The Co-op take over 700 Lloyds Bank Branches

The British government has claimed this sale as something to celebrate, but I have real doubts about whether it is going to be of any real benefit  to the British public.
Here are a few of the comments that have been made about this buyout......

Chancellor George Osborne said,"This is another step towards creating a new banking system for
britain that gives real choice to customers and supports the economy." ................................

The treasury also claimed this buyout , "... forms part of a raft of measures to reform the banking system and improve competition."

"The sale of hundreds of Lloyds branches to the Co-Operative creates a new challenger bank and promotes mutuals."

"This follows the sale of Northern Rock to Virgin Money in January and represents another important step towards a more competetive banking sector."

Some of the other comments made about this by the press include:-

"If this deal goes ahead it will see Co-op land  a 10% slice of the U.K.'s high St banking pie. That's a sizable figure and will give them real clout as a main stream lender.....This could be a really significant development for small firms looking to restore traditional relationship banking, where the tick box lending criteria approach will hopefully have no place."

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Lloyds are currently 40% owned by the tax payer.

First of all, Lloyds were expecting £2 billion for this sale, but will actually only receive a fraction of this amount. It is actually going to cost a maximum of £750 million. Only £350 million will be paid initially. The other £400 million is to be paid over the next 15 years! But this mortgage payment is dependant on the success of the combined Verde Group banking business. It may never be paid.......................................................................................................................

Secondly, the Lloyds Banking Group has in recent years spent a lot of money on up-dating the systems running the banks. However, the Verde Group Banking business has not been updated to the same level as it is much the same as when Lloyds bought the banks. So the sold off banks are un-likely to be able to compete with banks that remain in the Lloyds Banking Group. This will pose a challenge to the claims made by the conservatives that this is going to bring in much needed new competition in U.K. banking. Im strugling to find reasons how this will happen.

Thirdly........The Lloyds Banking Group combined with the Verde Group Banks, which are about to be sold, amounts to many banks which the Lloyds Banking Group probably does not actually need. The reason being that, due to the continued stagnation in the housing market, many of these smaller customer friendly banks have become comparitvely redundant as far as the actual banks are concerned. What I mean is, although we need our local banks, to the big banks, the smaller banks have become more of an inconvenience. Because wages are generally paid in electronically, the banks know that our wages will still arrive even with a lot less banks in our towns and villages. When banks were giving out lots of mortgages they needed the local branches so they had a place so you could sign the papers for 25 years of debt for your dream home. However, until something revolutionary happens in banking, for many of us the idea of buying a  dream home has long passed. For many, the idea of buying any delipidated shoe box of a home is a dream out of reach. I think Lloyds have calculated that they can concentrate on corporate buyouts and stock markets, without the need to hand out money to ordinary individuals. (No need to be too pessimistic. The whole point of this blog is that there is an answer, but it is un-likely to come from the big banks or the governments.......Not without a push from the people...). What I am trying to say is, the European rule which is forcing the sale of these banks by the Lloyds Group seems almost convenient for the long term Lloyds Banking Group. If they were not to be sold off, many probably would have been closed at some time in the future.

Forthly....... Probably one of the most niggling things about this deal is that Lloyds are going to remain as a  kind of landlord to the Verde Banking Group  banks.The Co-op is going to have to pay an annual commercial rate bill to the Lloyds banking group, expected to be many billions of pounds a year. Exact details are yet to be disclosed along with the management teams pay structure. For this reason there is little chance of the Co-op actually becoming competition for the Lloyds banking Group to worry about. Because if this was to happen, Lloyds could just increase the costs for the Co-op. So much for the much needed competition that George Osborne seemed so optimistic about.


