Traders in the City have an adage: “Buy on the rumour, sell on the fact.” Last
Wednesday morning it appeared that everybody had heard the rumours but were
not taking heed of the folklore.
The market should have been celebrating the previous night’s cut in American
interest rates, which had led to a rally on Wall Street, but instead the
rumour mill went into overdrive.
A British bank was in trouble, the rumours said, and was turning to the Bank
of England for emergency help. So serious was it that Mervyn King, the
Bank’s governor, had cancelled a trip to the Far East and ordered his staff
to remain at their desks over the Easter holiday.
As soon as the market opened at 8.30am everybody was selling shares in Halifax
Bank of Scotland (HBOS), Britain’s biggest mortgage lender.
By 8.45am the shares’ value had fallen so far that the London Stock Exchange
computers automatically halted trading. The wild swing in the prices being
entered into the system had made the computers think that a mistake had been
made.
The internet message boards used by City traders sprang into life. “HBOS going
under!? Look at the share price!” posted one at 8.56am. The bank had lost
nearly 20% of its stock market value.
Rumours sweep around the financial markets all the time, often distorted by
Chinese whispers. In the 1980s the markets plunged on rumours that Ronald
Reagan, the then US president, had suffered a heart attack. Somebody had had
a heart attack, but it had been misheard – the victim was Lonnie Donegan,
the skiffle artist.
This time the detail seemed too good for it not to be true. A report, the
rumours said, was to be published in a newspaper the next day which would
identify nearly £130 billion in new losses at HBOS. In a jittery financial
market that had seen one of Wall Street’s most venerable names, Bear
Stearns, collapse in just a couple of days the previous weekend, this was
bad news. If HBOS went under it would have made Northern Rock look like a
tea party.
The rumours were made up, invented by so-called short sellers, who can make
millions by driving down the price of shares. King had indeed cancelled a
trip, but to West Bromwich, not to the Far East, and there was nothing
sinister about it. Bank staff had not been told to cancel their Easter
breaks. And HBOS was not in trouble and had not turned to the Bank for help.
The rumour-mongers were playing with fire. Had the tales not been nipped in
the bud by the Bank and HBOS itself, a repeat of September’s run on Northern
Rock could easily have happened. It was the financial equivalent of dropping
a bomb in a crowded building. The episode showed that nerves are strained –
and not just in the City.
“There’s a degree of irrational fear taking over,” said Mark Nish, a director
of Chartwell Private Client, a firm of financial advisers in Bath. “I’ve had
many more telephone calls from clients looking for reassurance, particularly
retired people who inevitably have deep concerns about the impact all this
could have on their standard of living.
“Last summer’s increases in the stock market and property values created a
false sense of security, but there’s now a sense of reality being forced
upon people.”
How hard will this bite for the man in the street? Are the problems restricted
to the financial markets or is the economy set for meltdown?
ECONOMISTS are cautious by nature and unwilling to make declarations about the
state of the economy before they have all the facts and figures.
Last week, however, both the International Monetary Fund and the Paris-based
Organisation for Economic Cooperation and Development (OECD) came close to
declaring that America, the motor of the global economic machine, had hit
recession.
“The US economy is now essentially moving sideways, if not contracting
outright,” the OECD said. “It may be premature to declare a recession, but
with the pace of activity so far below potential, economic slack is widening
rapidly.”
It was more upbeat about other countries but warned that no economy would be
“sheltered from financial turmoil”. The aphorism that “when America sneezes
the rest of the world catches a cold” remains true, despite the rise in
importance of the Far Eastern economies, notably China.
In Britain, so far at least, apart from the housing market and a tumble in the
price of offices, shops and other commercial buildings, the effects of the
credit crisis on the wider economy appear to have been limited.
Even cash-constrained shoppers managed to increase their spending by 1% last
month, according to the Office for National Statistics, much more than
economists had expected. The number of people in work rose by a healthy
166,000 in the latest three months; unemployment continued to fall.
Some analysts, however, warn that this could be the lull before the storm and
talk of recession, which would be the first since the early 1990s, has grown.
