Car Finance Out of Control?

 

Warnings over excessive and risky borrowing in the car finance market are evoking memories of the financial crisis. Regulators on both sides of the Atlantic are becoming increasingly concerned about the car finance market, amid mounting fears that the same practices which created the financial crisis of 2007 / 2008 may be happening all over again.

 

In the UK, British households borrowed a record £31.6 billion in 2016 to buy cars (up 12% on 2015) according to the Finance and Leasing Association. A similar phenomenon is apparent in the US, where the value of outstanding car loans rose to $1.1 trillion (£880 billion).

 

However, it’s not so much the growth in car finance that is worrying regulators, but the nature of the debt and how financiers are managing it.

 

In the UK, around 9 in 10 loans are personal contract plans (PCPs), where buyers pay a small upfront deposit and then commit to making a monthly payment for the next three years with the option to buy or hand back the car at the end of this term. Very often (analysts suggest) these plans are being offered to borrowers with poor credit scores.

 

Similarly, economists in the US warn that there has been a sharp increase in loans to poor credit scorers over the past 5 years……no surprise that the arrears are rising at an alarming rate.

 

Another thing the US and UK car finance sectors have in common is securitisation, with the finance arms of leading motor manufacturers working with investment banks to package up their loans into tradable asset-backed securities, offering an income stream financed by borrowers’ repayments. Such securities are attractive to investors looking for yield in an environment where ultra-low interest rates make income hard to come by.

 

Déjà Vu?

 

All this sounds worryingly familiar. In the subprime mortgage crisis of a decade ago, borrowers began to default on loans en masse, with the effects then bouncing around the financial system because these loans had been securitised and sold on to banks, pension funds and other investors.

 

Regulators are understandably worried by such echoes. The Federal Reserve Bank of New York has warned that while car finance arrears have been increasing, lender appetites to offer such borrowing shows no sign of diminishing, with lending volumes continuing to rise. The Bank of England’s Financial Policy Committee, meanwhile, has said it is determined to monitor underwriting standards closely amid fears that consumer borrowing has the potential to leave lenders vulnerable to financial shocks. The Bank’s economists have also warned that the growth of PCPs has added to the potential for car finance defaults to damage financial resilience.

 

The biggest issues that regulators fear is that some sort of macroeconomic shock (an economic slowdown driving unemployment higher or a sharp rise in inflation that increases the cost of living) could trigger much higher default rates. Given that the value of most cars depreciates rapidly compared to other assets, lenders seeking to repossess vehicles in order to mitigate their losses would be likely to fall short – just as repossessions of properties bought with subprime mortgages did not prevent the last crisis.

 

All very worrying……we are not at tipping point but it is definitely a watching brief. The warning signs are there……but will they be respected this time around?

 

Cautious times.

Brexit Thoughts #3: Drugs

Currently the London-based European Medicines Agency (EMA) authorises drugs for use across the EU……including the UK. However, the EMA is expected to move out of the UK after Brexit, raising uncertainty over whether the UK will need to develop its own separate drug approval system.

The fear is, that if this happens, pharmaceutical firms could be slower to seek permission for their drugs to be used in just one country (i.e. UK)……focusing instead on getting their drugs approved for larger more lucrative markets (i.e. EU).

There are uncomfortable outcomes with this scenario:

Firstly, there are fears Brexit may cause delays in UK patients getting new drugs as the larger EU market is a bigger incentive for pharmaceutical firms.

Secondly, Brexit could undermine future investment, research and jobs in the UK in this sector.

Health, jobs, medical research and development, etc. all in the balance and hanging on positive negotiations.

2 years seems a very short timescale all of a sudden.

Brexit Thoughts #2: EU Employment

Employment reached record levels across the Eurozone and the wider European Union during the first part of 2017. Compared with last year, 1.5% more people in the countries using the single currency had jobs. The by-product of the employment figures is that it bodes well for the EU’s economic growth figures. This can only be a good thing in the short term for the UK as they are our biggest trade partner……we benefit from their prosperity.

 

There are two trains of thought on whether this is good for the UK’s Brexit negotiations.

 

On the one hand, some will argue that the EU is not coming from a desperate economic / employment background and there will be confidence in its current position. Some will feel that they don’t need the UK as a consequence……be off with them.

 

On the other hand, others will argue that their improving economic outlook is because the UK is part of the EU currently. As the EU’s biggest trade partner, barriers to trade with the UK as a consequence of Brexit will only have a negative impact on economic growth.

 

So, is the EU glass half full or half empty?

 

We shall see.

Brexit Thoughts #1: Cars

 

The EU is by far the UK's biggest car export market, with more than half of all finished cars bought by the EU. This is four times as large as the next biggest market. UK car manufacturing generated £77.5 billion of turnover last year and accounted for 12% of the total goods exported from the UK.

 

Clearly the EU is a ‘big deal’ in car making and to the UK economy.

