Sunday, April 13, 2014

George Osborne warns City to prepare for turmoil over Russia sanctions and interest rate rises

Chancellor says action on Ukraine could have a significant impact on City of London

George Osborne Russia's annexation of Crimea was
George Osborne Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact Photo: Bloomberg
The City must brace itself for a new wave of market volatility amid looming interest rate rises and the possibility of harsher Russian sanctions, the Chancellor has said, as he insisted that the Treasury was prepared "for any eventuality" on the Ukrainian crisis.
George Osborne said the gradual tapering of US asset purchases, which triggered a major emerging market sell-off last year, showed it was important that policymakers provided clear communication to the market about future policy actions.
"We all need to be ready for an increased level of volatility in line with historic trends," Mr Osborne said on Friday.
"It is something we need to be communicating more so that it is priced in and people expect this return of normal volatility and it's not a surprise when it happens."
Mr Osborne said turmoil in markets could be exacerbated by differing rates of recovery, especially if the European Central Bank decided to loosen policy further with negative interest rates or its own quantitative easing programme.
Speaking on the side lines of the International Monetary Fund (IMF) Spring Meeting in Washington, Mr Osborne said geo-political risks stemming from Ukraine would form a main talking point in meetings with G7 and G20 ministers this weekend, alongside IMF quota reform and the outlook for the global economy.
He said Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact. The Government would be "ready for any eventuality", he said, even if there was a significant impact on the City of London.
"The UK is prepared to take actions that will have an impact on Russian engagement with our financial services ... we are prepared to bear the economic price [of this], because the economic price of doing nothing is considerably higher," he said. "It's a price that we’re willing to pay if it enforces the international rule of law."
He also said the Treasury plans had received "strong support from the leading players in the City".
"The City of London is a global financial centre and that is an asset in the UK, but that doesn't mean that its interests will come above the national security interests of our country," he added.
Mr Osborne's warning about more market volatility comes after he announced steps in the Budget to enhance Britain's resilience to economic shocks, including building up the country's foreign exchange reserves.
IMF research this week also highlighted the growing interconnectedness of global economies. Using historic data, it calculated that a one percentage point rise in US 10-year borrowing costs roughly translated into an 0.66 percentage point rise in equivalent UK borrowing costs.
More recent rises in bond yields showed a higher correlation, the IMF research showed, suggesting that policy action in the US is likely to affect the UK, even if Britain's policy stance remains unchanged.

JPMorgan profits fall 19% as mortgage business fades

JP Morgan exterior JP Morgan has paid some $20bn to regulators over the past year
US banking giant JPMorgan Chase has reported a sharp fall in profits at the start of 2014, which it blamed on declines in its mortgage business.
The bank said net income in the three months to the end of March was $5.3bn (£3.1bn) - a fall of 19% compared with a year earlier.
Profits from its mortgage business stood at $114m, down $559m from last year.
The figures mark the second successive quarterly fall in profits at the bank.
It comes as Wells Fargo, the biggest US mortgage lender, reported a higher-than-expected 14% rise in first-quarter net profit.
But it said the rise in profits was the result of a series of equity investment gains, which helped offset a continuing slowdown in its home loan business.
It said net income rose to $5.6bn in the first three months of 2014, from $4.93bn a year earlier.
Both JPMorgan and Wells Fargo suffered from a fall in remortgaging activity.
Wells Fargo provides almost one in five US home loans. It said income from mortgage banking fell by 46% to $1.5bn from $2.7bn a year earlier.
Applications for refinancing fell to their lowest share of total mortgage applications since July 2009 in the week ending 4 April, the Mortgage Bankers Association (MBA) said.
And Black Knight Financial Services said February was the worst month for new home loans since at least 2000.
Wells Fargo's new home loans fell to $36bn in the quarter from $109bn a year earlier and from $50bn in the fourth quarter.
The company had not made so few home loans since the third quarter of 2008, when the housing market was under heavy stress.
At the same time, profits from JPMorgan's corporate and investment banking division stood at $2bn, down from $2.6bn just three months earlier.
Legal costs For JPMorgan, 2013 was marred by huge legal settlements over its mortgage practices in the run-up to the 2008 crisis.
The "London whale" trading scandal and other controversies including legal costs relating to the fraudster Bernie Madoff also dented earnings in 2013.
JPMorgan chief executive Jamie Dimon still described the bank's first quarter results as "good" given the industry-wide headwinds in both investment banking and mortgages.
"We have growing confidence in the economy -- consumers, corporations and middle market companies are in increasingly good financial shape and housing has turned the corner in most markets -- and we are doing our part to support the recovery," Mr Dimon said.
Mr Dimon called the conditions of 2013 "painful and nerve-wracking" in a letter to shareholders in April.
However, bank officials are hopeful 2014 will see fewer large legal settlements with regulators and private parties.