“We think that unemployment could eventually rise by 700,000,” said Vicky
Redwood of Capital Economics. “This would remove pretty much the last
remaining support for consumer spending.”
Michael Saunders, an economist with Citi, the US bank, has this weekend
revised down his forecasts for Britain’s economy and is now predicting less
than 1.5% growth both this year and next, well below the Treasury’s budget
forecasts.
“The sharp recent tightening of financial conditions is likely to hit consumer
spending and business investment quite markedly,” he said. “With the
intensifying and broadening financial crisis, we are cutting our forecasts.”
A reduction in growth is hardly the stuff of global melt-down, but that could
change if the banking crisis were to consume a big name such as HBOS. It is
a scenario that the world’s central banks are taking seriously. Yesterday it
emerged that they had been talking about engaging in a mass purchase of the
mortgage-backed financial instruments that had started the crisis. Such a
use of taxpayers’ money would be highly controversial, but it could put a
lid on the banking sector’s problems.
For many individuals in Britain, the credit crisis is causing more immediate
concerns. Our housing market has been driven for more than a decade by the
flood of cheap credit. Now that tap has been turned off, homeowners are
feeling it.
It is not just the first-time buyers who are suffering as 100% mortgages are
being withdrawn. Millions of people who are remortgaging their properties,
having finished cheap fixed-term deals, are finding that the amount they
have to pay is rising rapidly, despite the recent reductions in the Bank
base rate.
New figures revealed by The Sunday Times today show how the banks and building
societies are trying to recoup any credit crunch losses by increasing the
margin between the rate at which they borrow money and the rate charged to
the consumer. In some cases this has risen fourfold over the past year.
Even more unsettling is the fact that mortgage lenders are withdrawing
attractive deals, often within a space of hours, and replacing them with
ones with higher rates of interest.
Alicia and Shane Pavitt are in the process of remortgaging their three-bed
semi in Guildford. The couple, both 30, thought they had arranged a good
deal with Abbey to replace their 4.99% fixed-rate mortgage with Alliance &
Leicester; but after two weeks of waiting it was cancelled. They have
managed to fix another mortgage but calculate that it will cost them an
extra £300 a month in repayments. With a child on the way and with household
bills rising generally, it will hurt.
“We started looking for the new mortgage a couple of months ago, but it’s only
in the past two or three weeks that we’ve suddenly noticed the rates
shooting up,” said Shane, who works in property.
“We have got a child on the way and could really do without the increased
outgoings at this time of our lives. We’re hoping to ride the storm for the
next two years.”
They may be the lucky ones.
The credit crisis is biting and it is biting hard. Michael Coogan,
director-general of the Council of Mortgage Lenders (CML), suggests that
Britain’s mortgage market faces a £30 billion funding gap this year – the
difference between what the banks and building societies are able to supply
and the demand from borrowers.
“We have entered a substantially slower phase in the housing market,” said
Coogan.
“Demand for mortgages remains strong but cannot be fully met from existing
funding. This has led many lenders to reduce their product ranges, increase
their mortgage prices and, in some cases, to reduce their lending capacity.”
In the past few days a number of smaller building societies, including the
Bath, the Newbury, Melton Mowbray and the Tipton & Coseley have either
stopped or severely cut down their lending.
The CML had expected house prices to fall in the first half of the year but
then recover as the effects of the credit crisis faded. Now it is worried
that prices will remain depressed. The Nationwide, Britain’s biggest
building society, has acknowledged for the first time that house prices
could fall by 5% this year.
Some businesses, well away from the financial markets or property, are also
starting to feel the chill winds of the crisis. Adrian Yalland runs a travel
firm in Hampshire and is noticing the change.
“We are a small business of six employees and, as a travel company, rely
heavily on our overdraft and bank loans to allow the company to function,”
he said. “Lines of credit are drying up and the normal trading difficulties
you would expect in an economic down-turn are being exacerbated by the
banks’ hesitance to offer short-term financial assistance.
“We’ve applied for small business loan guarantee schemes at three different
banks. We’re only talking about £100,000 but all the banks said no. We’ve
had to borrow from friends and family and remortgage our houses.”
