Economy

ALEX BRUMMER: Chiefs who swerve blame over the LDI catastrophe

The turmoil in the UK government bond market and its impact on the pensions and mortgages of millions of ordinary citizens was the most disturbing financial event of our time.

No other collapse, ranging from Britain’s exclusion from the exchange rate mechanism in 1992 to the crisis of 2007-2009, caused such an immediate reaction.

Both Chancellor Kwasi Kwarteng and Prime Minister Liz Truss were mercilessly removed from office.

Market turmoil: Responsibility for the LDI crisis, which jeopardized the pensions of 10 million people and required a £20bn bailout by the Bank of England, is yet to be determined

The blame for the market shock lies entirely with Kwarteng-Truss and their frenzied drive for growth.

Responsibility for the turbulence, which jeopardized the pensions of 10 million people and required a £20bn bailout by the Bank of England, has yet to be determined.

The current parliamentary probes show that the financial establishment is in a money lender.

Banking Governor Andrew Bailey argued that the best way to avoid another collapse in the market for liability-driven investments (LDIs) — complex derivatives built on gilt-edged stocks — is to change the rules for trustees in smaller funds that don’t are equipped to deal with crises.

Please wait. The Bank itself warned back in 2018 that this was an accident waiting to happen, stress-testing the market for a full rise in government bonds and proposing to involve the pension regulator, its own prudential arm and international enforcers. Nothing happened.

As for Bailey, he received no early warning from Downing Street about the upcoming easing, so it is believed he was unable to brake the locomotive and prepare.

Members of the Monetary Policy Committee (MPC) do not live in a vacuum and could not help but be aware of the noises coming from Downing Street, including the decision not to have the mini-Budget audited by the Office for Budget Responsibility.

What was the point of the Treasury sending a senior official, Clare Lombardelli, to the MPC session just days before the budget if she was unable to provide a global tax briefing?

The story from the other side of the fence was equally unconvincing.

Legal & General bosses John Kingman and Nigel Wilson turned their fire on the departed political principals.

This easily pushed aside their own guilt in using LDIs to manage pension liabilities. Other major insurers such as Aviva avoided such risky strategies.

Former deputy governor of the Bank of England, Paul Tucker, called it right. He suggested that the stress tests for a full percentage move in rates were inadequate and should have been three full points.

The impact of complacent regulation is still being felt. Lloyds Bank boss Charlie Nunn argued at an FT banking summit that the effects of the mini-Budget will linger, in the form of a price drop.

Contagion from LDIs, part of the shadow banking universe, is not completely under control.

Branch devastation

HSBC has enough problems in Hong Kong China without alienating UK customers.

It can’t help but cut costs by cutting a quarter of its UK branches, reducing a network that once spanned every corner of the country, with 1,200 outlets, to just 327.

Yes, most customers go online for routine transactions. But there are entire classes of customers, including the elderly, who do not have digital access.

Many small retail businesses rely on the local branch to obtain coins and pay in cash.

They don’t need wasteful fuel and time-consuming travel to distant branches.

In turbulent days like this fall, there’s no substitute for meeting face-to-face to get a mortgage or for a company looking for a bigger line of credit.

Post offices, overcrowded as they are with online returns customers, are no substitute.

If the Nationwide, a mutual, can seriously repurpose affiliates, HSBC should be able to evoke similar creative thinking.

Self-injury

Mulberry has long struggled to establish itself as a world-class luxury brand.

Nevertheless, Jeremy Hunt has to listen to CEO Thierry Andretta who says customer numbers have plummeted since the Chancellor reintroduced VAT on foreign customers.

Brexit was intended to give the UK the freedom to set its own competitive tax rules.

Instead, the government has shot itself and the fancy tourist hospitality industry in the foot.

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Jacky

The author of what'snew2day.com is dedicated to keeping you up-to-date on the latest news and information.

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