Jean Shaoul | ukwatch.net

Bradford and Bingley nationalised

Alex Doherty — Thu, 02 Oct 2008 19:08:52 +0000

The chancellor of the exchequer, Alistair Darling, announced minutes before the London Stock Market opened on Monday that the government would take over the Bradford and Bingley (B&B).

The second such nationalisation after Northern Rock, the B&B is Britain’s largest buy to let (BTL) mortgage lender and faced bankruptcy. The Labour government organised the bailout on behalf of powerful financial interests without any public discussion, after private talks over the weekend with banking chiefs and regulators.

Darling said that nationalisation was necessary after B&B’s share price had fallen to 20p, down from a high of £5.20 only two years ago, raising the spectre of a run on the bank that might spread throughout the banking system.

“We had to stabilise the situation in order to protect the banking system as a whole, he said, insisting that Britain would do “whatever it takes.”

Prime Minister Gordon Brown also made it clear that he would intervene to protect the City. He said, “The governor of the Bank of England, the chancellor and I will take whatever action necessary to ensure continued stability.”

This is a pledge to use the money of hard-pressed working people, whose wages have for years been held down at the behest of big business and the City, to protect the wealth of the financial oligarchy—not just in this instance but in future bankruptcies.

The chancellor used his powers acquired under the emergency banking legislation to enable the nationalisation of Northern Rock, Britain’s fifth largest mortgage lender, last February. The legislation permits him to circumvent normal bankruptcy law and transfer a bank to another bank or take it over, with as much or as little compensation as he thinks fit.

The government will take over B&B’s £51 billion mortgages and loans. B&B’s £20 billion savings arm and its 197 branches are to be sold to the Spanish bank, Santander, which also owns the Abbey and the Alliance & Leicester mortgage lenders, for £600 million, making it the fifth largest bank in the UK. To ensure that Abbey has the funds to pay back the depositors, it will receive £20 billion from the Financial Services Compensation Scheme (FSCS).

Since the FSCS, essentially a depositors’ insurance fund provided by mortgage lenders should a lender collapse, has no funds of its own, the Treasury will loan the FSCS £4.5 billion and the Bank of England £14.6 billion, all of it taxpayers’ money. In the meantime, members of the FSCS, the 700 financial companies that take deposits, must pay interest on the loan estimated at £450 million for the first seven months due in 2009, and nearly double that the following year. This they will no doubt pass on to their depositors in the form of higher charges or lower interest rates on savings accounts.

The FSCS and thus the government, as the chief creditor, hope to recoup the £20 billion loan from when—or if—B&B’s mortgages are repaid or sold on. But it is far from certain that the £51 billion mortgages—85 percent of which are in the risky BTL and self-certification market—will realise £20 billion in the foreseeable future.

The government will seek to run down B&B’s mortgage book as it has with Northern Rock, by encouraging those who can to take out new mortgages with other lenders. This will leave those homeowners with the worst credit ratings with the B&B, offering the prospect of the government issuing repossession orders and turning families out on the streets.

The move came as:

The fourth largest US bank, Wachovia, had to be bought out in a rescue deal brokered by the US authorities.

The six largest US bank and savings and loan company, Washington Mutual, was taken over by the US government and JP Morgan Chase.

The Fortis bank had to be nationalised by the Dutch, Belgian and Luxembourg governments.

Glitnir, Iceland’s third largest bank, was taken over by the Icelandic government.

Since then Dexia has become the second Belgian bank in a week to be bailed out by governments in Belgium, France and Luxembourg to the tune of €6.4 billion.

The B&B bailout comes just one week after the government brokered a takeover of another failed bank and mortgage lender, HBOS, by Lloyds TSB by relaxing competition rules and providing other unspecified “support.”

B&B, with a history going back 150 years, demutualised just eight years ago under legislation announced by the Labour government in 1997, in order to gain access to the wholesale markets for funds to expand and thus avoid reliance on deposits.

It expanded recklessly in the riskier markets of BTL and self-certification mortgages and bought the loan book from GMAC-RFC, General Motors’ lending arm, further increasing its exposure to risky lending.

As the downturn in the housing market and the credit crunch took its toll, lenders struggled to keep up with repayments and the bank found it difficult to finance its activities. It was forced to launch a rights issue in May. But the situation was so grave that even after twice restructuring its rights issue, only 20 percent of its shareholders responded to its call for the £400 million necessary to bolster its capital reserves. This left the bulk of the shares with the six high street banks and two investment banks that had underwritten the issue.

This month, as fears rose about the financial crisis and mounting mortgage arrears, the ratings agencies cut B&B’s credit rating to just a notch above junk bond status. It renegotiated its contracts with GMAC-RFC, whose mortgage arrears have turned out to be even greater than B&B’s own arrears, slashed jobs, mounted an aggressive TV advertising campaign, and sold or wrote down its more exotic and toxic financial instruments to increase its capital ratios. But this was not enough. Its share price plummeted and its credit default swaps, a measure of risk, doubled in a week.

With its shares virtually worthless, tens of millions of pounds were being withdrawn by savers from B&B’s branches and Internet site on Friday and Saturday.

This raises new doubts over the BTL market that collectively owes £132 billion or 11 percent of all mortgages. As soon as the nationalisation of B&B was announced, some BTL lenders increased their rates, while others have closed their doors to new customers.

B&B’s collapse means that all the six building societies that demutualised to become banks since 1986 have been taken over or been declared bankrupt:

Woolwich was bought after just three years as a bank by Barclays in 2000. Halifax was bought by the Bank of Scotland in 2001 after four years as a bank. The Abbey demutualised in 1989 and was taken over by Santander in 2004. Northern Rock collapsed in 2007 after 10 years as a bank. Alliance and Leicester was bought by Santander in 2008 after 11 years as a bank when it found itself unable to obtain funding.

A 2005 study by a group of MPs of the demutualised societies found that consumers had benefited very little and in most cases were paying more for a mortgage from a bank than from a building society. The claims of the new owners added 35 percent to a bank’s costs. The real winners were the top managers, who saw their paychecks increase almost threefold compared with the 65 percent rise in pay for their counterparts in the building societies. The cost of converting to banks cost more than £1 billion.

The reason for the collapse in the US sub-prime market that has now spread to other mortgage lenders is the inability of the poorest and most vulnerable members of society to keep up their repayments alongside rising food, energy and transport costs and on wages that have failed to keep up with inflation.

The restructuring of the mortgage lenders and banks will further concentrate financial resources and power in the hands of a few giants. This will in turn increase pressure on small and medium size banks, undermine their competitive position, and force them to close or sell out to their larger rivals.

It will lead to high charges for loans and more aggressive threats of repossessions, should homeowners fall behind with their payments. It will also result in the loss of thousands of jobs as branches close and services are “rationalised,” adding to the thousands of jobs that have already been cut in the financial, property and construction sectors since the onset of the credit crisis in August 2007.

The government bailout of Northern Rock and B&B adds at least £127 billion onto the public sector’s liabilities, a sum equal to 8.6 percent of GDP in 2007-08, and increases total net debt to GDP to about 48 percent—assuming the government does not fiddle the books yet again.

To get some sense of the scale of what is involved, these two bailouts alone—without including the billions pumped into the money markets by the Bank of England—is more than the £110 billion scheduled for healthcare, by far the largest spending area, for 2009-10. It is double the £60 billion worth of capital investment in hospitals, schools, transport, etc., by the private sector over the entire lifetime of the Labour government since 1997. Yet the turn to private finance for public infrastructure was in part at least justified in terms of accessing the finance that the government could not provide.

Far from the rescue of B&B calming the financial markets, there are widespread fears that it could have a domino effect throughout the banking sector. Lord Turner, the chairman of the Financial Services Authority, said, “We are not necessarily right at the end of this process. We believe our other high street banks are well capitalised, and in a reasonable condition, but we will have to keep this situation under review.”

As he said this, shares of Britain’s banks were in free-fall. Mark Deans, dealing manager at Moneycorp, said, “Confidence in UK banking has fallen to a new low with the nationalisation of B&B.”

With interbank lending virtually at a standstill, despite an interbank lending rate of 6.26 percent, well above the Bank’s official rate of 5 percent, the Bank of England was forced to inject £40 billion of credit into the money markets and provide £10 billion in overnight credit.

Economy hit by inflation and threat of recession

tim — Fri, 22 Aug 2008 18:34:49 +0000

There has been a host of statistics in the last few weeks that testify to the increasingly serious impact the financial crisis is having on the British economy and the living conditions of working people. The rise in the cost of living has outstripped pay increases for the first time since the 1990s—meaning that the average person is now officially worse off.

According to the Office for National Statistics, the annual inflation rate has doubled in the last six months, reaching 4.4 percent in July, the largest rise since this index, the Consumer Price Index (CPI), began in 1997. It was much larger than expected and more than double the Treasury’s target rate of inflation, raising fears that the Bank of England will raise interest rates. The more broadly based Retail Price Index (RPI) went up by 5 percent in the 12 months to July.

As well as a 26 percent rise in petrol and oil, there has been a 13.7 percent rise in food costs, particularly meat, bread, cereals and vegetables, and a 16 percent rise in utility bills. The rise in the CPI will in turn trigger a 6 percent increase in rail fares next January.

The prices that manufacturers pay for their materials and fuel have risen by a colossal 30.1 percent in the last year. They have posted price increases on their domestic sales of 10.2 percent, the highest since 1982.

