First analysis of Lehmans and Merrill

After a weekend of bad news stateside during which Lehman Brothers finally fell, UK mortgage giants have already began feeling the crushing impact of the collapse.

Just hours after the news broke, which signals another nail in the coffin of the US economy, early trading saw HBOS’ share price fall a staggering 32% to just 180p.

Royal Bank of Scotland was also badly hit falling 18% to 202p while Barclays and Bradford & Bingley fell 16% and 14% respectively.

No one was unaffected with Lloyds TSB dropping by 7% and HSBC falling by 4%.

The fallout from the US has once again dealt a huge blow to the UK.

Despite a last ditch effort just seven days ago to save the financial world (and to save face) with the nationalisation of Fannie Mae and Freddie Mac the mortgage sector in America has come crashing down.

It seems while the government was concentrating on saving the quasi-public bodies that dominate the American mortgage market the two investment banks were struggling to keep their heads above water.

You have to feel for the Federal Reserve.

At close of play on Friday night it thinks it’s solved everything. Yes the US public may pick up the bill but the economy is safe, the credit crunch may well be coming to an end and it’s all thanks to the good ol’ US of A.

Just 48 hours later and Lehman Brothers has filed for bankruptcy.

After suffering loses amounting to billions of dollars the fourth largest investment bank in the US opted for chapter 11 bankruptcy protection after it struggled to find a buyer.

Rumour mills in the industry have been in over drive about the flagging lender for weeks so the weekend’s news is not really a surprise.

But it does mark one of the most significant periods in the US’s financial history.

The investment bank has been a stalwart of Wall Street and indeed the US sub-prime market since it was founded in 1850 by three Jewish immigrants.

While its bankruptcy is not wholly unexpected the industry is still coming to terms with the demise of one of the most famous investment banks in the world.

And, in what will go down in history as the weekend the US mortgage market fell to its knees, it was also announced that Merrill Lynch, another giant of Wall Street, has been bought by Bank of America for $50bn.

In the last four days of trading last week Merrill’s shares price fell by around 38%. It was rumoured that many of the firms who looked at buying Lehmans held back in the hope of buying Merrill instead.

The acquisition means Bank of America will be a force to be reckoned with in the industry but also signals the lack of confidence investors had in Merrill.

Last week brought some hope that the mortgage market might finally be picking up.

The Fed was launching a rescue plan, the UK government was at least attempting to look like it was doing something to help and some industry commentators were even signalling the end of the crunch.

Now it seems things are worse than ever.

After bailing out Fannie Mae and Freddie Mac in a move that could cost US taxpayers $25bn dollars the US government and the Fed quite rightly refused to step in and help the failing investment banks in order to protect the public.

But this year has been nothing if not eventful and we all know by now that even when the biggest crisis possible hits, the UK mortgage market still gets through it. There’s been Northern Rock, Bear Stearns, countless closures – they’ve all been and gone and the UK mortgage market is still here.

Now it just remains to be seen whether the market can weather this storm too.

But it’s important to keep a level head. We may be still up shit creek but we’re still desperately clinging to the paddle.

FSA issues warning on Leicestershire adviser

The FSA has issued an alert to consumers not to take mortgage or financial advice from Swati Patel from Leicestershire firm Mortgage Deals 4 U Ltd. Ms Patel is currently under investigation by the Leicestershire police.

In a statement, the FSA says: “We strongly advise customers not to take mortgage or financial advice from Swati Patel or to give her your personal and financial details.”

Customers who took out a mortgage, remortgage, or a personal loan through Swati Patel, or are in the process of doing so, are strongly advised to contact Simon Boden at Leicestershire Police on 0116 222 2222 ext 5194.

They may also contact either Chris Walmsley or Arzoo Azizi at the Financial Services Authority on 0207 066 5894 or 020 7066 3512, or via email to chris.walmsley@fsa.gov.uk or arzoo.azizi@fsa.gov.uk

Worried clients can also call the FSA’s Consumer Helpline on 0845 606 1234 (call rates may vary).

US government bails out mortgage giants

The US Government staged the world’s largest financial bail-out last night, nationalising stricken mortgage companies Fannie Mae and Freddie Mac.

The announcement has given a huge boost to global markets with the FTSE100 currently up 189.80 at 5430.30 helped by big gains for banks and house builders. Asian markets also rallied following this unprecedented move to boost confidence amid the US and global economic downturn.

Yesterday, the US Government said it will inject an unknown amount of taxpayer money into the lenders to “protect the stability of the financial markets”.

The move, labelled ‘conservatorship’, will see the removal of both the Fannie Mae and Freddie Mac CEO’s, with a business model no longer focused on maximising common shareholder returns.

US Treasury Secretary Henry Paulson says the ultimate cost to the taxpayer will depend on the Government Sponsored Enterprises’ (GSEs) business results going forward.

“I have long said that the housing correction poses the biggest risk to our economy,” he says.

“It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions.

“Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

Fannie and Freddie will “modestly increase” mortgage portfolios through the end of 2009, before gradually reducing at the rate of 10% per year – eventually stabilising at a less risky size.