Students could be paying loans into their 50s - report

BBC Moneybox's Paul Lewis: "This is effectively... a graduate tax"
Most students will still be paying back loans from their university days in their 40s and 50s, and many will never clear the debt, research finds.
Almost three-quarters of graduates from England will have at least some of their loan written off, the study, commissioned by the Sutton Trust, says.
The trust says the 2012 student finance regime will leave people vulnerable at a time when family costs are at a peak.
Ministers said more students from less advantaged homes were taking up places.
The study, written by researchers at the Institute for Fiscal Studies (IFS), assessed the impact of the new student loan system for fees and maintenance, introduced in England from September 2012 to coincide with higher tuition costs of up to £9,000 a year.
The study - entitled Payback Time? - found that a typical student would now leave university with "much higher debts than before", averaging more than £44,000.

England's former and new student finance systems

  • Tuition fees rose to a maximum of £9,000 a year in 2012, almost treble the previous fee, which was around £3,000 between 1998 and 2011
  • The threshold for paying back student loans is now £21,000; under the former system, the current threshold for repayment is £16,910 (both at a rate of 9% on all income above this)
  • Students under the new regime pay an above-inflation interest rate of up to 3%, which begins while they are still at university; under the former system, there was no real rate of interest
  • Under the new system, graduates earning more than £41,000 pay more interest (up to a maximum of inflation plus three percentage points); this higher level threshold did not exist before
  • Debts are now written off after 30 years, compared with 25 years under the old system.
It says: "We estimate that students will leave university with nearly £20,000 more debt, on average, in 2014 prices (£44,035 under the new system compared with £24,754 under the old system).
"The vast majority of this increase is the result of higher fee loans to cover higher tuition fees."
In cash terms, the researchers estimate that graduates will now repay a total of £66,897 on average - equating to £35,446 in 2014 prices.
The report says the lowest-earning graduates - those whose salaries rarely go above £21,000 - will pay back less under the new regime, while those who earn higher salaries will pay back substantially more.
The decision to bring in a real, above-inflation interest rate on student loans means that almost half (45%) of graduates will pay back more than they borrowed in real terms.
However, even though large numbers of graduates will repay more than they borrowed, the vast majority will not return their loan in full, the study finds.