Yet the Bank of England had predicted last year that the CPI would reach 2 percent. It has been forced to revise its estimates, and expects inflation to reach 5 percent or more, later this year. Just last May, it had predicted a 3.7 percent inflation rate for the year. Now it recognises that even the 5 percent figure may be optimistic, as the risks are high, particularly if inflation leads to higher wages.

But even more importantly, the Bank has revised its forecast for the economy downwards. It expects zero growth in the economy for the next year, despite a boost from exports as consumer spending and investment tumble.

Mervyn King, the governor of the Bank of England, told a press conference, “There is no point pretending that what is happening is not happening in the world economy—that this unique combination of higher food and energy prices on the one hand and a sharp dislocation in the financial sector on the other—is going to do anything other than make the next year a painful adjustment for the UK economy.”

King added that the country faced a period of stagflation. “The next year will be a difficult one, with inflation high and output broadly flat,” he said. He noted that since employment prospects were not good, “labour market flexibilities” might offset inflationary pressures.

But he could not avoid pointing out that there was a risk that the economy would spiral downwards into a deep recession. King said that there were “bound” to be one or two quarters of falling output as a result of the credit crunch and rising commodity prices. Furthermore, house prices had further to fall due to the banking sector’s inability to raise money in the capital markets and the consequent mortgage drought.

He made it absolutely clear that the Bank would “remain cautious”—code for refusing to lower interest rates to stimulate investment and the economy—despite the fact that wage growth was lower than inflation. “Wages do not make inflation,” he said. “It depends upon what happens in firms.” In other words, if companies believed that they could pass on their own cost increases onto their customers, second order inflation would appear.

The governor insisted however that “We will come through it; inflation will come down.” When asked why he was so confident, King replied, “We will take the action necessary to see that it does.”

What this means is that the Bank will raise interest rates to whatever levels are necessary and force the working class to bear the cost of adjustment.

Already unemployment has started to rise. The number of people claiming unemployment benefit rose for the sixth month in succession, increasing to 864,700. Last month saw the number of new claimants rise at the fastest rate for 16 years. The unemployment rate now stands at 5.4 percent. Total unemployment, including those jobless for more than six months and thus not eligible for unemployment benefit, rose to 1.67 million.

Redundancies rose by 13 percent between April and June. This is likely to rise further with more than 10,000 layoffs announced in the building and financial sectors since the end of June. A number of high profile city centre developments around the country have come to an abrupt halt, while British Land has held off signing construction contracts for the prestige 47-story development for the City of London known as the Cheesegrater.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said that the rise in unemployment was “gaining worrying momentum.”

Total employment would have fallen had it not been for the increasing number of pensioners taking jobs. Pensioners have been hit by the failure of the state pension to cover even the most basic needs, leaving ever more of those above retirement age in poverty and forcing them to stay in or return to work. The number of pensioners in work has risen by more than two-thirds since 1997 to 1.33 million, meaning that the employment rate for pensioners increased from 7.9 percent to 11.7 percent.

There has been a 47,400 fall in the number of job vacancies to 634,900. The trends illustrate how the credit squeeze and inflation are affecting employment. Particularly hard hit have been vacancies in shops, restaurants and hotels, which fell by 18 percent in the second quarter of the year as consumers have reined in their spending. Vacancies in the construction sector fell by 12.6 percent and in the financial sector by 9.9 percent.

Last week, a report from the British Retail Consortium (BRC) found that the fall in the housing market was affecting the demand for household goods and furnishings on the high street. Annual like-for-like sales were down in July for the fourth time in five months. The BRC said that shoppers were reluctant to spend on non-necessities, and they now included clothes in the non-necessity category. The supermarkets were the only high street traders to report significant growth on July 2007.

With fuel and food prices rocketing, more and more people are falling behind with their mortgage payments and face losing their homes. According to Ministry of Justice figures released a week ago, the number of court orders for mortgage repossessions rose to 28,568 in the second quarter of 2008, a 24 percent rise on the same period last year and the highest since the second quarter of 1992, when 30,587 court orders for repossession were made.

Adam Sampson, the chief executive of Shelter, the housing and homelessness charity, accused mortgage lenders of “still using repossession as the first, rather than the last resort, despite being urged not to.”

The Ministry of Justice also reported that the number of people facing bankruptcy rose from 17,847 percent in the first quarter of the year to 19,158 in the second quarter, an increase of 5 percent on a year ago. The number of creditor petitions—served by people who are owed money—jumped by 17 percent in the second quarter to 5,625. The number of debtor petitions—personal bankruptcies—climbed nearly 4 percent to 13,533.

According to Standard and Poor’s, the credit rating agency, UK credit card companies are seeing an increasing number of people walking away from the credit card debt. Companies have increased their charge-offs—defined as repayments of principal and interest which they no longer expect to receive—by an average of 6.9 percent in June, up from 6.62 percent in March.

The Bank of England’s warning of a recession sent sterling tumbling against the dollar and the euro. On Friday, the pound fell against the dollar for the eleventh day in succession to $1.85, down 6.5 percent since July.

Prime Minister Gordon Brown, who used to boast as Chancellor of the Exchequer that he had abolished the cycle of boom and bust, has made it clear that public sector workers will see their pay rise by no more than 2 percent even as prices rise, and has encouraged private employers to similarly limit their pay increases.

While the Labour government has bailed out banks and mortgage lenders on the point of collapse due to their own semi-criminal and reckless policies, it has done and will do nothing to assist the millions of working people struggling with mortgages, rising bills and debt.

Ombudsman demands government fund for Equitable Life insurance and pension victims

tim — Mon, 04 Aug 2008 13:44:44 +0000

A report by the parliamentary ombudsman, Ann Abraham, into the failed insurance and pension society, Equitable Life, took four years to compile.

Published recently, it states that more than a million policyholders left with lower-than-expected retirement income were the victims of “a decade of regulatory failure” by government departments and regulatory authorities. It identified 10 instances of maladministration by public authorities.

The ombudsman called on the government to apologise and to set up a fund to compensate policyholders for losses. While the report does not give a figure for compensation, the Equitable Members Action Group (EMAG) says that assuming about 70 percent of policyholders can show that they have suffered a loss, this would amount to about £4.5 billion.

Paul Braithwaite from EMAG welcomed the report, saying it was a “devastating indictment” of the performance of regulators over many years. “The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the society to suck in another £20 billion in pension contributions from more than one million new investors.”

The report is another political and financial crisis for Prime Minister Gordon Brown and the Labour government, which, with the Financial Services Authority, had sought to delay and rebut the original draft report with a 500-page rejoinder. Yet another of Brown’s measures—the financial services regulatory regime of which he was the architect during his 10-year stint at the Treasury—has come unstuck.

Not one of the institutions involved in the regulation of the insurance industry over an 11-year period—the Treasury, the Government Actuary Department (GAD), the Department of Trade and Industry, the Financial Services Authority (FSA) and its predecessors, the auditors, Ernst & Young, and accountancy body, the Institute of Accountants in England and Wales (ICAEW)—comes out unscathed.

The report reveals and confirms that the government’s real relationship with the City is one of complete subservience to the dictates of finance capital.

The 246-year-old Equitable Life, the world’s oldest mutual life insurer and a venerable City institution, was a major pension provider, responsible for more than £26 billion of investors’ cash. It announced in December 2000 that it would not be selling any new policies and was on the verge of collapse. This was the biggest crisis in the pensions industry.

Its failure was not the result of a stock market collapse, but of its own practices. It followed a House of Lords ruling one year earlier that the society’s payment of a differential bonus to policyholders, and thus its refusal to honour promises to make minimum payments to 90,000 people who had invested in the “guaranteed annuity rate” (GAR) pension policies, was illegal. Without the cash reserves of £1.5 billion needed to honour the agreement made when selling the policies between 1958 and1988, it was unable to find a buyer for the business.

Since then, it has wound down its activities and sold off most of its operations, transferring its sales force and non-profits policies to the Halifax Building society for £1 billion in February 2001, its subsidiary University Life to Reliance Mutual in December 2006, its £1.7 billion worth of with-profits annuities to Prudential in December 2007 and £4.6 billion of its fixed pensions to Canada Life in February 2007.

Its new management decided in 2001 to impose an across-the-board cut in policy values to the tune of £4 billion. The 1.5 million savers still with the society by 2001 faced low returns on their investment or a fall in the value of their policies if they moved them elsewhere. Those who continued to invest in Equitable Life’s with-profits policies saw the value of their savings slashed anyway, by more than 30 percent in three years, because there was not enough money to go around. This was also the case for some who were already receiving pension payments.

About 500,000 people are still saving for their pensions in the society’s £7 billion with-profits fund, either as individuals or via group pension schemes. But some 30,000 of them have died over the last eight years. Many of them were forced to live their last years in very reduced circumstances. Fifteen more die every day.

The parliamentary ombudsman’s report follows 12 other reports into different aspects of the Equitable Life fiasco commissioned by the government. One of these earlier reports commissioned by the Treasury, an interested party in the affair, by Lord Penrose, attributed most of the blame to the society. “Principally, the society was the author of its own misfortunes. Regulatory failures were secondary factors,” Penrose wrote.

His report said that serious failings among senior management went back to the 1980s, when the company had failed to set aside sufficient reserves for the guaranteed annual annuities. These were no longer sold after 1988 when the investment climate changed, making them too expensive to operate.