Fifthly.........If I thought this was going to make a positive difference to the economy and make more home loans available to home buyers, I would be the first to recomend people to open an account with the Co-op bank. Regretfully I can not see this happening so I could not recommend people to start switching their account. The only way I can see this working is if the Co-op was to give stop gap loans whch are more profitable due to higher interest rates. This would work for the bank as they could take business away from 'money shops', log book loan companies and pawn shops. This certainly will not have any real benefits to the economy, as the only loans that make economic sense for the ordinary people is for loans to buy homes. However , I don't really see the Co-op as a competetive force to compete with the big banks.  So the claims of George Osborne and the treasury on this buyout have little foundation to actually fulfil their claims. I hope I am proved wrong. Unfortunately, I don't think I will be.


Sixth.........Lloyds will continue the 'back office' work for the Co-op bank. This is likely to thwarte any adventurous new strategies, for example.........to start lending for home purchases instead of the mostly pointless speculation on the stock markets which has continued to thrive despite the recession. If the Co-op was to proceed with this 'new strategy' it would for certain bring in new account holders who are currently with other banks. But this change in direction could have affects on the stock markets which would be negative. A sudden rise in home loans would have a negative affect on the sacred stock markets. This would have a negative affect on bonuses of bankers, stock brokers and also a temporary affect on interest on various types of investment products that are predominantly linked with stock markets. It would also affect businesses related to the buying and selling of big business (buyouts). I know you are probably thinking that banks lending for home loans should earn bonusus just as easy as the stock markets.......No...Because home loans take a long time to get the money back........As much as 30 years.....Compare this to a corporate buyout of a large company.....It won't take as long to get the money back. Because the buyout business is an industry its self which is backed and supported by stock markets. When big business people buy businesses they will usually be hoping to sell them within a few years at a profit, to another business with another load of borrowed money.........Very similar to stock brokers and hedge funds buying shares of companies.......Again any money lent for this type of investment gets returned to the banks quicker to be used for the next investment.  Lots of the bonuses the top bankers get comes from the success in these shorter term investments. If a bank can provide the finance for a buyout and then provide the finance for the next investor to buy the same company they make money from fees from both deals, but also early repayment fees etc. These buyouts provide lots of good for the bankers, but these buyouts do little for the rest of us apart from add a few pennies of interest to investments at the expense of higher costs for products and services we use and often job losses to make the savings to pay off the interest on the loan to buy the company!..
If account holders want the Co-op to lend money for mortgages, they are probably going to have to tell them that they require this as a condition of the account holder placing their money in the Co-op's banks. Failing that...It will probably need the forming of a peoples bank that does the things the people want. It could be the pheonix from the flames of David Camerron's big society ! Though I some how doubt that he would back this new peoples bank due to his completely biased relationship with people in the current international banking industry.- See "David Cameron has Worked Out What Caused the Economic Crisis !" in X-ECONOMICS.

 Roll on the next building boom!

U.K.'s Farmers Protest Over Reduction in 'Milk-gate' Price. Have the banks had an influence?!

Dairy farmers in the U.K. have recently been protesting about the price being paid for each litre of milk they are producing. There are mixed feelings from the public about this, going by recent debates that have been going on in the media and press. The thing is, most be people will not have been told all the factors which are involved in this scenario. The businesses involved are giving their own version of what is going on which is then re-iterated to us by the Financial Times, The British Broadcasting Company, The Daily Telegraph and all the rest of them. If the journalists don't have experience in areas outside of journalism, the chances are it will be easy for certain types of 'business' people to use them not to keep the public informed, but to create a smoke screen over goings on which they may wish to keep from both the public and potential investors.

Before going any futher, the press and media is far more important in these kinds of situations then most of the people working within it could possibly realise. It is therefore vitally important that the reporters collect all information available from both sides of an argument. If this doesn't happen it will affect the decisions made by political parties and also the general  publics' votes when it comes to voting time. And we will end up with the wrong people in government or possibly potentially the right people, but people who have been misled by the people who have been feeding them information such as the press and media.

So, if you are a reporter for the press or media, lets get this one right, otherwise we are at risk of losing all our farmers!

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A lot of the attention by the press and media is focusing on the big supermarkets, but this attention would seem to be mis-placed. The big supermarkets have been blamed by many news papers for squeezing the price that the farmers are receiving. If these news papers had done a bit more research, they could have come up with some important influential factors which have been over looked....
First of all let's look at the Supermarkets, and their reaction to what has been going on....

