able to voice their opinion on compensation pay-outs and thus reward executives for performance.

However this week in the major financial bibles the Financial Times, Bloomberg, and The Wall Street Journal, the shareholders were very quiet. It was also very interesting to read how Lewis was told to give up his salary by the 'pay tsar'. All sorts of adjectives were used.
The Financial Times- 'avert a dispute'
Bloomberg- 'decision based on advice'
The Wall Street Journal – 'demanded by'
Reuters – 'request'
The Guardian- 'ordered'

They can mean all different things depending on your view of the 'pay tsar'. But the Bank of America releases a statement which said: 'Mr Feinburg suggested that Ken Lewis should take no compensation for 2009'. However, I get the impression the statement from BofA was downplayed for the press.

The Financial Times was the most objective and most conservative in its language. The Farrell article mentioned 'averting a dispute'. It seemed that both Lewis and Feinburg worked together and reached an agreement. Farrell also quoted a Treasury statement on the role and responsibilities that Feinburg will play in compensation payments. I found this very enlightening for an uneducated reader on the conditions for government bail-outs. Other articles failed to mention it.

Bloomberg, I felt was very anti-intervention and subjective. It was not what I had expected. The whole article had opinion from managers from the US who gave the their opinion that the action by Feinberg was 'extreme' or 'unfortunate'. But I suppose that can be expected if Bloomberg chooses to interview employees that would directly benefit from stock options and massive bonuses. However the article does mention the restricted stock and option rewards Lewis received since 2006. Maybe an average pay-out of $15 million is not much for an executive? There is was no views from shareholders which I found discouraging from Bloomberg since they usually give a balanced view.

The Wall Street Journal is a short article compared to the FT and Bloomberg but also failed to voice shareholder interests. It was also strongly worded- Feinburg 'demanded' Lewis give up his salary. The last few paragraphs also focused on the work of Lewis which could justify Lewis receiving a salary but definitely not for the fiasco surrounding the purchase of Merrill Lynch last year. The article also reported 'the' rationale for the decision by Feinburg which was based on retirement benefits but the sources conveniently remain 'anonymous'.

The level of pay-outs to executives should be regulated to protect shareholder interests. But based on the press I have read this week it seems that Wall Street would prefer if 'pay tsar' did not exist. Its based on the rationale that if free markets exist governments should not get involved. Since executives are willing to do anything to get that big cash bonus or stock option, I feel that it is necessary in extreme cases like the Bank of America for the government to step-in and defend the shareholder interest. However within the boundaries of contract law. New alternatives to reward to employees should be developed and shareholders should also be given more rights. It will be riveting news for Wall Street to hear who will also get a pay-cut by the October 30 deadline. But not surprising for the Average Joe. But at this moment the 'pay tsar' is the only alternative and in the eyes of executives it looks like karma for corporate greed.


Sources
Financial Times
http://www.ft.com/cms/s/0/c6626158-b9e2-11de-a747-00144feab49a.html

Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKnVhijkdgR0

The Wall Street Journal
Print and Online
http://online.wsj.com/article/SB125564137421788337.html

Reuters
http://www.reuters.com/article/ousiv/idUSTRE59E6GI20091016?sp=true

USA Today
http://www.usatoday.com/money/industries/banking/2009-10-16-bank-of-america-ceo-no-bonus_N.htm

CNBC
http://www.cnbc.com/id/33334914/for/cnbc/#

The Guardian
http://www.guardian.co.uk/business/2009/oct/16/ken-lewis-bank-of-america-pay

The Economist
http://www.economist.com/businessfinance/displayStory.cfm?story_id=14678300

Friday 9 October 2009

Interest rate hike a time to party?

Was the rate rise too pre-emptive for Australia? I think not. A world economic recovery? Highly unlikely. An increase in the target cash rate to 3.25 per cent signifies that the Australian economy is weathering the economic recovery better than other G20 nations and is 'close to trend'. My prediction, rates could hit 4 percent by early 2010.


The rate rise was based on the following factors:

  • Strong export growth from China
  • Rising Asset prices – such as home prices
  • Lower than expected unemployment

And to a lesser extent consumer and business confidence.

The direction of the indicators are the opposite from other developed nations such as the US, Japan and Britain. The indicators give some justification for the Reserve Bank of Australia (RBA) to raise interest rates to prevent the 'economy from expanding too quickly'.

Media organisations this week reported the news with very similar headlines with constant reference to the Reserve Bank Governor, Glenn Stevens. There is very little information that can be distorted by the news however an analysts' opinion may sway influence for a reader.

Two short articles, from Wearden in the Guardian and Burgess in the Times reported on Britain's upcoming decision to set monetary policy. The articles were written with a UK-centric voice with a neutral stance to a change in interest rates.

Wearden interviewed Howard Archer from IHS Global Insight and suggested that interest rates would remain unchanged. While Burgess at the Times also reported that rates would remain unchanged to 'avoid damaging rebounding consumer confidence'.