There was “a culture of manipulation and concealment,” and the society did not communicate details of its finances to either its policyholders or regulators. During the 1980s and 1990s, Equitable, as a mutual society without shareholders, had been paying out bonuses to its members—the policyholders—and concealing the fact that it had not built up sufficient reserves and was in effect running the guaranteed annuities on the back of new policyholders enticed by the bonuses and loans.

Penrose particularly criticised the chief executive between 1991 and 1997, Roy Ranson, for failing to provide pertinent financial information. He wrote that non-executive directors were “ill-equipped,” “ill-prepared” and “incompetent,” as regards the particular difficulties of supervising a complex life assurance firm. Ranson, in addition to being CEO, was appointed actuary at the firm from 1982 to 1997. This overlap of regulatory and executive functions led to confusion and conflicts of interest.

Penrose could not avoid the glaringly obvious and, going beyond his remit, criticised the supervision of Equitable Life. His report found that the system of regulation, which handled Equitable with a light touch, was “inappropriate.” The Department for Trade and Industry, in particular, had insufficient understanding of how to measure the solvency of a firm like Equitable, thereby allowing the society to get away with not putting aside sufficient reserves. The Government Actuary’s Department (GAD) was insufficiently tough on the society, failing to respond to changes in bonus policy and failing to demand disclosure from management.

However, he argued that there was no evidence of “maladministration or negligence” among regulators and said—letting the government off the hook—that as a general principle, “building false expectations of regulators can lead to a destruction of public confidence,” and he stressed that regulators themselves must inform consumers about the realities of the financial system. “Effective consumer education is essential.”

EMAG, Equitable’s policyholders, were not satisfied with this and asked the parliamentary ombudsman to review its supervision. But her first report in 2003 cleared the Financial Services Authority (FSA), one of the society’s regulators, of any failure of supervision in the run-up to its collapse. EMAG pressed for another and fuller investigation.

In 2005, the European parliament’s commission of inquiry—set up because the society had sold policies not just to UK citizens but to citizens in the EU—blamed the UK government for failing to ensure that EU legislation had been implemented properly. It also argued that the system of regulation was “excessively lenient” in failing to ensure that Equitable was solvent. It pointed out that there was no real prospect of policyholders gaining any redress under the UK’s legal and regulatory system. Consequently, the government had an obligation to assume responsibility and establish a compensation scheme.

The FSA tried to prevent the ombudsman from carrying out a second and more thorough investigation—and with good reason. Ms Abraham, whose remit by virtue of her statutory position was the effectiveness of the society’s regulation, reversed her original findings. Her report excoriated the government and regulatory authorities and accused it of maladministration for its role in the society’s collapse in 2000.

She argued that “those responsible for undertaking financial regulation should act in a way that is compatible with the duties and powers which Parliament has conferred upon them. Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report.”

Her report revealed a catalogue of failings and maladministration.

The Department for Trade and Industry and the Government Actuary’s Department (GAD) had regulated in a “passive, reactive and complacent manner.” GAD had let one person hold the role of both CEO and appointed actuary for more than six years, which meant that there was no potential whistleblower to protect investors. GAD had failed to question or resolve any of the issues that were apparent in the insurer’s annual regulatory returns, GAD had allowed the introduction of a different terminal bonus to policy holders that was the subject of the legal case brought against the society and ultimately led to its collapse, but failed to tell the regulators and raise the matter with the society.

While GAD and the FSA, which took over prudential regulatory responsibility in the last two-and-half years of the society’s life, “often initiated discussions appropriately with equitable,” they still allowed Equitable to get away with non-compliance. For example, they let it take credit on their books for reinsurance contracts that had not been concluded and did not cover the issue at the heart of the House of Lords ruling.

They failed to question the lack of crucial information on the society’s returns that gave an inaccurate picture of its financial situation, even though they knew that the ratings agencies were “misconstruing the company’s financial strength,” thereby enabling it to declare a bonus in 1999. The net result was that investors were making decisions based on false information. In the words of the ombudsman, investors “were thus actively misled.”

Furthermore, the FSA failed to ensure that Equitable Life warned new policyholders of the serious implications of losing the legal case that was then under way. Even after losing the case, the regulators sill allowed the society to stay open for new business despite the fact that it was then unsound. Finally, after the society closed for new business, the FSA provided information that was “misleading and unbalanced, with assurances being provided that the society was solvent, when that was in considerable doubt and was not the view of always held within the FSA.”

Despite the ombudsman’s trenchant and very valid criticisms of the regulatory authorities, she never deals with the more fundamental question. Regulation was and can never be more than a cosmetic device to licence the essentially fraudulent nature of the pensions and insurance-selling industry. It doubles when the need arises as the industry’s public relations arm.

In practice, “regulation” consisted of asking questions but being satisfied with bland assurances; allowing the society to continue selling new policies when it was essentially insolvent and give out misleading information; giving “advice” and not instructions; backing down when Equitable Life threatened a Judicial Review or ministerial intervention for going beyond its powers; and being fobbed off with reassurances about future profits, re-insurance arrangements and selling costs.

While the society’s policyholders have welcomed the thoroughness of the report, it is far from clear that the government will establish and fund a compensation scheme for the policyholders, as the report recommends. Chancellor of the Exchequer Alistair Darling is likely to argue that the government cannot be held liable for all the losses suffered by investors.

An earlier ombudsman’s report in 2006 that also found the government guilty of maladministration over advice given on occupational pension schemes that led to 125,000 people losing all or some of their occupational pension savings had recommended full compensation. The government immediately rejected her findings and the case went to the High Court, which ruled earlier this year against the government. One of its accusations was that the government had rejected the findings too quickly, which suggests that at the very least the government will drag its feet for as long as possible before making any announcement.

Though the government stepped in to rescue Northern Rock and shore up the banks via a “liquidity scheme” with hundreds of billions of taxpayers’ money, it is reluctant to compensate policyholders when its own official bodies are found guilty of maladministration.

EMAG has said it is “digging in for a long fight” and getting its members to write to MPs and candidates in marginal constituencies. Some lawyers have argued that policyholders could have a claim for “misfeasance in public office,” similar to the failed case brought by Railtrack’s shareholders.

The Financial Times, the City’s mouthpiece, provides an insight into the thinking of the financial elite. It called in a self-serving editorial for the government to fund limited redress, arguing that it is not the job of the taxpayer to bail out completely investors who put their money into an institution that gets into financial trouble. This would remove responsibility from the institutions, their advisors and investors. But more importantly, it would also lead the financial regulators to behave too cautiously or to regulate strictly. That of course would never do.

But there are, it argues, two strong reasons for partial compensation. Firstly, the moral case, since the authorities allowed Equitable to present misleading information to the public. “Secondly, there is a public interest in encouraging people to make long term financial provision for themselves so that an aging population looks less to the state for its pensions.”

As well as encouraging private pensions to slash welfare spending, the Financial Times is also concerned that nothing will disrupt the implementation of the government’s new national pension savings scheme, which would invest the public’s and employers’ compulsory contributions in the Stock Market.

Equitable Life is by no means the worst case in terms of the outcomes on guaranteed annuities. Patrick Collision of the Guardian newspaper noted that millions of pensions companies’ customers have received payouts that are worse than those of Equitable Life. He went on to use this, plus the fact that most of Equitable’s victims were doctors, dentists and lawyers, as arguments to support the government’s expected refusal to provide compensation at the taxpayers’ expense. He also pointed out that “by mid-2003 virtually every insurance company in the UK was technically bankrupt and receiving ‘waivers’ from the FSA.”

What he, like all the rest of the financial commentators will not say was that the case of Equitable Life and the failure of regulation to rein in the financial services industry demonstrate the absolute necessity for pensions to be publicly funded and provided.

Britain: Tax credit system plunges families into debt

tim — Tue, 08 Apr 2008 23:52:51 +0000

Prime Minister Gordon Brown’s Working Families Tax Credits (WFTC) system, launched in 2003 and which was supposed to lift families with children out of poverty, has caused untold stress and financial hardship for millions of families.

Designed to replace an earlier system of tax credits introduced by Brown when he was chancellor in 1999, a family of four with an annual income of £15,400 a year (half the male average earnings), would get an additional £4,200 in 2006, still less than two-thirds average male earnings, under WFTC.

But the new IT system was overly complex, dealt with three times the number of households and was riddled with design and implementation problems. Brown rejected warnings that the system would not be able to cope and pushed on regardless.

The system was designed so that claimants would notify Her Majesty’s Revenue and Customs (HMRC), which administers the system, of changes to family circumstances and income after the year end so that adjustments could be made the following year. But HMRC had underestimated the volatility in poor people’s income and the work after the year end this would give rise to, particularly as there is little information publicly available to show entitlements or how the credits are calculated.

While HMRC had anticipated 300,000-400,000 overpayments in the first year as the tax credit payment system bedded down, the volume was five times that number. It “overpaid” £2.3 billion to 1.9 million families in 2003-2004, £2 billion to 2 million families in 2004-2005, and £1.7 billion to 1.9 million families in 2005-2006. One third of payments to more than 6 million households were wrong. This is equivalent to an average overpayment of £1,000 a year or £20 a week, a large sum for a low-income family for whom this could represent more than 10 percent of their income.