“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” Paulson says.

“This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement.

“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

UK personal finance literacy worsens

Despite personal finance issues taking centre stage over the past year, the financial literacy of British adults has declined compared to this time last year, according to Abbey Banking.

The research is based on a simple GCSE-level personal finance exam conducted among a group of adults in August 2007 and repeated a year on.

It found this year, one in seven adults (7.1m) would fail to achieve the 40% pass mark needed to obtain a grade C; a rise of 1.2m since last year when one in ten would have failed.

Reassuringly, 25% of adults matched last year’s tally of A*s but A grades were down this year by 2% to 28%.

Steve Shore, director of Abbey Banking, says: “While most people are in the realms of a GCSE pass, the failure rate has increased by over one million. Quite worrying given that the credit crunch and cost of living has dominated the front pages for the past twelve months – and people say that they are more interested in understanding their finance than ever before.”

Government plans to introduce personal finance skills into Maths GCSE should certainly be welcomed by 18-24 year olds, since the age group’s average score of 56% in 2007 dropped to 53% in 2008, says Abbey Banking.

The most common wrongly answered question this year was answered incorrectly by 88% of Britons, who didn’t know they get six weeks to pay back a credit card before it accrues interest.

An estimated 38% failed to explain negative equity is where a mortgage is larger than the value of a house, a marked improvement on 47% last year.

A quarter of Britons were unaware that failure to pay a secured loan meant their house could be sold to pay for the loan, while 18% did not understand what hire purchase is, marking a rise of 6% from last year.

Ice looks to help firms hit by credit crunch

Ice Commercial has introduced a portfolio of professional services designed to meet the demands of businesses struggling with the present economic downturn.

It cites the lack of support that many businesses are receiving from their bankers coupled with the general tightening of credit facilities and overdue payments from customers, as just a few of the reasons why more and more companies are finding it increasingly difficult to meet the payroll as well as keep up to date with key creditors such as HMRC and trade suppliers.

Ice Commercial’s new solutions include: tax debts assistance; payroll finance; unsecured non-status business loans; re-finance and consolidation finance; factoring and invoice discounting; credit control support; debt management; informal arrangements with creditors; insolvency solutions and commercial remortgages.

Brits approaching retirement saddled with debt

More than one in three of the UK population over the age of 55 have outstanding unsecured debts and could be heading towards retirement with £66 billion in the red.

This equates to an averaging £11,106 per head.

The analysis based on 4,507 people in the UK aged 55 and over who released equity in their home with Key Retirement Solutions in 2007, reveals that almost one in four have outstanding loan payments owing £8,766 on average per head.

One fifth have outstanding credit card debts and owe £8,358 on average per head and only 3% are in the red, but £3,667 is owed on average per head.

The average outstanding mortgage debt stands at £37,316 per head for this age group.

KRS is concerned that the further people reach in retirement the deeper in debt they seemingly become. The total unsecured debt for those aged 55-59 is over £2.5 billion and this takes on a huge increase of 747% reaching a total of over £22 billion for the over 70s, which is on average £10,659 per head with an average monthly payment per head of £244.

Dean Mirfin, business development director at Key Retirement Solutions said: “As the cost of living is on the up, these figures, even if they are only part reflective of pensioners as a whole, are of real concern. Retirement should be a time to enjoy yourself after all those years of hard work, yet one in 20 people in their 60s, 70s and 80s admit to constantly struggling to keep up with financial commitments or having fallen into arrears.

“The cost of living for the elderly has surpassed inflation over the past decade therefore it is more important than ever that consumers are aware of the dangers of approaching retirement with such large amounts of debt.”

Chris Tapp, director of charity Credit Action, said: “In recent years there has been a ‘buy now, worry about it later’ culture in the UK when it comes to borrowing, particularly on unsecured forms of credit. For many pensioners today these figures show it’s a case of ‘bought then, worrying about it now.’ With the cost of living increasing dramatically – particular as winter approaches and fuel costs mount up – it is vital that those struggling are given the help they need to ensure that people aren’t trapped by debt but are given the necessary advice and support to enable them to stay in control of their money and their lives.”

First European Securities makes secured loan comeback

First European Securities has re-entered the secured loan market four years after it withdrew.

The lender is distributing its products through a panel of ten introducers, including Broker-Support.

Its range includes unlimited adverse loans from £3,000 to £25,000, available up to 65% LTV, including fees and PPP, plus self-cert loans up to £40,000.

Nick Barron, director at First European Securities, would not comment on the other nine distributors, but says it may look to extend its panel.

He says: “We came back into the market a few weeks ago. We are having a look to see how the market reacts to our products and we will see if we will distribute them via a wider network. It has been received well so far, we think there is a big gap in the unlimited adverse sector at the moment and that is what’s slowing the secured market down.”

Steve Dicks managing director at Broker-Support, says: “We are delighted to welcome 1ST Euro to our preferred panel of lenders, as we believe them to significantly complement our market leading support service to personal loan packagers.

