Category: media

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The Cladding Scandal – a generation trapped?

On YouTube as I speak.

Why you should watch: There may be as many as 11 million people trapped in apartments that are unmortgageable (and hence unsaleable) as a result of building deficiencies revealed after the Grenfell disaster. Remediating those deficiencies could cost well over £10 billion – vastly more than the £1.6 billion that the government has budgeted for.

Who pays?

Legally, at present, it’s the leaseholders – who can face bills up to £100,000, on top of insurance premiums that shot up five-fold. ‘Morally’, it might be the developers – if you can find them. It doesn’t seem to be the freeholders. This is a major issue – economically, financially, socially, and politically. At present, there is point-scoring in Westminster, with Labour demanding that leaseholders shouldn’t pay anything, and Government ministers backtracking a bit from a firm pledge to a softer promise that leaseholders shouldn’t be faced with ‘unaffordable’ bills.

Maybe this is an area where a bit of financial innovation wouldn’t come amiss…

Moderator: Andrew Hilton (Director, CSFI) Panellists: Sir Bob Neill is the Conservative MP for Bromley and Chislehurst. A barrister, educated at LSE, he was formerly a member of the London Assembly and Shadow Local Government Minister. He is chair of the Justice Select Committee, and has recently become chair of an APPG on the cladding issue. Martina Lees is a senior property writer at The Times and the Sunday Times, where she previously spent ten years as a digital section editor. She began her journalistic career as a crime reporter in Johannesburg. Dean Buckner is policy director at the UK Shareholders’ Association, and a trustee of the Leasehold Knowledge Partnership. He is a former insurance data specialist at the PRA and BofE, and, before that, spent a number of years in the City.

 

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Equity release in the news again

By Adam Williams, Sunday Telegraph.

..  those looking to release equity have been urged to compare the fees charged by advice firms. The UK Shareholders’ Association, a not-for-profit consumer group, found that some homeowners could be charged almost 10 times more if they used certain advice firms. All equity release sales must be conducted through an adviser.

But the UKSA said the fee often bore no relation to the amount of advice given. It found that one broker, Age Partnership, charged a fee equivalent to 2.25pc of the cash released. This would mean that a 70-year-old taking out a 40pc mortgage on a home valued at £750,000 would pay £6,750 in fees.

[..]

The UKSA questioned whether there was a potential conflict of interest at firms that only charged customers who were sold a loan, rather than charging for the advice itself.

 

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Are UK banks really as strong as the Bank says?

Youtube this morning.

With the economy undergoing the biggest downturn since 1709, it is natural to ask if UK banks are strong enough to withstand this downturn and still function normally. The mood music coming from the Bank of England has certainly been reassuring. But are UK banks really as strong as the Bank says?

The answer, sadly, is no. In this video, Professor Syed Kamall (IEA Academic and Research Director) chairs a discussion with Dr Dean Buckner and Professor Kevin Dowd, who authored a recent IEA Discussion Paper “How Strong are British Banks: and can they pass the Covid Stress Test”.

Professor Dowd and Dr Buckner argue that Banks are more fragile now than they were going into the last crisis. The Bank of England’s failure to ensure the resilience of the banking system suggests a need for radical reform that does away with the regulator.

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Lenders more fragile than before crash

The Times mentions today a report by the Institute of Economic Affairs dismissing claims that banks are strong enough to survive a more severe financial crisis than the last one.

Kevin Dowd and Dean Buckner, the authors, say that acute pressure on banking stock prices “contradicts” the central bank’s conclusions that they are adequately capitalised. “The Bank of England’s claims that UK banks are so strongly capitalised after the global financial crisis they could go through an even worse event and still emerge in good shape do not hold water.”

Oh dear.

The report is here.

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Regulation masking condition of insurers

Source: FT

A great piece from Ford of the FT this morning.  Insurers don’t have to mark down the virus losses on their bond portfolios on the assumption that the spreads will narrow back down again. Analysis from Dean Buckner, a former insurance regulator at the UK watchdog, has estimated that six large UK insurers collectively ran up £28bn of mark-to-market losses on their bond holdings as of the beginning of June, etc.

But the worry is that “a large number of bonds subsequently default or get downgraded to junk. That would force the insurer to crystallise a sudden and potentially much more substantial loss. ”

Quite.  The comments as always are instructive. Buckner is accused of being a ‘mark to market fundamentalist’. Correct. If you value the balance sheet above its market price, you are defrauding prospective shareholders who might want to buy. If you value the balance sheet below its market price, you are defrauding existing shareholders who might want to sell. You should not be defrauding shareholders, who bear the brunt of the risk. Therefore value the balance sheet at best estimate of its market price.

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To Be or Not to Be, L&G’s £10 Billion Question

L&G have been much in the news recently, so too has our own Dean Buckner, with star appearances in the Financial Times, the Times and the Daily Mail (see also here) and all in two days.

The fur continues to fly over L&G’s planned June 4th dividend, but the attention is shifting subtly from the dividend itself to the underlying valuation methodology and the central issue is (one again) the Matching Adjustment.

There is also the issue of the firm’s ‘virus spread’ losses or, more precisely, Dean’s estimate that these could be up to £10.3 billion. Dean has stirred up a right hornets’ nest this time.

Here is my take.

Continue reading “To Be or Not to Be, L&G’s £10 Billion Question”

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Two for one

Not one but two articles on Matching Adjustment in mainstream media today.

The Times:

L&G ‘sitting on £10bn of bond losses’ Pressure grows on insurer to abandon dividend

Legal & General is sitting on estimated bond market losses of as much as £10 billion, according to a shareholder group which is urging the insurer to postpone its planned dividend. The UK Shareholders Association argues that the outlook for financial markets is much too uncertain to justify L&G making its £754 million payout promised for next month. Dean Buckner, its policy director and a former Prudential Regulation Authority official, said L&G would be sitting on huge paper losses because of the slide in many bond prices since the start of the year.

Slightly misquotes me. I actually said that mark to market losses could be high as £10bn, but without knowing the breakdown by rating and sector it would be difficult to say.

In the Financial Times:

Investors should beware the insurance magic money machine

Ford gives one of the best layperson explanations of the Matching adjustment that I have seen yet.  He supposes a company with £100 of risk free assets and thus £100 of liabilities swaps them for £100 of higher yielding risky assets.

The matching adjustment kicks in when it shifts some of that money into higher-yielding assets. In theory this should change things: higher yields carry more investment risk. So to continue protecting the annuitants, the insurer needs more loss-bearing capital than its present zilch.

But here’s where our convention really earns its corn. Using matching adjustment, our insurer can discount its liabilities at a higher rate, reflecting the extra return it hopes to make from those higher-yielding assets. This reduces its liabilities to, say, £90. So without anyone contributing a penny, or the company retaining any earnings, hey presto, its equity “buffer” has risen from £0 to the more substantial level of £10.

No less helpful is what happens when market turmoil strikes and spreads balloon. Then our insurer gets to discount its liabilities at even higher rates, creating more artificial capital and thus compensating for falling asset prices.

Then we are back to masks versus cushions again.