HMRC then sought to claw back the overpayment automatically. Families were brusquely informed that deductions would be made in their tax credits for the subsequent year or recouped via increased taxes, arguing that families could “reasonably” have expected that their changed circumstances would result in HMRC seeking to recover the overpayment. Unless challenged, HMRC immediately begins recovery.

HMRC had made no provision to examine each family’s situation on a case-by-case basis before automatic recovery of overpayments. The transfer to HMRC, which had been used to dealing with taxes, usually where people are more prosperous, meant that it would be totally unused and unsuited to dealing with highly vulnerable people for whom £10 a week matters.

Claimants were faced with bills to repay £5,000, a massive sum for families earning an average wage, let alone the more vulnerable families on low and fluctuating incomes, and were plunged into debt. Unable to pay, many found themselves facing court orders for the repayment of thousands of pounds of tax credits.

Having commissioned a fully automated system, HMRC had few staff to handle the volume of complaints that poured in. In 2006-2007, 371,282 families disputed the recovery of overpayments. When challenged, HMRC has taken months to reply and provides no explanation of the so-called overpayment. So error-prone and arbitrary is the system that some families have had their “overpayments” reduced and a few have had them written off, but many families found they were increased, again with no explanation.

There is scarcely a family in the country that does not have a horror story to tell about their experiences with WFTC: from the extreme complexity of forms that have been known to defeat qualified accountants to the nightmare of challenging the alleged overpayments and attempts to claw them back, and coping with reduced income the following year.

Nearly 55,000 people filed an official complaint expressing their dissatisfaction with HMRC, mostly relating to the handling of disputed overpayments. The parliamentary ombudsman has stated that more than a quarter of the cases she handles relate to the WFTC system, higher than any other department. In 2006-2007, she received 393 complaints about tax credits, of which 74 percent were fully or partially upheld, higher than in any other department.

The ombudsman’s 2007 report, Tax credits: getting it wrong?, noted that a group of some of the poorest people in the country had said that this had led to them getting into debt where they had previously not been in debt—causing distress, anxiety and even family break-up.

Many families have refused to have anything to do with WFTC for fear of being caught up in the system’s maladministration. As a result, hundreds of thousands of families do not claim the money to which they are entitled.

While families can appeal to an independent tribunal about the amount of tax credits to which they are entitled, they do not have a similar right in relation to a decision by HMRC to recover an overpayment once the claimant has disputed it. They cannot appeal the way the HMRC has reached its decision or applied the “reasonableness” test, unlike the comparable right of appeal in the benefit regime.

The reform agenda

The state of play with WFTCs is not simply the result of bureaucratic error. WFTCs were part of the Tony Blair government’s broader agenda of getting families off welfare and into work by “making work pay.” When Blair took office as prime minister in 1997, he categorically rejected redistributive taxes and universal cash benefits to reduce the ever-growing social inequality that is the hallmark of Britain today.

Instead, he called in an array of big businessmen to review welfare and social policy issues and suggest how it should be reformed. Martin Taylor, then chief executive of Barclays Bank, was asked to set up a task force “to advise on the reform of the tax and benefits system.”

His task force concentrated on work incentives and converting the existing system of family credits to a tax-based system. It was a crucial step in the direction of a unified benefit system more directly linked to the tax system and workplace, and a tax-based credit system that would force people off benefits and into low-paid work.

As a unified benefits system, WFTC would—it was claimed—reduce fraud and “offer joined up government,” with a “more efficient service to customers.” But a unified benefits system would have to bring together the assessment of eligibility for benefits and their payment. It therefore depended upon highly integrated IT systems linking the various agencies and the transfer of responsibility from the then-Department of Social Security to the Inland Revenue, which has subsequently merged with the Customs and Excise Agency, under the direct control of the Treasury.

This resulted in yet another lucrative IT contract for EDS, but a financial disaster for claimants. While most of the responsibility for the faulty IT system and the £7 billion worth of wrong payments has been laid at EDS’s door, the contractor has been subject to a trifling £75 million penalty, and £25 million of this would only be payable if it won further government contracts. To date, less than £55 million has been repaid.

WFTC aligns benefits away from payments paid as a matter of right based on rules of eligibility to a means-tested tax credits system. In effect, it is determined by employers. Under the Labour government, welfare henceforth was to be linked to the responsibility to work. In the future, anyone refusing a job, however lowly paid, will have his or her benefits stopped. This is now being extended with attempts to force those with disabilities, long-term sick and health problems into work.

The “social safety net” of collective social insurance is being replaced by discretionary payments by the state. They can be withdrawn or changed as the state sees fit and are subject to tax regulations rather than those of the benefits system. Part at least of the benefits system has been brought under the direct control of the Treasury.

In this context, a little-reported measure in the Finance Bill going before parliament is significant. It will extend the right of Customs and Excise officials to turn up unannounced on taxpayers’ doorsteps, demanding to go through records, to tax inspectors, as part of the ongoing merger of Revenue and Customs. The proposals will specify and standardise the records taxpayers must keep, although it is as yet unclear what these requirements will be.

While Customs officials have long had strong search rights, tax inspectors require official warrants to make surprise visits. Now, HMRC is seeking to extend these rights across the two merged agencies. While these new powers are ostensibly aimed at corporations and businesses, they will be used against working people under the guise of combating fraud.

A recent report published by the Economic and Social Research Council, Tracking income: how working families’ incomes vary through the year, sheds light on the implications of the move to a tax credit system. It found that low-income households had much greater income volatility than had been expected. For example:

*Only 7 of the 93 families it tracked had incomes within 10 percent of the annual average.

A quarter of the families had at least four periods with incomes outside the range of 85 to 115 percent of their annual average.

The families with the highest volatility were generally those with the lowest incomes, and a higher proportion of lone parents and tenants had more variable income.

WFTC was aimed at creating a new pool of cheap labour by forcing people off benefits. That in turn would serve to drive down wages. By providing inducements to work in the form of tax credits, it was a barely disguised subvention to big business, enabling employers to pay poverty-level wages. The government admitted as much when it said that making savings was not the primary purpose of the scheme. Indeed, it would cost more, not less, as the evidence has confirmed.

WFTC is a £20-billion-a-year subsidy to the employers and has become key to making Britain a low-paid service centre, while the service companies are the Stock Market’s darlings. It is an essential mechanism for corporate welfare—for redistributing wealth from the mass of the population to the financial elite.

The latest official figures show that unclaimed means-tested benefits—pension credits, housing benefit, council tax benefit, jobseekers’ allowance and income support— amounted to about £9.37 billion in 2005-2006, the most recent year for which data is available. This is an increase of £1 billion on the previous year. It contrasts with the paltry £750 million for 2008-2009 and £950 million earmarked for tackling child poverty in the budget, which Save the Children believes means that the government will miss its own target for relieving child poverty by 450,000.

It is now deliberate government policy to increase the level of unclaimed benefits. According to official papers from the Department for Work and Pensions (DWP), ministers have decided not to try to meet the benefit take-up targets on the grounds that it would not represent “value for money to repeatedly press unwilling people to take up their entitlement.”

In the case of pensions, the government has introduced legislation making it compulsory for workers to pay into a second-tier personal and portable insurance for pensions, whose funds are to be invested on the Stock Market.

The new welfare system radically alters the relationship between the government and its citizens: the individual’s responsibility is to work, be independent, support family members, not just children, and save for retirement. The state’s role is to ensure that people do work and thus become “economically independent” so that the state supports only those unable to work, and then only on the most stringent conditions with meagre entitlement. Thus, the Labour government has gone a long way towards dismantling the system of state social insurance, introduced by the post-war Labour government exactly 60 years ago as a mechanism for eradicating poverty.

Metronet's Collapse

eddie — Tue, 07 Aug 2007 18:40:21 +0000

Metronet has been put into administration with debts of at least £2 billion. It had two of the three 30-year, £17 billion contracts under the Labour government’s hugely unpopular Public Private Partnership (PPP) programme to maintain and renew the London Underground rail network. Metronet’s owners, five international corporations, refused to put in another penny beyond their original £350 million commitment under the terms of the contract.

With Metronet’s debts guaranteed by Transport for London (TfL), London Underground’s parent body, and ultimately the government, the taxpayers, workforce and travelling public will bear the cost. Yet another privatisation has proved to be a disaster.

Metronet’s bankruptcy was precipitated by the refusal of the Rail Arbiter to award more than a fraction of its appeal for increased payments from London Underground to fund its near £1 billion overspend and a further £1 billion projected overspend by 2010. Chris Bolt, the Arbiter, said that if Metronet “had delivered in an efficient and economic way, its costs would have been lower”.

It is yet another—very expensive—refutation of the myth, so assiduously promoted by big business and the government, to justify privatisation: that the corporations are more efficient at delivering public services than the public sector.

It is also potentially a huge political embarrassment for Prime Minister Gordon Brown, who as Chancellor of the Exchequer was responsible for the PPP. The London Underground PPP, the government’s attempt to partially privatise the Tube, was almost universally opposed. It followed the Conservative government’s disastrous break up and privatisation of Britain’s national railways, and the subsequent collapse of Railtrack, the network operator, in 2001.

The PPP was the flagship project of Brown’s Private Finance Initiative for privatising essential public services. The London Underground PPP constitutes more than a quarter of the capital value of the £55 billion deals signed thus far—more than a few of which have already been a financial and service disaster.

But it turned out that Brown had nothing to fear from the project’s collapse. After all, who better to rescue him than the man who had formerly opposed the PPP? That is, the Mayor of London “Red” Ken Livingstone, who runs Transport for London (TfL), stepped into the breach, reassuring the City and limiting the political fallout for Brown.