“Broker-Support.com is again distinguished from its competitors by adding real value to lenders and this most recent example can only benefit our members who will undoubtedly make good use of the innovative products now available.

“We would like to thank 1st Euro for extending the opportunity to all our members & allow us to put still more distance between us & the lending volumes of the commission clubs.1st Euro are the first of a number of new facilities and preferred partners that will be launched in the near future.”

25% of Brits halt holiday plans

People living in Wales and the South West of England are the most concerned about the affects of the current economic conditions, according to a new survey.

The poll, conducted by credit reference agency Experian, found that 65% of people in these regions cite “the credit crunch” as the main reason for not planning a holiday in the next 12 months.

It is estimated that 2.8 million British adults will take on more borrowing to fund a holiday this year.

Jim Hodgkins, managing director of CreditExpert.co.uk said the current economic conditions are starting to be felt by consumers for the first time.

He added: “Due to the recent increases in the cost of living, we are seeing more people keeping a closer eye on their credit commitments using Experian’s credit monitoring service.

“The credit crunch is really biting now and it will be painful for people to make the choice between not going on holiday or taking on more debt to do so.”

In total, 24% of Britons are shelving their holding plans this year, with 43% of them worried about the impact the current economic conditions will have on their lifestyle.

The research also highlighted that people in the North East of England (27%) are the most likely to go into debt from holiday spending.

Intermediaries key to debt advice

TCF Debt Solutions, the debt management and IVA firm, believes that mortgage brokers and IFAs are in the best position to help families reorganise their finances to cope with debt and the economic downturn.

It adds that they should look to change their business models to take account of the need for dedicated help.

TCF Debt Solutions, which works exclusively through intermediaries, has seen an increase in the number of agency agreements from individual firms recently.

Andy Moody, managing director of TCF Debt Solutions, said: “With the number of new agencies we are opening increasing rapidly, it is clear that some mortgage intermediaries have seen that their future lies in adapting their business model and offering a wider service that starts with helping clients manage their finances better. Before the credit crunch that might have been limited to finding a lending product. However with the downturn really taking effect, the need has never been greater for advisers to look to help clients comprehensively reorganise their finances to cope with the demands of a world where obtaining more credit is no longer realistic or desirable.

“The credit crunch is definitely making people think very carefully about trying to live within their means and there is no one better placed than financial intermediaries to help them. When cheap credit was freely available, it was not fashionable to economise, but the vast majority of the population is now having to make significant adjustments to their lifestyles.

“For those with growing debt problems, the help of intermediaries is going to be invaluable. In the absence of funding liquidity, mortgage and loan brokers can lead a revolution in helping people balance their budgets and relieve the burden of debt.”

Banks want BoE to extend liquidity scheme

The Bank of England will be lobbied by high street banks today to extend the special liquidity scheme, put in place three months ago to help free up money markets which have been frozen by the credit crunch, reports The Guardian. The banks are thought to be keen to ensure that the scheme, which allows billions of pounds to be pumped into the financial system, is fine-tuned as it is not becoming any easier for banks to borrow money on the financial markets.

Many need access to funding either from the money markets or from the Bank of England’s special scheme in order to offer mortgages to customers and loans to businesses.

The banks are thought to have drawn up a number of suggestions for discussion with the Bank at a routine meeting today.

The scheme was rushed into place in April shortly after the near-collapse of US bank Bear Stearns. The rescue of Bear Stearns, orchestrated by the US Federal Reserve, raised fresh fears about the solvency of the banking system and caused financing among the banks to dry up following last summer’s credit crunch.

Among the items for discussion at the meeting between the treasurers of the major lenders and Bank officials, is an idea from at least one of the lenders to extend of the type of assets that banks can pledge as collateral in the existing scheme.

The parlous state of the equity markets on both sides of the Atlantic has sent investors piling into the controversial practice of shorting, which has driven fees to more than double in just nine months, reports The Independent.

The price of borrowing stock in London’s blue-chip companies has risen twofold since last October, according to Data Explorers, which specialises in stock-lending information, and went up as much as four times in January.

The data group added that the cost of borrowing stocks from mid-tier companies on the FTSE 250 has trebled in the past 10 months, although it did not release the actual size of the fees. In the UK, banks and housebuilders have been particular targets of the short sellers this year.

Hedge funds suffered their worst start to the year for almost two decades in 2008, although there was some good news as Man Group, the giant UK alternative asset manager, posted solid results for the last quarter, reports The Independent.

As the markets have weakened, hedge fund performance has suffered more than in the wake of the dot.com bust, as managers have had to write down billions or face closure. Peloton Partners, set up by Ron Beller and Geoff Grant, and Sailfish Capital have closed, while the private equity giant Carlyle ended its hedge fund business, and Citigroup in effect shut Old Lane, the manager it bought less than a year before.

Hedge Fund Research, a US analysis group, said the industry index it compiles was the worst in the first six months of the year since it began tracking in 1990.

This article was first published by IFAonline, part of the Incisive Media group.