Here are my views on what’s been happening in the world of insolvency during the last month or so.
The role of the Bank of England and accountants in the banking crisis
The last month or so have seen the conspiracy theorists and doom and gloom mongers given a good deal more ammunition to support their theories.
Firstly, in Mid December Wikileaks released notes of Mervyn King’s meeting of March 2008 with two senior US government officials – this was around the time the first major US bank, Bear Stearns, found itself in difficulty, six of months before the larger Lehman’s collapse which brought about the chaos in the banking system that still reigns today. The notes show that he suggested that an alternative to the G7 should be set up to finance what he saw as a necessary bailout of the world’s banking sector. He believed the sector was systematically insolvent – far more serious that being merely illiquid – and the G7 was ‘dysfunctional’ because it did not include the major nations capable of financing a bailout of the level required. This US commentator explains why he sees the banking sector as remaining vulnerable to melt down – here’s a link to his video on the subject.
Secondly, there are some interesting debates going on over accountants’ involvement in the banking sector. In late December Ernst & Young were sued by the New York attorney general over their audit of Lehmans. Whatever the outcome, the reputation of the firm and wider accountancy sector as a watchdog will be tainted. Representatives of the top 4 firms of accountants have also recently appeared before a select committee of our own House of Lords. Their report, which is due to be published in February, will make interesting reading – I’ll summarise it in the next newsletter. The top 4 firms’ dominance of the bank audit market, their ability to understand global banking systems, their valuing of bank assets, and their reporting role will no doubt feature in the report.
On this latter point, what I find interesting is the fact that the big 4 firms of accountants sought fit to write a joint letter to the then Chancellor of the Exchequer in November 2008, a few weeks after the bail out of the banks. In that letter they warned of the potential inadequacy of bailout given the immense figures involved and of the devastating effect a meltdown of the sector would have. Here’s a link to the letter itself.
Why do I find this all very interesting? Firstly, the interdependence of the world’s banks, far from being something positive, is a major structural weakness – surprises could come from anywhere at any time, striking down banks you thought had nothing to fear. It was this interdependence, this inter-lending, that created the credit bubble. Reducing that interdependence is key to building a safer banking sector, but doing this will reduce the level of credit available to you and me going forward. Secondly, it is clear that governments and regulators have known a lot more about the depth of the sector’s problems, and far earlier, than they have let on. There has been an awful lot going on behind closed doors. Thirdly, the hugely expensive bailout of the banks merely addressed some of their then liquidity problems. The real problem in the banking sector is one of systematic insolvency. And this requires a completely different solution, one that needs the banks’ balance sheets to reflect the reality of their financial position – and this may involve letting some of the major banks fail. Put another way, propping up the banks and stimulating the economy has merely bought time, time which governments hope will see the banks winding out their bad debt problems, their viability hopefully restored, and the interdependences reduced. Meanwhile credit remains tight because the banks are reluctant to lend to each other – they do not trust each other’s ability to pay their debts! It will be some years before the banks’ exposure to toxic lending wind out. And if Wikileaks releases some of the documents it has suggested it will about one of the major US banks, will it, or we, have that time, or is the sector just a pack of cards? Fourthly, and this for me is the killer, nothing has changed since the King meeting or the Big 4’s letter. The underlying problems remain unresolved. And governments appear powerless – whatever they do has little lasting effect.
With Joe and Joanne Public being kept largely in the dark yet ultimately paying the costs of all this, it’s not surprising people are keeping their money in their pockets. It’s not just 2011 that will be interesting.
Interested in this subject? – I recommend the book ‘Too Big to Fail’ by Andrew Ross Sorkin. I struggle to put it down!
Cleaning up the debt advice sector
Readers of my newsletters will be aware that the end of 2010 saw the authorities making some effort to clean up the wider debt advice sector. Here’s a link to one of the latest examples of such steps, this time by the Insolvency Service, in closing down the IVA Council, a commercial company which helped people who had been mis-sold the IVA solution go into bankruptcy. To give you an idea as to the level of indignation by some of those in IVA, the IVA Council earned £2.8m from 3,000 clients in 2007/2008 – or should I say it took from the credit card companies as often it maxed out clients’ cards in order to get paid?
What the IVA Council got wrong was (i) it lacked clarity and consistency as to its fees; (ii) it overpriced its services; and the thing that really caused its demise (iii) it upset the larger IVA providers and credit card companies, whose financial clout ultimately led to the DTI taking action. What it got right is that IVAs continue to be massively oversold: it’s not by chance that about one in twenty people in IVA in the UK used the IVA Council’s services. With about one in three simply defaulting on their IVA, and many others simply unaware they were mis-sold the IVA solution, the client base of the IVA Council, although large, is only the tip of the iceberg. Unfortunately I am old enough to remember that IVAs were introduced with the aim of providing sole traders with an insolvency solution better than bankruptcy. They have instead been hijacked by the insolvency profession to help the typical Joe and Joanne Public in the street to deal with consumer debt.
Look at any IVA provider’s literature or website, and you will see they are worded very carefully indeed. Nowhere will you see any statement similar to ‘how you deal with your debt problem should reflect the importance you place on making a moral as opposed to a commercial choice. This is because on a purely commercial basis unless by going into IVA you protect your family’s income or assets, bankruptcy is normally the better route’. Nor will you find many references to the fact that nowadays lenders are more willing than ever to consider other options, such as full and final settlements from other family members. These are principles that I consider are key to providing best advice, and which I have upheld for a good many of years, with the introduction of the Enterprise Act back in 2002 merely accentuating the general principle. It’s why in the last 7 years, I have only recommended an IVA once – and that was to a lawyer who had financial problems.
People come to accountants, lawyers, IFAs and other professionals for guidance on issues such as how to best structure their affairs so as to minimise the tax they pay, where to invest to maximise their return, etc. The moral compass is largely ‘turned off’ when making such decisions. So why are the the big IVA providers allowed to fail to point out the the moral / commercial dilemma when it comes to dealing with debt problems? Do the Insolvency Service and the OFT not understand what best advice is or do they simply not have the courage to challenge the big boys? Answers on a postcard to the head of the Insolvency Service please.
Links to other press articles, blogs and sites
If you have a client looking to save costs, perhaps a good starting point would be to visit the website of Expense Reduction Analysts. Visit their download page for guides on topics such as property, back office, logistics and IT costs, or on how the comprehensive spending review could affect private businesses There’s also a pretty good blog section on a whole host of topics. Your local ERA member, Steve Jones, will be happy to help you.
Revenge of the Zombies – here’s an article I wrote for the Business Report explaining what zombie businesses are and the impact I think they will have on the upturn.
How would you like your frog, Sir? – my blog on the 10 things I think small business owners should consider in order to be successful in 2011.
Finally, I would really appreciate your continuing feedback, good or bad, on my newsletter.
Midlands Business Recovery
‘Doing more for Black Country Businesses’
Midlands Business Recovery, Alpha House, Tipton Street, Sedgley, West Midlands, DY3 1HE.
telephone: 01902-672323 fax 0705-343-7063
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