Livingstone, who was elected Mayor in 2000 on the basis of his opposition to the PPP, announced that £750 million would be made available to the Administrator to ensure that the trains would keep running. Metronet would continue its work while in administration, while suppliers—Metronet’s sister companies—and the workforce would continue to be paid. Transport for London would reconfigure the contracts and sell them back to the private sector. TfL warned that some of the improvements expected under the PPP were likely to be postponed.

Far from the private sector bearing the risk and cost when things go wrong—another myth parroted by government ministers to justify the higher cost of private over public finance—it has simply handed back the keys and left it to the taxpayer to sort out. Furthermore, Metronet’s successors will be rewarded with yet more lucrative and expensive contracts at public expense.

Livingstone’s determination to reassure the financial establishment and the government was so great that London Assembly members were moved to ask whether he had been asked not to “gloat” to the Prime Minister after years of attacking the PPP. Livingstone retorted, “How many people have you heard saying ‘I told you so’ and found that it makes them a more attractive human being?”

Within a few days, the collapse of Brown’s flagship policy was off the front page without a single commentator calling for the end of the PPPs, the creeping privatisation of public services, or raising any awkward questions.

The future of the Underground and how it is run is an issue of fundamental social importance. The Tube carries 3.4 million passengers a day. With 40 percent of commuters into London using it for at least part of their journey to work, it is one of the most grossly overcrowded subway systems in the world. The cost of travel in London is the highest in Europe, if not the world. Yet reliable and affordable public transport is crucial in determining access to jobs and housing as well as reducing the polluting effects of high car usage.

As the administrator repackages the PPP to make it financially attractive to the private sector, a task that could take at least a year if it can be done at all, it is worth recalling how and why the London Underground PPP came into being, Livingstone’s role, and the euphoria on the part of the left radical groups when he decided to run for Mayor against the Labour candidate.

Livingstone and the London Underground PPP

Back in 1997, the Underground was widely acknowledged to be crowded and unreliable with a backlog of £2 billion worth of repairs and maintenance, the legacy of successive governments’ decades-long refusal to renew basic infrastructure.

Geoffrey Robinson, the millionaire businessman who had funded Gordon Brown’s office while in Opposition and now Paymaster General under Brown at the Treasury, convened a group of four businessmen with experience of privatisation to advise on what should be done. Their proposals were refined by the international financial consultants PWC and the law firm Freshfields.

In 1998, the Blair government announced that it would separate passenger services from the network, which would be offered to the private sector in three PPPs to maintain and renew at a cost of £15 billion over 30 years. The private sector would finance the investment that the state could not afford, thereby ending the need for a state subsidy.

At the same time, the government was proposing to devolve power for London’s transport to a new Mayor of London, who was to be directly elected. While the new Mayor would be responsible for the PPP, he or she would not be involved in the negotiations. The PPPs with Metronet and Tube Lines were pushed through in April 2003, in the teeth of popular opposition and critical reports from the board responsible for running the Underground, the National Audit Office and financial and transport analysts.

Livingstone had, as the leader of the Greater London Council in the 1980s until it was abolished by Margaret Thatcher in 1986, built up a reputation as “Red Ken” with his verbal championing of cheap fares, along with support for the Palestinians and Irish independence. In practice he did nothing While he held a leading position in the Labour party’s left wing, he never allowed Labour’s rightward lurch under Neil Kinnock, John Smith and Tony Blair to force him into opposition, even when Labour under Blair abandoned its former social reformist programme.

Livingstone was adopted as Labour’s mayoral candidate in a ballot of London party members on a platform of opposing the PPPs. But Blair and the Labour leadership blocked his nomination, insisting that Livingstone’s left wing image would deter international business from investing in London. When Livingstone responded by running as an independent, he was expelled from the party.

Despite Blair’s hysterical reaction, Livingstone’s differences with the government were only tactical. He proposed to open up London Underground to the City and Big Business by financing the investment programme with public bonds (something that local authorities were not then allowed to do) and outsourcing the work to private contractors. This, he argued, was a more viable model than the PPP. Secondly, he wanted to introduce road pricing under the guise of a “congestion charge” to be administered by private contractors and spent on purchasing additional services from private bus operators.

At no point did Livingstone mount a political challenge to Labour. Instead he made it clear that he wanted to be readmitted to the party. Despite this, his candidacy and opposition to the PPP was trumpeted by the trade unions and radicals. The Socialist Workers Party and others proclaimed his standing as the start of a new socialist revival— only the first of a number of Labour lefts who would take a stand against Labour that could be used as an opportunity to recapture the party for the left or as the base from which to launch a new party. The radicals came together in a joint slate, the London Socialist Alliance, to promote Livingstone’s candidacy.

While he refused to join a common slate with the Alliance, he was not averse to letting them act as foot soldiers in his election campaign. With Blair’s hostility to Livingstone only serving to enhance his popularity, he went on to win the Mayoral election in May 2000 and pushing the Labour candidate into fourth place.

Livingstone’s opposition to the PPP was to be based upon the courts, not the working class. He would do nothing that would antagonise the City. Much to the delight of the City, the Mayor then brought in Bob Kiley, a former CIA operative, as Commissioner for Transport, on the UK’s highest public sector salary. During the 1980s, Kiley had used public bonds to refurbish New York’s subway and overseen cuts in workers’ wages and conditions to pay for them while safety plummeted.

Despite calling Kiley a “union buster”, the rail unions refused to organise against the PPP. Even though rail workers had voted three times for joint action, the Rail Maritime and Transport union (RMT) repeatedly called off strikes and overturned ballots for strike action in an effort to demobilise workers’ opposition to the privatisation of the Tube. Such one-day strikes, as were held in 2001, were the result of unofficial action.

While workers saw strike action as a means of opposing privatisation, the unions refused to make this their explicit aim. Livingstone lambasted the strikes.

As negotiations over the PPP continued, its costs escalated, and projects to be included were scaled back to make it more affordable. Far from privatisation ending the need for grants as Brown had expected, the government was forced to subsidise it to the tune of at least £1 billion a year for the first seven and a half years, ten times the amount awarded under the first years of the Labour government! But that was not all. Transport for London would guarantee 95 percent of the contractors’ approved debts in order to reduce the cost of borrowing and reassure their financiers.

The government gave an open-ended commitment to the City and big business. In February 2003, just before handover, the Department of Transport wrote to TfL stating that in the event that London Underground found itself in financial difficulties as a result of the PPP, the Secretary of State for Transport “regards it as untenable that” he would not consider further financial aid or that “he would stand by and do nothing in those circumstances”.

The contractors and bankers saw this for what it was—a blank cheque—with taxpayers footing the bill for the opening up of public services to private profit. Livingstone’s challenges via the courts to the privatisation of the Underground were soon exhausted and, with the government’s implicit guarantees in his pocket, his opposition to the PPP evaporated.

Brown adopted Livingstone’s suggestion that local authorities be allowed to borrow from the City in his Local Government Finance Act and Livingstone went on to issue bonds to finance Transport for London. TfL’s staff toured the corporate conference circuit, promoting private finance for public infrastructure. The City was delirious. Within months of the Tube’s privatisation, and in the run up to the second Mayoral election in 2004 when Labour faced another humiliating defeat, Livingstone achieved his aim of re-admittance to the Labour party. It is from this position that, thanks to the good auspices of the trade union bureaucracy and the radical groups, he now steps forward to cover Brown’s exposed rear.

Money Laundering for Saudi Arabia

Tim Holmes — Sat, 21 Jul 2007 18:44:51 +0000

The scandal over allegations of BAe Systems, Europe’s biggest weapons manufacturer, and the British government’s corrupt dealings with the Saudi ruling clique promises to haunt the new prime minister, Gordon Brown, despite his predecessor Tony Blair’s best efforts to contain it.

The Labour government is accused of functioning not simply as the marketing arm and financial intermediary for BAe Systems, but as a money launderer and conduit for channelling cash and arms to Islamic militants on behalf of one of the most venal, reactionary and inhumane regimes in the world. The Bank of England, the Foreign Office, the Department for International Development—whose remit includes anti-corruption—and the Ministry of Defence are all implicated.

Last month, the BBC and the Guardian revealed that the British government had been party to £1 billion payments to Prince Bandar ibn Sultan, the son of Prince Sultan, the Saudi defence minister and heir to the throne. Bandar, who served for more than 20 years as Saudi Arabia’s military attaché at its embassy in Washington and later as its ambassador, is national security advisor to King Abdullah.

The BBC and Guardian allege that the payments were bribes by BAe Systems to secure the lucrative Al Yamamah deal, called at the time “the arms deal of the century.”

The Al Yamamah deal

The Al Yamamah defence contract for Tornado jetfighters was BAe’s largest-ever overseas arms deal. Negotiated during Margaret Thatcher’s premiership in 1985, the contract was worth more than £40 billion over the subsequent 18 years, a sum widely believed within the arms industry to be more than 30 percent above the going rate.

The deal was secured by a government-to-government contract between Britain and Saudi Arabia that has never been made public or subject to public scrutiny. The 1992 National Audit Office report into the deal was suppressed.