The Bank of England's decision is based on the lack of consumer confidence, lack of growth and liquidity in the British economy. I think it would be wise to hold back any rate rises until there was better signs of recovery in the British economy.

In Reuters they reported the rate rise as a 'first among equals' and it is highly unlikely that the 'US, EU zone, Britain, Canada and Japan' are to tighten their monetary stance. However, Australia's economy is now more-than-ever reliant on selling commodities to Asian-Pacific economies. Looking to Australia may not be a good indicator of a world recovery in technology-based developed nations in the EU.

Analysts interviewed by Reuters had an optimistic view on the Australian economy and predicted that there will be cash rate increases in the next few months to a high of 4 to 4.25 before stabilising. This is consistent with my prediction of a cash rate of 4 percent by March 2010, based on favourable unemployment data and low inflationary pressures.

The Bloomberg article reported the shock of the interest rate increase. 'Only one of 20 economists surveyed by Bloomberg News forecast today's move'. This highlights the pessimism that is prevalent in the world economy and the pre-emptive nature of the RBA.

The Bloomberg article was the most extensive with background information, interviews with major Australia banks and senior economists. The article also mentioned government measures that stimulated growth in the Australian economy and driving up asset prices. I believe it is in the best interest for the government to also think about unwinding some of the stimulus measures which are likely to overheat the economy.

A prediction of a 4 per cent cash rate for Australia by March 2010 is looking more likely on the cards. GDP growth and the potential of a 'housing bubble' are strong influences. Correct me if I am wrong. But Australia's economy is based on trade with China so as long as the Dragon blows fire the Kangaroo is likely to also hop along!

Reuters
http://uk.reuters.com/article/idUKTRE5950IH20091006?sp=true

The Australian
http://www.theaustralian.news.com.au/business/story/0,28124,26172946-5018001,00.html

SMH
http://www.smh.com.au/business/rba-lifts-rates-20091006-gkv5.html

FT
http://www.ft.com/cms/s/0/e2e96a4a-b232-11de-a271-00144feab49a.html?nclick_check=1


Sunday 4 October 2009

Myer IPO

Myer, Australia's largest department store retailer plans to float on the Australian Securities Exchange in November. It is considered to be Australia's second largest IPO in two years and considered to demonstrate a rebound in IPOs in the region. The Financial Times, Bloomberg and The Sydney Morning Herald(SMH) both reported on the news in varying ways however they were all written by journalists based from Sydney or Melbourne.


Myer CEO Bernie Brookes and Myer ambassador, former Miss Universe Jennifer Hawkins, launch the Myer prospectus. Picture: AFP / William West

The Financial Times reports the article briefly and concise stating the financial facts of the IPO such as, in the headline 'Myer aims for A$2.8bn...' the expected equity market value of the company, the gross proceeds from the sale, price of the shares and the net profit after tax. It can be assumed the length of the article and lack of detail is due to its publication in The Financial Times UK. The IPO of one of Australia's largest retail stores could be considered to be of minor interest to UK or European investors but it would be a different case if it was targeted for Australian institutional investors or retail investors.


The article in Bloomberg.com does take a different stance to the IPO sale. With a headline reading 'TPG, Blum to Sell Myer Stakes...' the article does focus on the sellers and the justification for the sale rather than just the cut and bone financial facts. Whitley also mentions some detail of the managers of the IPO and making frequent reference to what 'the prospectus said'. This highlights the importance of the prospectus in IPO's and the information that is available to the media to report the story. The significant difference between the Bloomberg.com and the later mention SMH story is that there are interviews with other members in the financial sector such as Prasad Patkar from Platypus Asset Management and Sean Fenton from Tribeca Investment Partners, who are institutional investors. Their opinions are relevant to the target audience and likely influence other institutional investors.


Therefore, there is a contrast to the information provided and the detail in the SMH article 'Prospectus out: Myer Prices Shares'. The Greenblat article is a significantly longer article. It reports the same information in the Financial Times however there is more information relating to who appears on the front cover of the prospectus, the history of the company, the private equity owners TPG and Blum Capital and more importantly the future prospects of the company. Upon reading the article the first time the information provided is very useful for information on the Myer share sale. Though after repeated analysis and comparing this article to Financial Times UK it could give the impression that the article is used to promote the sale of the shares of the company to SMH readers, most likely retail investors. This can be evidenced by comments such as 'this would help place Myer in a strong financial position going forward', followed by statements from the Myer chairman, future store openings and the offer dates for investors. However, the target audience of the SMH must be considered before making rash statements. Myer is an Australia company and it would be necessary to inform Australian investors of such a significant sale. The information provided was not biased with evidence that supported future prospects and earnings potential of the company.


For an IPO it is necessary to inform investors of the future earnings potential of the business to garner the interest and investment from potential investors. The three articles were able to target three different audiences the general investor, the institutional investor and the retail investor and give information that was relevant for each type of reader. However, more reference for readers to view the prospectus at the end of each story would enable the investor to perform their own due diligence.