Student protesters on a march The decision to increase fees and change the student finance package prompted anger
"We estimate that 73% will have some debt written off at the end of the repayment period, compared with 32% under the old system. The average amount written off will be substantial - about £30,000."
The researchers go on to say that, under the new system, most graduates will repay slightly less until they are in their mid-30s than they would have done under the old regime, but will then pay more in their 40s and early 50s.
'Average' teacher The study cites the example of an "average" teacher, who takes out an average level of loan, works every year after graduating and has average earnings for the profession.
It says they would repay £25,000 in today's prices under the old system, finishing their repayments by the time they are around 40.
But under the new system, the same teacher would pay back around £42,000 in 2014 prices, but would not have finished paying back their loan by the time they are in their early 50s and would have around £25,000 written off.
Conor Ryan, director of research at the Sutton Trust, said: "There has been a lot said about the lower repayments that graduates make in their 20s under the new loan system, but very little about the fact that many graduates will face significant repayments through their 40s, whereas many would previously have repaid their loans by then.
Martin Lewis explains to students the best way of managing money at university
"The new system will benefit graduates who earn very little in their lifetime. But for many professionals, such as teachers, this will mean having to find up to £2,500 extra a year to service loans at a time when their children are still at school, and family and mortgage costs are at their most pressing.
"With recent revelations about the proportion of loans unlikely to be repaid, it seems middle-income earners pay back a lot more but the Exchequer gains little in return. We believe that the government needs to look again at fees, loans and teaching grants to get a fairer balance."
Liam Byrne, the shadow minister for universities, science and skills, said: "Degree costs have trebled yet costs to the taxpayer have gone up, and now we learn our children and grandchildren will be paying off their student debt well into their fifties.
"The system has lost all fiscal credibility and is losing public confidence."
A spokeswoman for the Department for Business, Innovation & Skills said: "As a result of our reforms, a greater proportion of students from disadvantaged backgrounds are going to university than ever before.
"Most students will not pay upfront to study. There are more loans, grants and bursaries for those from poorer families.
"We have protected those on lower incomes by increasing the repayment threshold to £21,000 and our universities are now well funded for the long term."

Federal government seizes $424 million in tax refunds from children to pay back old debts owed by their PARENTS

  • U.S. Treasury has grabbed $75 million this year from Americans whose debts are more than 10 years old, thanks to a single line in the farm bill
  • Many of the debts trace back to the deceased parents of the people who now see their IRS tax refund checks sent back to Washington, D.C.
  • Only about 10 per cent of appeals are granted
  • A Maryland woman said she lost nearly $3,000 because the Social Security Administration overpaid her mother in 1977 after her husband died, leaving her with five children to raise
  • Before the farm bill language turned up, Uncle Sam couldn't recover money that was owed for more than a decade

Hundreds of thousands of U.S. citizens are getting shocking letters in their mailboxes instead of tax refund checks – nastygrams informing them that the federal government has seized their money to repay debts their parents decades-old debts that they never settled.
In some cases, they're debts the parents never knew they had. And no one warned their children.
The 2008 Farm Bill included a single line that made it possible, allowing the government for the first time to hunt down individual taxpayers who have owed Uncle Sam money for more than ten years.
If the debtor is deceased, according to the Federal Trade Commission, the money is considered a write-off. But the Social Security Administration has a different view of the law, chasing down adults whose parents cared for them with unintentionally overpaid benefits.
Frustrated: Mary Grice and her attorney Robert Vogel sued the federal government for seizing money it says the Social Security Administration incorrectly paid her mother 37 years ago
Frustrated: Mary Grice and her attorney Robert Vogel sued the federal government for seizing money it says the Social Security Administration incorrectly paid her mother 37 years ago
Shock: Social Security overpayments made decades ago are boomeranging on the beneficiaries' children
Shock: Social Security overpayments made decades ago are boomeranging on the beneficiaries' children

The Treasury Department has been exercising its new authority since 2011, bringing in $424 million in old debts that were previously considered out of reach.
Social Security says it's identified 400,000 taxpayers whose families have owed a combined $714 million for ten years or more. Every oen of those, the agency claims, will learn their fate by this summer.
Since January the government has recovered more than $95 million in ancient obligations. That's a fraction of the $1.9 billion the Treasury has seized overall in 2014, most of it owed for a much shorter time.
But it's the targeting of Americans for their deceased parents' decades-old delinquent Social Security accounts – often without solid evidence of exactly who received errant payments in the first place – that has people up in arms.