Saudi Arabia agreed to deliver oil to BP and Shell, which sold it and banked the proceeds in a special account, controlled by both governments, in the Bank of England, which received a commission for managing the account. Tens of billions of dollars flowed through this account. Some of the money passed through into the UK’s Defence Export Services organisation, part of the Ministry of Defence (MoD), for which the MoD received a commission, as well as other secret accounts in Switzerland and elsewhere. The special account was used to pay BAe for Al Yamamah, and BAe used some of the money for commissions to intermediaries for facilitating the contract.

As far as Saudi Arabia was concerned, the jets were something of a white elephant for which it had little use and few capable pilots. The chief threat it faces comes from domestic not external opposition against which Tornados provide no protection. But the jets did provide a convenient cover for recycling the country’s oil revenues outside its official budget. One person involved in the deal told the Financial Times, “It was a way of Saudis paying money to Saudis”.

More damaging still for the British government, the oil proceeds were not only used to pay for the jets but for arms from Egypt for the Mujahideen, the Taliban and Al Qaeda fighting the Soviet army in Afghanistan and arms from Moscow to drive Libyan troops from Chad. A biography of Prince Bandar, The Prince, explains that the Al Yamamah account was used to buy whatever they wanted off budget. The Saudis were paying the British government and the Bank of England to launder their own money and keep quiet about it.

The British government and the culture of bribery

Over the years, there were constant rumours of corruption, with allegations that BAe had operated a £60 million slush fund to sweeten the deal and pay for extravagant hospitality for key middlemen. Successive governments maintained that no bribery was involved, although numerous officials and politicians in a position to know have admitted that bribery is endemic in the arms trade.

Denis Healey, a former Labour Defence Secretary in the 1964 Labour government, told the Guardian, “Bribery has always played a role in the sale of weapons. In the Middle East, people wouldn’t buy weapons unless you bribed them to do so—and that was particularly true in Saudi Arabia.”

Healey should know. He set up the government’s arms sales department, now known as the Defence Export Services Organisation (DESO), which has been protected until now by the Official Secrets Act. Recently released papers in the National Archives in Kew provide an insight into the Ministry of Defence’s role, via DESO, in bribery:

More than £1 million in bribes were paid to the Shah of Iran to buy tanks and weapons by the Heath and Wilson governments in the 1970s.

Prince Bernhard of the Netherlands was paid £50,000—the equivalent of £500,000 today—as an influential person to persuade the Dutch government to buy tanks from Britain

DESO also knew that the disclosure of such payments to Kuwait, Iran and Saudi Arabia would cause uproar and be impossible to defend should they become known

The then permanent secretary to the MoD, Sir Frank Cooper, issued a secret directive that although slightly reworded in 1994 is still in force today, authorising “commissions” on government-to-government deals, details about which could be withheld from ministers. He ordered civil servants not to ask the companies so involved in “over extensive inquiries.”

According to a recent survey by Control Risks and Simmons and Simmons, the law firm, one third of international companies believed that they had failed to win contracts because of bribery by their competitors. One third of the 350 companies surveyed said they were “totally ignorant” of their countries’ laws on foreign corruption.

It was only when the Guardian newspaper published details of documents inadvertently released to the Public Records Office, almost immediately withdrawn after the damage had been done, that the Serious Fraud Office (SFO) was finally forced to launch an inquiry in 2004.

BAe has never denied paying commissions to its agents, payments that it says were and are normal practice in the arms trade. But it claims that they were not illegal at the time and stopped altogether after the British government outlawed the practice in 2002.

Government suspends inquiry in “wider public interest”

When the SFO seemed likely to come up with incriminating evidence about Saudi Arabia and thus have the potential to damage the economic and political interests of British imperialism, the rule of law was suspended and the inquiry dropped like a hot potato.

Last December, Lord Goldsmith, the then attorney general and Britain’s highest legal officer, announced that the SFO had abandoned its £2 million investigation into the Al Yamamah contract due to lack of evidence. Nothing could have been further from the truth. The SFO had just gained access to key bank accounts in Switzerland used to channel money from BAe to Saudi middlemen.

To continue the investigation risked turning up evidence that would jeopardise all of Britain’s relations with the Saudis. But such a justification was outlawed under the OECD’s anti-corruption convention. Article Five of the OECD’s anti-bribery convention, to which Britain is a signatory, states that investigations and prosecutions must “not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Goldsmith therefore invoked national security and the public interest. He told Parliament, “It has been necessary to balance the need to maintain the rule of law against the wider public interest.” He said that the SFO dropped its inquiry so as “to safeguard national and intelligence security” and that this was also the view of the intelligence services.

The announcement came a few months after Blair had reached a preliminary agreement that would see BAe supply 72 Eurofighter Typhoon jetfighters, in a new deal worth £20 billion. BAe and the then prime minister feared that any further investigation could put this latest deal, which BAe is now on the brink of signing, at risk.

Blair backed Goldsmith up, even saying that he took “full responsibility” for ending the probe, something he had no power to do. He claimed that to continue the investigation would be “devastating” for the UK, not only in relation to the loss of thousands of jobs but especially as regards national security and the “war on terror.” He inferred that Saudi Arabia would end its intelligence cooperation with Britain.

Allegations of government involvement and cover-up

The SFO dropped its investigation into the £60 million slush fund, though inquiries into BAe’s deals with Chile, South Africa, Tanzania, Romania and the Czech Republic are continuing. Investigations by the Swedish and Swiss authorities into BAe’s activities are also under way. But the BBC’s Panorama programme and the Guardian’s revelations have brought to light fresh evidence of corruption that threaten to explode the attempted cover-up.

They alleged that BAe paid more than £100 million a year to Bandar personally over more than a decade in connection with the contract. Even more importantly, it was alleged that these payments were made with the knowledge of the Ministry of Defence, which countersigned the cheques, into accounts at Riggs Bank in Washington, which Bandar controls.

Bandar immediately denied receiving any “improper secret commissions or backhanders” over the Al Yamamah contract. The Riggs account was, he said, a government account, not his own personal account. However, as the Financial Times notes caustically, “At least one investigator who has examined those accounts has said it was hard to distinguish between public and private use of Saudi funds.” Not for nothing has the Saudi government been called the world’s largest family business.

BAe does not dispute making the payments. Instead it sought cover from the government itself, claiming that they were made not illegally but with the “express approval” of the MoD. Not one government minister has denied the allegations. They have all hidden behind “commercial confidentiality”.

Before he left office, Blair did not deny the allegations. He again told parliament that he took full responsibility for halting the SFO inquiry and withholding information about the £1 billion payments to Bandar from the OECD. In answer to a question from Menzies Campbell, the Liberal Democrat leader, as to who was responsible for the decision, Blair replied, “If he [Campbell] wants to blame anyone for this, he can blame me, and I’m perfectly happy to take responsibility for it.”

Blair ducked the issue of whether the payments to Bandar were continuing, adding, “It [the investigation] would lead to the complete wreckage of a relationship that is of fundamental importance to the security of this country…. That’s why I took the decision: I don’t regret it then and I don’t regret it now.”

Speaking at a G8 meeting in Berlin, he said, “This investigation, if it had gone ahead, would have involved the most serious allegations and investigation being made of the Saudi royal family. My job is to give advice as to whether that is a sensible thing in circumstances where I don’t believe the investigation would have led anywhere but the complete wreckage of a vital strategic relationship to our country.”

It is now clear that Blair’s decision to halt the inquiry into the £60 million slush fund in December was also motivated by the need to stop any incriminating evidence about the role of successive British governments, including his own, from coming out.

If the payments continued after 2002, when Britain’s anti-corruption law took effect, then they may have breached the legislation. Jeremy Carver, a lawyer and board member of Transparency International, told BBC’s Panorama programme, “Those payments, on the face of it, are straightforward bribes as defined by the OECD anti-bribery convention…. It’s quite plain that he [Bandar] meets the test of who is a foreign official for the purpose of the OECD convention.”

These revelations led the US Department of Justice to launch an investigation into the allegations of multimillion-pound bribery by Bae, as these payments were routed via the Riggs Bank, a US-based bank. They have also prompted the OECD to demand an explanation for the Blair government’s decision to call off the SFO investigation into possible corrupt practices by BAe and to withhold information from it in March. While the OECD has no power to discipline its members, it can “name and shame” those it considers to have stepped out of line.

The Cornerhouse and Campaign Against the Arms Trade, two anti-corruption groups, have mounted a legal challenge to the government’s decision to abandon the SFO inquiry into the Al Yamamah.

Supressing the Truth About PFI

Alex Doherty — Fri, 18 May 2007 22:16:13 +0000

While I am better known to readers of the World Socialist Web Site for articles on the Middle East, in my professional life I am an academic who writes on business and public policy and finance. My recent experiences reveal how the Labour government seeks to ensure that research contradicting its lies and exposing increasing corporate control over public policy is suppressed.

Last March, the Department of Health (DoH) tried to stop the journal Public Finance from publishing a very brief summary of research, co-authored by myself and colleagues at the University of Manchester, showing the enormous cost of using private finance for the first 12 hospitals built in England under the government’s Private Finance Initiative (PFI). The DoH claimed that the data was wrong.

PFI has been a hugely unpopular and controversial means of financing much-needed new buildings for essential public services. Under the PFI, the private sector builds and operates hospitals, schools, prisons, roads, etc., which are leased to the public sector in return for annual payments for both the buildings and services. In the case of hospitals and schools, the core professional services are retained by the public sector.