The Federation of Small Businesses says that cases such as Yalland’s are, at
present, rare. The steady increase in the cost of borrowing, however,
suggests that the pinch may become stronger in the next few months and the
business environment could change for the worse. THE crisis is also
transforming the political landscape. Downing Street has been transfixed by
the chaos in the global markets, the biggest test for the economy since
Labour took office 10 years ago.
Two of the new arrivals in Gordon Brown’s bunker have experience of working in
the City. Stephen Carter, his new head of strategy, was previously chief
executive of Brunswick, the financial public relations firm, while Jennifer
Moses, who joined last week as a senior policy adviser, used to work as a
Goldman Sachs banker.
Her family has personally suffered at the hands of the credit crunch. Her
husband Ron Beller is believed to have lost half his personal £40m fortune
as a result of the collapse of Peloton Partners, his hedge fund.
Brown is distancing himself from day-to-day management of the crisis. A
Downing Street aide said: “Unlike Northern Rock, where Gordon did personally
interfere, the management of the crisis has genuinely been left to Alistair
Darling at the Treasury, the Bank of England and the Financial Services
Authority.”
Allies of Brown are praying that the banking crisis does not trigger serious
problems in the “real” economy. Hands-off or not, he would be blamed. They
are aware that amid the plunge in Labour’s poll ratings the Tories have
moved into a lead as the party that voters trust most to run the economy.
As shares in HBOS dived on Wednesday there was a widespread expectation that
David Cameron, the Conservative leader, would use prime minister’s questions
that lunchtime to attack Brown for his incompetent stewardship of the
economy. Instead Cameron led off on the violence in Tibet.
“We did consider kicking off on the markets, but we could not think of the
question that would ensure a comprehensive defeat of Brown,” said a senior
adviser to Cameron. “Everyone now expects Dave to beat Brown every week.”
The Tories are reckoning that with even the Treasury’s experts warning that
the credit crisis will get worse before it gets better, there will be plenty
more opportunities to put ministers through the mill.
Others seem happy to do the job for them. In the wake of the HBOS share plunge
last week, some City wags pointedly noted the silence of Brown and Darling
on the issue. “Taxman and Boy Blunder are noticeable by their absence
again,” said one poster on an internet message board. “I have visions of
them hiding under the table in Downing Street rocking back and forward in
blind panic with their thumbs in their mouths.”
DESPITE the gloom, not everybody is giving up – even on the housing
market. Jenna Kelly, 23, manages a cosmetics counter and Bradley Johnson,
26, works as a floor layer. The couple are buying their first property, a
two-bedroom maisonette in Romford, Essex, for £175,000.
“The first time I went to look for a mortgage was in June last year, but no
one would give us a 100% mortgage so we have had to wait almost a year until
we’d saved the deposit,” said Kelly. “We’ve had to live in my parents’ house
in order to be able to save enough money and even then very few of the
mortgage companies would accept us.”
The couple’s Standard Life 95% mortgage will be on an interest rate of 6.29%,
more than a percentage point above the official Bank rate, but they think it
is worth it.
“It has been difficult but we just wanted to get onto the housing ladder,”
Kelly said. “The repayments are going to be a bit of a hit at first but we
decided to do it.”
They are thinking about the long term. After all the turbulence and alarms of
recent days, many would hope that those who have the job of managing our
money could learn to do the same thing.
WHAT TO DO ABOUT YOUR MORTGAGE
What’s happening?
Up to 1.4m people face a sharp rise in mortgage repayments this year when
their fixed deals come to an end. The Council of Mortgage Lenders has
calculated that a borrower with the typical £114,000 mortgage will have to
pay an extra £140 a month or £1,680 a year. Lenders have been hiking rates,
making their lending criteria tougher, especially for first-time buyers.
What can I do about it?
If you aren’t due to remortgage until later this year, you could still book a
good deal now. You can normally apply for a mortgage up to six months in
advance of your remortgage date, although there may be a nonrefundable
booking fee of around £100. Consider paying off some of your debt ahead of
your remortgage date, too – the best deals are available to those with
substantial equity in their homes.
