Friday, October 10, 2008

Council investments on ice

Via Tygerland, I see that Dave Osler has written a perfectly sensible post over at Liberal Conspiracy.
For some reason, this morning’s newspapers are full of outcry about what UK councils are doing investing in Iceland anyway. The answer to that seems quite simple; they were seeking the best returns for the council tax payer, which is exactly what they should be doing. Remember, Iceland’s leading banks offered high rates of interest and enjoyed AAA credit ratings. Sounds fair enough to me.

This is a good point well made. The trouble is that seeking the best value for the taxpayer does mean that, when your investments are looking dodgy, you should pull the cash out.

Your humble Devil has been sent this Time article (and I see that they spammed Iain Dale too) which points out that those in the know were aware that Iceland was perhaps just a wee bit dodgy some time ago.
In July, Kitty Ussher, then Economic Secretary to the Treasury and now a minister in the Department for Work and Pensions, was quizzed by an influential House of Commons committee after newspaper reports that the Icelandic Deposit and Investors Guarantee Fund had insufficient resources to cover its potential liabilities. "Are you satisfied, Minister, that British investors in Icelandic banks are fully guaranteed in the event of a bank collapse then?" wondered Michael Fallon, the Conservative MP who chairs the committee. "I am satisfied that the law exists to guarantee them, yes," replied Ussher. Fallon persisted: "You are satisfied that the law exists to guarantee them?" "Yes," came Ussher's reply, "under a combination of European and British law." "So they will get all their money back?" Fallon asked. "That is the legal situation," said Ussher.

The key phrase here is 'British investors'. There was no differentiation between individuals, councils or companies. And Ussher then went on to say that everyone would be legally entitled to get their money back. If she had misspoken, no doubt the record would have been corrected.

What this does show is that there were doubts about Icelandic banks many months ago. On the face of it, it seems incredible that no one who was offering financial advice to local authorities seems to have picked up on this. And what about HM Treasury, the FSA or the Bank of England? Shouldn't one of them have picked up on what was going on and issued some advice?

Those who have followed the Iceland situation for a few years—and your humble Devil is not, I confess, one of those—have long felt that the situation there (banks lending out five times the country's GDP, and the like) was more than mildly insane in the short-term and utterly unstable in the long-term.

One wonders who has been advising the councils...?

UPDATE: according to Gavin Ayling, one or two did get good advice and acted on it.


Anonymous said...

Oh lovely a Google challenge.
I'm sure I read that two firms who give financial advice to public bodies (one called Butlers or something) gave warnings in November 2007 and January 2008.

If I find it I'll return

Old Holborn said...

I've launched an FOI request on my council

Read the full story over at my place

TheFatBigot said...

There is no contradiction between the advice given to Gavin Ayling's council and the answer the minister gave the committee.

The minister's answer was that all British investors are "fully guaranteed in the event of a bank collapse". The advice given to Mr Ayling's council was that Icelandic banks might collapse. The two sit together very comfortably.

A council receiving both pieces of information would have the choice of: (i) leaving its money in place to get a high return and calling on the guarantee if things go belly-up or (ii) withdrawing the money to safer pastures thereby getting a lower return but avoiding the inconvenience of calling on the guarantee.

Either course of action could be perfectly rational. What would not be rational, however, would be relying on an off-the-cuff legal opinion thrown out by a junior minister rather than seeking formal legal advice.

The problem, of course, is that the minister's answer does not appear to be correct and, presumably, any properly researched legal opinion would make that clear. The wise treasurer, responsible for millions of pounds, would seek legal advice because he then has the lawyer's professional indemnity insurance as additional security.

A lawyer researching the issue could only reach one of three conclusions: (i) the minister was right, (ii) the minister was wrong or (iii) it is unclear whether the minister was right or wrong. Only the first conclusion would be a proper basis for leaving substantial sums in a risky bank.

Anonymous said...

The kind of people giving advice were no doubt like Professor Richard Portes of the London Business School. Google him and Iceland.

Trixy said...

Pah, I knew Iceland was going tits up so if I did, financial advisors should have done. Which is why Trixy's father did not put anything in his IceSave account even though it was recommended by the likes of moneysupermarket and other whizz wad websites.

Guthrum said...

I am in heated correspondence with the CFO of my local authority, who is sending me emails at 8am on a Saturday Morning.

His contention that Fitch issued an A rating when they invested £3m on the 27th May, Fitch on Sky News are saying they issued warnings in 2006 and specific warnings on 1st April.

see the lpuk blog and lookingfor a voice blog.

Locally we are currently seeking legal advice as the same arguments are being deployed as in the Orange County Bankruptcy in 1994 in California, when speculating with Taxpayers money.