Brought in by the Conservative government in 1992, PFI has been vastly extended by the Labour government to all key public services. The government has justified the policy with the claim that it is better “value for money,” as risks are transferred to the private sector.

In 1999, previous research I was involved in with Professor Allyson Pollock, of Edinburgh University and author of NHS Plc, showed that while the government boasts of launching the biggest building programme in the history of the National Health Service, it had resulted in an actual contraction in the service.

PFI was so expensive that hospital plans had to be scaled back. The first wave of PFI hospitals had 30 percent fewer beds than the hospitals they replaced. The high costs were offset by increased subsidies to the hospitals, land sales at knockdown prices to the private sector, and “challenging performance targets” for nurses and clinical staff.

The National Audit Office, the parliamentary watchdog, also criticised the government’s claims as based upon unreliable evidence.

My recent research showed that the first 12 hospitals were paying about 8 percent interest for private finance compared to 4.75 percent for public finance. This adds up to £60 million a year extra every year of the twelve 30-year contracts. For the 155 schemes worth nearly £9 billion signed so far, the additional cost of private finance is £480 million a year. That sum would build several new hospitals every year.

While the government justifies this on the basis of risk transfer to the private sector, it is far from clear what risks have been transferred since the payments are to all intents and purposes guaranteed by the government. These deals are shrouded in secrecy and immune to Freedom of Information requests from the public, due to “commercial confidentiality.”

But this is only the observable cost of private finance. Other costs that cannot be quantified on a systematic basis include:

the massive profits made on the land deals;

the refinancing of the deals;

the profits derived from subcontracting to sister companies;

the income received directly from patients and their families for car parking and canteens, and the scandalous charges for pay telephones and televisions.

Furthermore, once the hospitals have been built, many companies have been able to take out larger loans, repayable over a longer period, pay off their pre-existing debt and walk off with the difference as profit. For example, the consortium that has the Norfolk and Norwich hospital contract was able to generate a lump sum of more than half the cost of the £210 million hospital in this way.

Secondly, we found that most of the hospitals were paying more than they expected when they signed the deals. While the average increase was 20 percent, 3 of the 12 hospitals were paying between 50 and 70 percent more. This was due to higher-than-anticipated caseload that had triggered volume-related increases, and the failure to specify precisely everything that they needed in the contract: from filling the patients’ water jugs to including marmalade with breakfast!

One of the most egregious examples to hit the headlines was the failure to move a patient who had died of natural causes in a mental health unit. Because this had not been specified in the contract, the contractor refused to move the body within the requisite 30 minutes on the grounds that they were only required to move patients within 30 minutes and a patient was someone who was receiving treatment, not a corpse. In the end, the hospital had to call in commercial undertakers to move the deceased patient to the morgue.

Even after a 56 percent increase in funding since 2000, PFI payments were still taking 11-12 percent of the hospitals’ income. Without the increase in funding, PFI charges would have been unaffordable. It also shows that much of the government’s increase in health spending has gone on the cost of private finance, not service provision.

Once the hospitals were operational, the post-tax returns on shareholders’ funds were at least 58 percent a year. Yet the Treasury was on record as saying the average returns were between 7 and 15 percent and that 15 percent was too high.

Finally, our study showed that many of the hospitals were in a parlous situation. Meridian, the private sector “partner” for the Queen Elizabeth II Greenwich Trust, was making far more than it had set out in its bond offer document to the London Stock Exchange in 1999. The Trust attributed its “technical insolvency” to the £9 million a year that was the additional cost of private finance. Its finance director said that the PFI deal locked the Trust into an annual deficit of £20 million, which it could not afford. Without government support, its long-term prospects were unviable and patient care was threatened.

Irrespective of any causal role in the hospitals’ deficits, which our research was unable to determine, since PFI charges are essentially fixed costs that must be paid, they matter when margins are already low due to other rising costs. They reduce flexibility in managing budgets, under conditions where the Trusts have always struggled to break even.

The Labour government and various public agencies have long known of my critical work on privatisation in general and PFI in particular.

Public Finance, as the weekly journal of professional accountants and financial managers in the public sector, is also widely read by journalists and policymakers. The research referred to is an updated version of part of a much larger study on PFI hospitals and roads that had been funded and published by the Association of Chartered and Certified Accountants in 2004. The Department of Health and the NHS neither acknowledged nor challenged any of the findings of that study, despite being sent copies and the publicity it received in the financial press. They could not do so.

Our work has since been accepted for publication in at least four peer-reviewed journals. It has been the subject of numerous invitations to speak at international conferences and seminars on healthcare and transport financing, as countries around the world seek to adopt the self-same policies and rhetoric as Labour.

The article on the cost of PFI hospitals will come out shortly in Public Money and Management, the academic and professional journal of the Chartered Institute of Public Sector Accountants (CIPFA).

Public Finance had sent its summary of the research to the Department of Health so that its comment would form part of its article. The NHS’s press officer at the DoH wrote back to Public Finance, without having read the paper on which the article was based, saying, “We would strongly urge you to get this data independently audited before you even consider running an article.”

The DoH specifically challenged the additional cost of private over public finance and the increase in PFI charges since the deals were signed. It asserted that PFI charges were no higher than they would have been if the hospitals had been procured conventionally. It repeated the claim that PFI was only used if it was expected to deliver value for money and was affordable.

When Public Finance said that it would go ahead with its article, the DoH asked for a page in a subsequent edition of the magazine to rebut our research.

However, Health Minister Andy Burnham, after giving the research paper to his officials in the NHS PFI unit, simply wrote a short letter to the magazine. In it, Burnham quibbled with the figures cited for the shareholders’ rate of return, saying that we had simply cited one set of figures (58 percent in 2005) that gave a misleading picture. In fact we had deliberately cited only one year, because we thought that this was likely to be more normal and we did not want to overstate our case. Returns in the other years for which the hospitals were operational were 1,000 percent!

While other definitions of shareholders’ returns are indeed used, all of them show that these deals are highly profitable. That is why so many of the consortia are able to sell their shares at a massive profit to international companies specialising in hospitals, schools, prisons or roads across the world.

Burnham claimed that annual returns were “much more likely to be between 12 percent and 14 percent” (emphasis added), the figure the Treasury had earlier rejected as too high. But he did not define the term, identify the evidence from which this was derived or cite evidence as opposed to “likely” returns.

Above all, he did not refute our finding that—extrapolated to all signed hospital deals—PFI would cost an extra £480 million a year due solely to the observable higher cost of private finance.

The DoH had attempted to suppress a summary of research with a tissue of lies that even its own staff could not substantiate in public. It had to back down on every one of its claims against us.

This is by no means the first failure on the part of the DoH to rebut our work. In 1999, after four of our papers on PFI hospitals were published in the British Medical Journal, Colin Reeves, the director of finance and performance at the NHS, wrote a strong letter promising a response. While the BMJ invited him to submit, his response was not deemed suitable for publication. Nevertheless, Reeves claimed in Health Services Journal that criticisms of PFI had been comprehensively rebutted elsewhere.

Unable to rebut our work, the DoH has largely ignored evidence that does not sit well with its claims about PFI. This is despite the fact that it has a rebuttal unit whose task is to counter any criticism of PFI.

It is notoriously difficult to get clear, consistent and up-to-date information about expenditure under PFI, and future commitments, let alone details of any guarantees, implicit or explicit, that the government has given. Such information that does become available is typically via the Stock Market, which requires facts in order to price the bonds and securities that underpin PFI. Thus, more information is given to the financiers than the public as users or taxpayers that ultimately underwrite their profits.

This is hardly surprising. The PFI policy was designed and implemented by big business. International financial consultants lent their staff for two-year secondments to the Treasury’s PFI Task Force and PFI units in key departments and in some cases even paid their salaries. The constant revolving doors between the City and senior civil servants meant that policies always reflect the wishes of the financial institutions.

The Labour government has sought to justify its turn to private finance by citing “evidence” that PFI constitutes “value for money.” But this evidence is anything but independent. Commissioned from financial consultants such as Arthur Andersen, PwC and KPMG, who have a vested interest in such policies, it is based upon surveys of the opinions of managers involved in such deals, evidence that it refuses to make public, or inappropriate comparisons.

In 2000, the government reconstituted the Treasury PFI Task Force, which managed the PFI procurement process, as Partnerships UK (PUK), and sold the majority of PUK’s shares to the very corporations that are closely involved as owners, financiers and subcontractors in PFI projects. Legislation was amended to give PUK the authority to do so. It thereby handed over the control of policy development and implementation from the civil service to the private sector, an unprecedented change in the process of government that went largely unnoticed.

Housing Out of Reach

Alex Doherty — Wed, 02 May 2007 17:22:29 +0000

A report by the Halifax building society provides a glimpse of the desperate situation facing millions of workers and their families in Britain today in their search for affordable housing.

Nurses, firefighters, teachers, police officers and ambulance staff—defined as key workers—have been priced out of the housing market in 70 percent of Britain’s towns and cities, compared to 36 percent in 2002. They were unable to afford homes in 363 towns out of 517. Ninety-nine percent of towns were too expensive for the average nurse, while 97 percent were too expensive for firefighters.

The least affordable homes were in London and the surrounding towns. In the most expensive area, Gerrards Cross, the average house costs nearly 30 times a nurse’s gross annual wage of £25,724.