The Co-operative is one of the smaller buyers of the milk being produced by the farmers, but was one of the first to promise to increase the price they would pay. Also there was no hesitation by Morrisons and Asda to increase the price paid after the protests kicked off. So then, it would seem there was another outside factor influencing the situation. So let's look a little deeper.

Robert Wiseman Dairies processes 30% of the U.K.'s fresh milk, but they are not a retailer to the public as they are a processor which buys milk from farmers and then sells on to retailers. Robert Wiseman Dairies in fact supply milk to the Co-op supermarkets! The Co-op does not pay the farmers directly, but pays Robert Wiseman Dairies who then pay the farmers.

Therefore, there is no guarantee that the increased payments promised by the Co-op will actually reach the farmers. Regardless of this is ; Why did the processor not anticipate this problem arising? The willingness of it's customers to actually pay more............

The problem with lots of businesses which become ....merely vehicles for the investment of billions of dollars, Euros and pounds is that the people who actually run them are little more than landlords,... of that business and often don't have the nouse to really have the understanding of the business they are seen to be running..........

There is one factor which the 'free markets' promoted by many politicians, bankers and capitalist investors do not take into account. That is the 'human factor'. This is the idea that 'the people' want what is right , and this is not necessary what the capitalist motives of the bankers and other beneficiaries of capital want!.......

On 16th January 2012, Robert Wiseman Dairies was taken over by the dairy conglomerate Muller for the price of £279.5 Million.....

....The way this works is that the buyer borrows the majority of the purchase price against the subject company, and puts that company in debt. (Its an internationally accepted financing rule that needs to change). Basically, since Muller bought the company, Wiseman has become in debt to banks. When Muller bought the company, it borrowed money which Wiseman will have to pay back with the added interest payments. The interest will obviously affect its running costs which will have an an inevitable affect on the price it can buy milk and the price at which it can sell. Either the selling price for its end product will have to rise or the running costs will have to be some how reduced.

So, to summarise - the costs of running Robert Wiseman Dairies has increased substantially in the months that have recently passed. It would certainly be possible that the dairy will either have to increase its prices or lower it's costs so the resultant accumulated cash can be used to pay back debt and associated costs such as interest on the debt.

Also note that the mostly borrowed finance was handed over by banks who clearly had no anticipation of problems concerning the products of the dairy which could have an adverse affect on the company's well being. The reason I say this is that on 29th June 2012, Robert Wiseman Dairies released the following statement (just six months after the buyout):-

"Wiseman Confirms Milk Price From August 2012."

"Robert Wiseman Dairies  has given it's dairy farmer suppliers a months notice of a 1.7pence per litre reduction in the 'farm gate' milk price to take effect from August 1, 2012."

"The decision follows a collapse in value of the cream in each litre of farm-gate milk over the last 12 months. From it's peak the commodity fell in value by the milk price equivalent of more than 5ppl (Source:Dairy Co Datum)"

"Wiseman had hoped that the need for  further adjustment to it's milk price following a 2ppl reduction which took affect in June could be negated by a sustained and significant rally of commodity market values"

"But whilst markets have improved from the lows of recent weeks, they remain at levels not seen since early 2010, when the average DEFRA milk price was 24.19ppl. Wiseman's standard litre price from August will be 24.73ppl."

"Pete Nicholson, milk procure directorment director at Robert Wiseman Dairies said,"We know that this news will come as a major disapointment to Wiseman Milk Group members. We have done everything we can to minimize the reduction in our farm-gate milk price, but we must now reflect the substantially lower returns from the markets which we serve."

One week after Robert Wiseman Dairies reduced their 'milk gate' price, both of the U.K.s other big milk processors reduced their 'milk gate' price. They are Arla and Dairy Crest......  Arla supply Asda......Without being some kind of mind reader , it is difficult to give a clear picture of what is going on. But, it is possible that Arla, and Dairy Crest saw the Robert Wiseman 'band wagon' going passed and decided to jump on it!... After all, it would only result in bigger profits for both these companies.

