Repo 105 vs FSA soft touch regulation 101

Two things strike me about the Lehman Brothers accounting for the over-collateralised repos. What did the counterparties do in respect of their own accounting treatments of the repos and what anti-money laundering investigations were made?

If Lehman's booked a sale, how did the counterparties such as Barcap, UBS etc, account for the repos? Were they purchasing the assets on an outright basis or did they regard these as normal repo transactions?

Unfortunately we'll never know. Lehman's year end was November while European banks have December, and Japanese banks March year ends, respectively. Thus banks can readily teem and lade assets and liabilities in order to help each other present the best balance sheet possible at the year end.

Perhaps as part of the global reform of the banking system, all banks should have the same financial year end.

The money laundering angle is simply the case that if I, as a customer of a bank, were happy to accept $100 for liquid assets clearly worth $105, such a suspicious contract should lead to the bank investigating me for potential money laundering.

But then the FSA withdrew its rule book on money laundering in early 2006, relying on banks to use their own code of practice for "know your customer" procedures based on a risk-based approach.

A typical in-house code would require a bank to investigate customers entering loss-making transactions where the loss is avoidable or transactions which have no apparent economic purpose. Also any suspicion of illegal activity or attempts to hide money from law enforcement and tax authorities should be followed up.

What the risk in the risk-based approach has come to mean, is the risk that the activity is found out or that the FSA will admonish the financial institution. The FSA's light touch has been a soft touch as far as the banks are concerned.

UK Financial mis-selling at its worst

I am one of 20 or so people who made written representations to the FSA after the members of the Britannia Building Society had voted to approve the merger of the society with The Co-operative Bank Ltd.

Setting aside that the transaction is strategically wrong – why does the UK’s #2 building society by assets need help when it complies with the FSA’s capital requirements? – the transaction was mis-sold.

The bulk of documentation and all the publicity surrounding the “merger”, referred to a merger between the society and Co-operative Financial Services Ltd. This is incorrect and misleading. The CFS is the owner of the eponymous bank, but as anyone in business knows, a holding company is a separate legal entity from a subsidiary. The transaction was described as a merger with the holding company; the vote was for a merger with its subsidiary.

Merger implies that the parties merging are broadly equal and that shareholders in each party will end up with an ownership interest in the merged entity. This is not the case here as Britannia members will have no interest in the enlarged bank. Society members are being offered membership of the Co-op Group but this is the holding entity for CFS. Returns to society members will therefore be diversified and diluted not only by the Insurance business of CFS but also by the returns from Somerfield/Co-op supermarkets, housing development, undertakers and pharmacies, to name but a few.

The accounting for the transaction is a straightforward transfer of the net assets from the Society to the Co-op bank. At the end of December 2008, the net book value of the Society was GBP881 million – and this, in effect, is simply being given to the Co-op Bank’s shareholders. I am not expecting a windfall payment but for the Society’s board to imply that giving away the Society at a cost of over GBP200/member (assuming 4 million members) was the best deal they could get, is suspiciously mendacious.

Of course the representations to the FSA will be considered – but ignored. The documentation for the deal was passed to FSA for its prior approval. But just in case someone there has forgotten the definition of mis-selling, I attach the link to the FSA’s website.
http://www.fsa.gov.uk/Pages/Library/Communication/PR/2003/052.shtml

Should it still be signed off by the FSA, it will no doubt be discussed at a higher place. The Treasury Select Committee will bare its teeth and get to the bottom of the matter and then, led by its Chairman, John McFall MP, decide that apart from a couple of slapped wrists, it is all hunky-dory.

Did I mention the Co-op Party? Society members after years of no political donations will now find that the new owners of their assets are funding the Labour party. The Co-op Party has 29 MPs who stand as Labour Co-op members.

Labour Co-op is abbreviated to Labour even on official documentation. How do I know? The published list of members of the Treasury Select Committee describes the following:- Rt Hon John McFall MP (Chairman), West Dunbartonshire, Labour.

Society members are being undertaken to the cleaners.