 

All of this is the by-product of the tariff / tax free movement of goods within the EU……can you now imagine the impact of increasing car production costs if there is a new EU import / export tariff?    

 

Then add in new regulatory red tape and new labour issues and it is clear there is much to be thrashed out during Brexit negotiations.

 

This is just one small area amongst the enormity of issues to be negotiated……but it is one small area that employs 1 million people in the UK.

All The Presidents Lies

There is simply no precedent for an American President spending so much time telling untruths. Every president has shaded the truth or told occasional whoppers. No other president has behaved as Trump is behaving. He is trying to create an atmosphere in which reality is irrelevant……yet he complains of ‘fake news’. The guy is clearly persistently drunk!

 

The New York Times has catalogued all of these lies and it is a truly fascinating read……Trump told public lies every day of his first 40 Days. The streak didn’t end until 1 March 2017. Since then, he has said something untrue on at least 74 of 113 days. Nearly 60% of Americans say the President is not honest……up from about 53% when he took office.

 

The full article can be read at the following link. However, my particular favourites are below:

https://www.nytimes.com/interactive/2017/06/23/opinion/trumps-lies.html

 

21/01/2017: “A reporter for Time magazine — and I have been on their cover 14 or 15 times. I think we have the all-time record in the history of Time magazine.” (Trump was on the cover 11 times and Nixon appeared 55 times.)

 

25/01/2017: “So, look, when President Obama was there two weeks ago making a speech, very nice speech. Two people were shot and killed during his speech. You can't have that.” (There were no gun homicide victims in Chicago that day.)

 

16/02/2017: “Walmart announced it will create 10,000 jobs in the United States this year because of our various plans and initiatives.” (The jobs are a result of Walmart's investment plans announced in October 2016!)

 

07/03/2017: “122 vicious prisoners, released by the Obama Administration from Gitmo, have returned to the battlefield. Just another terrible decision!” (113 of them were released by President George W. Bush.)

 

08/05/2017: “You know we’ve gotten billions of dollars more in NATO than we were getting. All because of me.” (The deal was struck in 2014!)

 

21/06/2017: “Right now, we are one of the highest-taxed nations in the world.” (They are not even close to being the highest!)

 

 

And in case you need reminding, this is the most powerful man in the world!

 

Remarkable……truly remarkable.

The Price of Keeping Power

So there you have it…… Theresa May has made a pact with the Democratic Unionist Party (the DUP to you and I) to bring the total farce of a General Election to an end.

 

In short, the Tories have done a ‘deal’ in return for the DUP voting in line with the Conservatives at W1 and propping up the minority Government for the two years (which in theory is necessary to deliver Brexit).

 

Here’s the kicker……the Government has promised a sweetener for Northern Ireland to the tune of £1 billion (for investment in health and infrastructure). Or to put that another way……that’s £1 billion of our money to buy 10 DUP MPs voting rights.

 

Which begs the question……is this deal in the national interests?

 

The money that has been found down the back of the Number 10 sofa for Northern Ireland may be worth it for Theresa May as the price of holding power……for now.

 

What is very striking is that she has not signed the agreement with the DUP……it has been signed by her chief whip Gavin Williamson. The rationale for this? The deal will survive her resignation or eviction.

 

Which all leaves me feeling that democracy is deformed.

Barclays Bashed

The fallout from the banking crisis has been long, grossly incompetent on so many levels, calamitous, moral sapping and lacking logic to so many (well, to pretty much everybody outside of Westminster and the Banking sector). Yet, here we are 9 years on and headlines are still dominated by bank corruption and greed from that period.

 

The moral corruption of the sector seems to be just an accepted part of ‘what goes on’. The illegal corruption has been harder to pin down given the few instances that have actually ended in charges, the law courts or in fines……but Barclays look like they are going to get a bloody nose.

 

The Story……

Barclays took £12 billion from Qatar in 2008 as foreign investment, as banks scrambled to avoid nationalisation. These emergency funds allowed Barclays to avoid a Government bailout in 2008 at a time when rivals Lloyds Banking Group and Royal Bank of Scotland were forced to rely on a taxpayer rescue. Investigations have focused on a £2 billion loan advanced to Qatar by Barclays after the fundraisings were negotiated - the implication being that there was a money-go-round at work. Or to put that another way, Barclays was handing Qatar some of the money it was using to support the British bank. There are also instances of Barclays paying for fictitious ‘advisory services’ to the tune of over £300 million.

 

Interestingly, it has taken over 5 years to untangle the web to get this far and issue criminal charges. Even more interesting is that these are the first criminal charges related to the financial crisis that have been brought against a bank in the UK.

 

Which begs the question why are there so few criminal charges ……is it the complexity of the financial interactions, lack of investigating resources or limited financial experience of the investigations? More worryingly, is the moral corruption actually legal?

 

As we have seen over the years, fines have failed to stop banks pushing the envelope. Perhaps taking the liberty away from those involved is the only way that the message will get through.

 

Finally we are getting somewhere.