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Okay then, I am no expert on the milk production business or farming, but going by the information made available to us by the press and media, and also this statement by one of the U.K.'s biggest milk processors.

Although Robert Wiseman Dairies does not control the market, it certainly has a major influence. Yet the above statement would have you beleive that Wiseman are at the mercy of  the stock markets. I beleive this to be a load bull. Demand for cream may well have dropped in the U.K., but this has been happening over the last couple decades as people have turned to a more healthy diet. This should not be an issue that has had the negative affect that Wiseman claims.

 The real reason for Wiseman to be squeezing the price of the milk it buys I beleive is because....
...The debt it is now carrying as a result of the recent buyout has influenced a drive to cut its costs. One of those costs is obviously the farmers providing the milk which it processes.

As mentioned in  the above statement, Wiseman has already pushed down the price in June and is going to again in August. So then, what are the big supermarkets' position whilst this is happening. Well that is fairly clear. If a big milk processor which apparently processes 30% of our milk reduces the price it pays, then the supermarkets are understandably going to expect a comparable reduction in the price they pay.

To bring this to a swift conclusion.......

Wiseman are a major player in milk production in the U.K., but due to the recent buyout which will have involved masses of debt being added to it by major banks, it needs to cut its costs to pay back its debts and to keep its investors happy. However, some of the supermarkets who are buying milk direct from the farmers appear to have turned and gone in the opposite direction. The effect this could have on Wiseman is to say the least worrying.

The Dairy farmers that Wiseman uses are under contract to supply milk to Wiseman, it would seem at the price that suits Wiseman as long as a period of notice is given.

If Wiseman sticks to this next price reduction in August there is a chance dairy farmers will go out of business.
However, if the farmers stick to their guns and refuse to supply the milk to Wiseman this would cause major problems for Wiseman.

What is most probable is that a compromise will be reached which will most certainly reduce profits for Wiseman. The problem is, will the company's inability to control the market cause problems with paying back its debt and therefore put the company and the jobs of all the employees at risk ?
If this was to happen the main stream press and media may well tell every one that market forces were to blame. This would be the wrong explanation. The difficulties are being caused by the banks loading the business with debt. Debt that is totally un-necessary. This debt is now risking the livelihoods of British farmers. Whilst much of the press and media only help the banks cover up the real reasons behind the farmers protests.

If you can't get your head round this Idea that bankers and some business people will get some kind of satisfaction from putting businesses we depend on in financial difficulty, you need to find out about some of the benefits of doing this...

See posts on private equity, hedge funds and buyouts in this the X-ECONOMICS  blog and also the ANTI-CRISIS ECONOMICS blog. You soon will ! 
                                          


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The F.S.A.'s Contribution to the Barclays 'LIBOR' Scandal!

The F.S.A.'s Contribution to the Barclays 'LIBOR' Scandal!

It looks like our banking regulator, the F.S.A. had a chance to resolve this without the United States financial regulators getting involved. You might have noticed that our American friends are generally pretty diplomatic when having to deal with our inept politicians. But I think we know that as patient as the Americans often appear, its likely to come as a surprise when they do decide to take decisive action where they think it necessary. In this particular circumstance I think the Americans lost their patience, and from what I know about the F.S.A. I am not the least bit surprised!....

When I read about this it was difficult to understand why the press and media has suddenly made such a fuss about this story as it has been around for so many years. I heard about it a couple of years after the financial crisis, but obviously no fines had been dished out at that time. The press and media have just not bothered to cover it since. Either that or have been encouraged not to due to a fragile international financial system which could be further damaged by further bad publicity whilst people were still running away from banks with there money.

There is a possibility the Americans delayed their actions for some years in order to prevent damaging publicity to the world of finance.

From what I have read in the British press, some important details of this story have been left out by most of the journalists covering it. The bit  being over looked is the part the F.S.A. played in this fiasco. They have been aware of the goings on for a long time but would appear not to have taken any action until the U.S. sent in the Financial Industries equivalent of an air strike!