The most “affordable” homes were to be found in Lochgelly, Bellshill, Clydebank and Wishaw in Scotland. But even there, the average house cost four times a nurse’s average wage, a multiple beyond the level that most building societies will lend and one that is extremely difficult to keep up with when granted.

First-time buyers need increasingly large deposits to get on the housing ladder. More than one third of first-time buyers in London between 1995 and 2001 relied on gifts, family loans, inheritance or a windfall for their deposits.

The Halifax report called on the government to help make homes affordable to such key workers—in effect demanding a subsidy for the mortgage-lending companies. But this is just the tip of the iceberg.

Key workers are by no means well paid, but such is the income differential in Britain today that they earned more than the median wage of £23,244 in 2006. In other words, a massive 60 percent or more of those in work earn less than these workers and are even less able to afford a home.

The average price of a home today is £217,076, eight times the median wage. This is a rise of 8.1 percent across the country, with London rising by at least 12 percent a year. Even in Tower Hamlets, one of the poorest London Boroughs, where 43 percent of households live on less than £10,000 a year, the average house price is about £300,000.

The impact on families has been devastating.

Last year, the National Housing Federation, which speaks for the not-for-profit Housing Associations, warned that the country faced a “housing time bomb” unless public investment in affordable homes increased dramatically. There had been an “explosion of housing need” under Labour. The failure of the private housing market has fuelled a massive demand for social housing. There were a staggering 1.6 million households on council (public) housing waiting lists that are growing at nearly 8 percent a year. Many more are discouraged from registering at all. Last year, 17,000 families lost their homes via mortgage repossessions, a 65 percent increase on 2005. Official homelessness rose by 14.5 percent between 2000 and 2005.

Shelter, the homeless charity group, reports:

More than 1 million homes in Britain are deemed to be unfit for human habitation, yet more than 90 percent of these are occupied.

Another 800,000 or more homes are empty. These are in terrible condition, in areas of high unemployment and crime, with few amenities.

Half the housing in the private sector does not meet official standards, but tenants dare not complain for fear of eviction and losing their deposit.

There are more than 260,000 families on waiting lists in England for homes with three or more bedrooms.

More than 1 million children in Britain live in overcrowded, unfit or temporary housing, more than the combined population of Edinburgh, Bath and Manchester.

10 percent of children in England live in overcrowded housing. Black and ethnic minority households are six times more likely than white households to live in overcrowded accommodation.

100,000 households or 221,000 people in England alone live in temporary accommodation—more than double the number in 1997.

The impact on children’s well-being is particularly tragic and long lasting. One in 12 children in Britain is likely to suffer from bronchitis, TB or asthma because of bad housing. Homeless children in bed-and-breakfast hostels are twice as likely to have to seek treatment in hospital for burns and scalds.

Their education suffers, as they tend to lose about a quarter of their schooling. They are twice as likely as other children not to get any GCSEs (the basic school-leaving certification), to be excluded from schools and undergo persistent bullying.

As ever, housing is characterised by social inequality. At the other end of the scale, at least a quarter of a million people in England and Wales have second homes within the UK, while many more have homes in France and Spain.

Few houses are being built. In 2002, the Rowntree Trust found that house building—both public and private—was at its lowest level for 80 years and called for 4 million new homes by 2022 to avoid a catastrophic shortfall, or at least 250,000 extra homes every year.

The government and local authorities have done nothing to bring the nearly 1 million empty houses, typically in areas of multiple deprivation, back into use by regenerating the neighbourhoods.

The privatisation of housing

It was in the early 1980s that the Conservative government under Margaret Thatcher began the process of selling off public housing, first introduced after World War I to provide protection against slum landlords and racketeers, rented at affordable rates with security of tenure. By 1981, there were about 6.3 million council houses providing homes for about one third of the population.

Using the slogan of “a home-owning democracy,” the Tories introduced a “right to buy” scheme for council house tenants that enabled them to buy their homes at a discount on their market value in order to create a popular social base for its neo-liberal policies. The best properties were sold off, leaving the councils with the rest and creating a huge revenue stream for the building societies and banks in the process.

Later, the Conservatives introduced the stock transfer programme, whereby whole estates were transferred to housing associations or registered social landlords (RSLs). While housing associations and RSLs are part of the much-vaunted not-for-profit sector, they are multimillion- and in some cases multibillion-pound concerns that operate on a commercial basis. Rents and service charges have risen despite promises made in the transfer agreements that have turned out to be legally non-binding. As the cost of loans from the banks has risen, they have been forced to consider demolition and sales to raise cash, further exacerbating the housing shortage.

While at first it was only the Tory councils that were transferring homes to RSLs, now it is the Labour and Liberal Democrat councils that are doing so. Since 1976, there has been almost no money for new builds and little for refurbishment. Most of the proceeds for such sales or transfers, as well as much of the rental income, have gone to the Treasury, not the local authorities, thereby depriving them of the funds to refurbish the remaining stock or invest in new homes. The Right to Buy receipts in 2003-2004 alone were £2 billion. However, the local authorities were allowed to keep only £700 million. About a third of housing rental income has been withheld from local authorities, meaning that tenants pay more than £25 a week more than it costs to manage and maintain their homes.

Since 1979, more than 3.5 million council houses have been lost to the private sector through the sales to individuals and the transfer of estates. By 2005, there were only 2.8 million public housing units and a further 2.1 million homes owned by RSLs. This, coupled with little or no money for new builds and refurbishment since 1979, has created a huge shortage of affordable homes.

The Labour government has vastly accelerated this privatisation process, with annual sales and transfers exceeding those of the Tories. Ministers have even claimed that taking housing out of public control is the only way to bring public housing up to a decent standard.

New Labour has shown contempt for the wishes of the electorate, residents and its own conference decisions that have voted repeatedly against such policies. It has bullied and bribed councils with a variety of sticks and carrots: financial incentives and tight controls on councils’ spending and borrowing.

Councils have only been able to get extra housing funds if they transferred their stock to arms-length companies (ALMOs) to manage homes. But even if this is maintained, it will only fund the repair of 300,000 homes over 10 years. In other words, only 300,000 homes will remain, a mere 10 percent of the number inherited in 1997. Under Labour’s plans, security of tenure for the most vulnerable and impoverished layers, a key feature of public housing, will go.

The councils’ only other alternative is to use the private sector under the government’s Private Finance Initiative (PFI) to refurbish and manage homes. But councils only get permission to refurbish under PFI if the scheme involves some demolition to allow development for private build homes by the PFI contractor.

Labour’s plans to privatise what remains of public housing stock—presently about 4 million homes worth about £400 billion—have gone virtually unnoticed. In 2004, it announced plans to sell off 200,000 council homes a year, or 1 million, by 2010. By 2015, there will be virtually no public housing left.

Now, it seems that ALMOs deemed to be “excellent” will be allowed to become housing associations—in other words, private sector companies—despite promises that they would never be privatised. The new regeneration quango, Communities England, is tasked with “razing and building” the councils’ worst estates and creating so-called mixed communities—i.e., private housing and gentrification that benefit the better off. Even where such developments include so-called affordable housing, property companies have bought up the entire stock. Thus, the government’s policies are subsidising a growing army of private landlords.

The transfer of public housing to ALMOs, the housing associations and RSLs, which have to some minimal degree protected rents, is part of a broader process whereby homes, paid for by tenants over decades and transferred at knockdown prices and debt free, will be fully privatised to provide a valuable income stream for the financial institutions via real estate investment trusts (REITs).

REITs are new entities that came into being in the UK in January of this year, much to the delight of the City. As private sector companies deriving their income from property or “real estate,” they are exempt from Corporation Tax for the benefit of their shareholders. In the United States, such REITs have bought up affordable housing, evicted the tenants, and refurbished or gentrified the homes at a massive profit. Seventeen housing associations are now considering converting into a REIT.

Whereas public housing once provided a check on private landlords and rising house prices, now workers are being sucked into ever-escalating levels of mortgage debt.

House prices have more than tripled since Labour came to power in 1997. The obscene riches that the financial institutions have amassed as a result have sparked a huge escalation in land and house prices in Britain and internationally.

This has made it impossible for young people in the fifth largest economy in the world to afford their own home on the basis of their wages. For many families, the high cost means that the mortgage has become a millstone round their necks. And whereas the family home was once seen as a nest egg that could be used to supplement a retirement pension, with means-tested benefits it must often be sold to pay the costs of residential care should it be required.

Alongside the shortage of affordable housing has gone a huge increase in personal indebtedness: bank loans and credit cards, as well as the growth of loan sharks and the sub-prime market, as the cost of housing has made the everyday necessities of life unaffordable. Personal debt in Britain now stands at more than £1.3 trillion, more than the GDP of the entire country. The much-anticipated increase in interest rates will push many families over the edge and see housing repossessions soar, under conditions where no safety net exists.

The question today is not simply the defence of public housing and the restoration of public spending cuts. Rather, a planned and massive programme of public building is required for one of the most pressing problems that production for profit has never anywhere been able to resolve. Such a programme necessitates the public ownership of the construction industry and the land banks owned by the corporate sector, the Church, the Crown, and big landowners.

The Socialist Equality Party is calling for a cap of 20 percent of mortgage repayments, a ban on house repossessions and the implementation of a massive social housing programme to provide comfortable, secure and affordable accommodation for students, workers, the unemployed and pensioners.

While the ukwatch.net collective have sympathies with a broad array of left-wing organisations we do not endorse particular political parties. The reproduction of this article should not be considered as such.