Social Security spokeswoman Dorothy Clark told The Washington Post on Thursday that '[w]e have an obligation to current and future Social Security beneficiaries to attempt to recoup money that people received when it was not due.'
Mary Grice, a 56 year-old Food and Drug Administration employee, told the Post that she received a threatening letter in March advising her that all $4,462 of her 2013 tax refund was seized to compensate the government for overpaying her mother Sadie's Social Security benefits in 1977.
The bill came to $2,996, but the government captured Mary's entire refund check.
Sadie Grice died in 2010.
'What incenses me is the way they went about this,' Mary said. 'They gave me no notice, they can’t prove that I received any overpayment, and they use intimidation tactics, threatening to report this to the credit bureaus.'
She sued the Social Security authorities this week in federal court, arguing that her due process rights were violated when the government put her on the hook for a debt that allegedly traces back to her long-dead father's benefit account.
Democratic Senators Barbara Boxer (2nd R) and Barbara Mikulski (L) are demanding the Social Security Administration cancel debts that are more than ten years old and incurred through no fault of the person who's currently on the hook
Democratic Senators Barbara Boxer (2nd R) and Barbara Mikulski (L) are demanding the Social Security Administration cancel debts that are more than ten years old and incurred through no fault of the person who's currently on the hook
Looking for one of these this April? Check your parents' credit reports first. Sadly, it doesn't matter if they passed away years ago
Looking for one of these this April? Check your parents' credit reports first. Sadly, it doesn't matter if they passed away years ago

The agency told the Post that it always tries to contact taxpayers before seizing their money. In Grice's case, they send postcards to a PO box where she hasn't received mail since 1979.
Somehow, though, they knew the correct address to reach her when it was time to take her tax refund.
Robert Vogel, a lawyer who took Grice's case pro bono, told the Post that '[t]he craziest part of this whole thing is the way the government seizes a child’s money to satisfy a debt that child never even knew about.'
'They’ll say that somebody got paid for that child’s benefit, but the child had no control over the money and there’s no way to know if the parent ever used the money for the benefit of that kid.'
Democratic Senators Barbara Boxer of California and Barbara Mikulski of Maryland wrote to Acting Social Security Commissioner Carolyn Colvin on Friday, asking for a time-out.
'While this policy of seizing tax refunds to repay decades-old Social Security overpayments might be allowed under the law, it is entirely unjust,' they wrote.
'Garnishing taxpayers’ refunds to pay for debts that are more than a decade old – and incurred through no fault of their own – is a policy that cannot be continued in good conscience.'
Wants her day in court: The feds are going after deceased debtors' children, even if the children had nothing to do with the debt in the first place
Wants her day in court: The feds are going after deceased debtors' children, even if the children had nothing to do with the debt in the first place

In an online essay, CNBC producer Jake Novak noted that tax refund checks are now 'the new promised land for government regulators and bureaucrats desperate for more revenues.'
The Obamacare law, for instance, was designed to use the IRS as a mechanism to collect penalties levied for disobeying the individual medical insurance mandate.
The Social Security administration is the latest example. Already 1,200 Americans have filed appeals on seizures of old debts that they say don't belong to them. But they win only 10 per cent of the time.
'We have a case of the government saying: "When you screw up, you pay. When we screw up, you also pay",' wrote Novak.

A Deep Look Into The Close Interconnectedness Between Washington & Wall Street

Published on Apr 9, 2014 
Our lead story: The eight largest US banks –JP Morgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and State Street — will have to add as much as $68 billion in extra capital. Federal regulators say the new rule is intended to help “too-big-to-fail” banks withstand losses during periods of market stress. Erin brings you the details.Our interviews today discuss banking and its relationship to political power. Nomi Prins, author and senior fellow at Demos, comes on to talk about her new book All the Presidents’ Bankers, a deep look into the close interconnectedness between Washington and Wall Street. You can find a link to the book here. Then we move on to Anthony Randazzo, the Director of Economic Research at the Reason Foundation, to give a libertarian view of the banking system, regulation, and politics. Take a look.Finally for today’s Big Deal, Edward Harrison and Erin talk about the cooling temperatures in California…in the housing market. Check it out.

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