 The way I understand what has happened from memory is this;

Basically what has happened is that the U.S. financial regulator informed the United Kingdom Financial Services Authority that Barclays had been manipulating the 'LIBOR'. This is the agreed  rate for interbank lending which varies, but all major banks contribute their own opinion to what the level should be. Barclays wanted the rate where it was most profitable for them. This, a few years ago would have normally been fairly high, as Barclays would have more surplus cash then other banks in the U.K. This is because Barclays had more depositors than any other bank. They would therefore regularly be on the lending side of interbank lending deals. Hence, the higher the inter-bank lending rate, the higher Barclays profits and bonuses would be. However, more recently they have been trying to lower it. This is because of Barclays' rapid growth into an investment bank.

Barclays Capital currently has more assets under mangement than any other investment bank in the world. In 2008 it was just about in the top 10 ! This is what Goldman Sachs were known for. Barclays have however caught up with Goldman Sachs, and left them behind as far as investment banking is concerned. So this is why their tune has changed as far as the inter-bank lending rate is concerned. They need more money for their lucrative buyout business. Barclays have helped create a shopping spree for corporate buyouts, since the housing market collapsed.
 (This is great news, atleast some one is benefiting from the collapse of the housing market!...... But then again its probably part of the cause of the stagnation in the housing market.............)
  Along with new restrictions on banks having to hold cash, Barclays need cheap money from other sources to continue their buyout bonanza. Barclays had apparently been bribing management at many other banks to raise or lower the 'bar' for the lending rate depending on  their requirements at the time.
(You can see more on this in ' The Legacy of Bob Diamond' soon to be added to the blog posts.)

Any way, the American authorities kindly informed the F.S.A. as to what they believed Barclays were up to. I also understand they specified that they wanted the F.S.A. to take appropriate action.
Im not sure what happened between then and now, but the way understand it is that the U.S. authorities were giving the U.K. authorities a chance to deal with the situation. My guess is they were not satisfied with the F.S.A. and so decided to take action themselves.

The way its supposed to work is that the F.S.A. and the Bank of England are supposed to regulate the British Banks and take actions where required. It looks like the Americans have decided to take action on Barclays themselves despite the in-action of British Authorities. This would then be a kind of 'activist' fine which Barclays would not have been expecting. The choice Barclays probably have is to pay the fine and straighten out their procedures or lose billions in the way of business. I would speculate that the fine by the F.S.A. is in response to the action by the U.S. regulator. How would it look now if they were still to do nothing?

When you take into account the length of time the F.S.A. took to deal with the 'miss selling of PPI', it would be easy to understand why the U.S. regulator became frustrated and reacted accordingly. It took four years for the F.S.A. to come to the conclusion that mis-selling was taking place in British banks.

For the LIBOR scandal the U.S. regulator fined Barclays £230 Million whlist the F.S.A. only fined them £60 Million.

It makes you wonder if; If the Americans didn't get involved, would the FSA ever have done any thing about it?

On second thoughts, may be it doesn't!

The affects of raising the lending rate in the lead up to the crisis could certainly have created problems for smaller banks such as Northern Rock who are known to have borrowed fortunes from other banks. Was it a contribution to the crisis?
It could be an addition to what is becoming a very long list.

There have been conflicting messages on this story depending what you read or who are speaking to. But be aware that when top management start bringing traders into their explanation as to what is going on and blaming them , I don't think you will need me to explain that traders are not going to be making decisions that will affect the destiny of many trillions of dollars. The big decisions are made by the top people thats why they are paid many millions.

 Eighty percent of a top bankers job is justifying their actions, or confusing the public so they don't know what they are really doing. Ten per cent is just public relations, - feeding it to the press who generally eat it up and then feed it to the generally un-suspecting public.

(Percentages expressed are estimates at time of posting which may rise or fall in due course)

By the way, happy independance day to all Americans following this blog!