MIWNLF

Just how stupid are they? (Part 94)

The wonderful taxpayer funded two-year interest free mortgage holiday will be asset means tested of course; "... only those with less than £16,000 worth of savings will be eligible."

Er, right, so Mr & Mrs A have a mortgage of £384,000 and no savings, their income has dropped, so they're eligible. Mr & Mrs B next door have exactly the same circumstances, but their mortgage is £400,000, and they would be eligible but for the fact that they also have £16,000 in savings.

Notwithstanding that people who have a large mortgage and a lot of savings are daft anyway (you usually pay more interest on your mortgage than you earn in interest), what is Mr & Mrs B's most likely course of action:

a) Make sure the savings are with a different bank to the one holding the mortgage and "forget" to mention it when applying for the interest-free holiday?

b) Use the £16,000 to make a one-off mortgage payment and apply for the interest-free holiday straight away?

c) Use up the £16,000 savings to cover the next eight months' mortgage payments and then apply for the interest-free holiday?
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As a separate issue, asset-based means testing is even more evil that income-based means testing. There is a taper applied to most UK benefits, if you have savings of £16,000 or more (or £8,000 for some benefits). Given that you are only earning a few hundred pounds a year in interest on that level of savings, this is an effective marginal tax rate on savings income of several thousand per cent.

You couldn't make it up (Part 94)

Poverty chief 'paid nearly £1m'

Man with orange face is let off the hook

Damn.

Reader's letter of the day

From the FT:

Featherbedding the owner-occupier

Sir, Mr and Mrs Bellemaison gambled on the property market ("Brown throws homeowners a mortgage lifeline", December 4). Mr Bellemaison loses his job and has to accept a lower-paid one. The state steps in and subsidises their interest payments.

Next door, Mr and Mrs Prudence are tenants. Mr Prudence also loses his job and has to accept a lower paid one. The state does not step in to subsidise their rent*. The Prudences are forced to move to a lower-rent property.

Why the difference in treatment?

Yugo Kovah, Twichenham, Middlesex.

Lex on the back page summarises the madness of this in more depth.

* Unless Mr Prudence fails to find a new job, of course, in which case they can claim Housing & Council Tax Benefit.

Westworld: Sonic Boom Boy

In case you're wondering what the song is in the Sony Centres TV commercials (the ones with the CGI and the rainbows), it's "Sonic Boom Boy" by Westworld, which was one third of Empire (two thirds of which consisted of the half of Generation X that didn't make it into GenX)* plus Ms Westwood on vocals and some drummer chappy.



* GenX in turn split up into Billy Idol and the other half of GenX (being a quarter of the original Generation X line-up) formed Sigue Sigue Sputnik. These being basically some of my favourite bands of all time.

What goes around, comes around

Lola has sent me a link to this. You don't actually need to follow that link to get the gist of this post. In fact, you can save yourself even more time by just reading Lola's summary.

There is an underlying pattern, and a sort of twisted logic, emerging here. As I have said before:

Modigliani & Miller won a Nobel Prize for pointing out that the total 'enterprise value' of a company is usually equal to the value of all its shares and its bonds. Corporate finance wizards claim that companies can boost their own value in the good times by replacing shares with bonds (in other words, using borrowings to fund a share buy back), if this is true, then in the bad times, the reverse must also apply (in other words, doing a debt-for-equity-swap).

It was Ed (in the comments here) who pointed out why New Star had such high bank borrowings in the first place:

New Star's debt burden was taken on last April in order to facilitate a return of cash to shareholders. At the same time, New Star moved to the London Stock Exchange's main market and Mr Duffield and his family interests sold their stake down from 20 per cent to 12.5 per cent.

Let's call that an 'equity-for-debt-swap', which happens in The Good Times. And now that New Star have hit The Bad Times (and rightly so, according to Lola), the earlier deal is unpicked and the company does a debt-for-equity swap, i.e. the banks waive their loans and are issued with shares instead.

As ever, I should point out that New Star are of no particular interest to me (or probably anybody else reading this) , but all this illustrates that debt-for-equity-swaps are the market solution to over-leveraged companies. And why are our commercial banks in trouble? Because they have insufficient Tier One/Two capital, i.e. they rely on borrowings, i.e. they are over-leveraged. If our benighted gummint hadn't waded in with £37 billion of taxpayers' finest (plus all the other guarantees), then this is how banks would have been recapitalised.

Another day, another desperate throw of the dice (14)

Bank [of England] cuts interest rates to 2%

I trust readers are already familiar with the concept of "pushing a piece of string"? The government seems to have worked out how to bully banks into passing on rate cuts, but they still haven't realised that even if they do, there is a no benefit to 'the economy' as a whole (see Krugman on Japan and the Liquidity Trap, written in 1999).

John Band summarises which groups gain and which groups lose from this sort of madness.

Reader's letter of the day

From today's FT:

Sir, With reference to Mark Clare's letter* "House prices are crucial to UK's fortunes" (December 1): certainly they are, and the sooner prices drop another 30-50 per cent** the sooner life will return to normal. Mortgage finance is not the issue; affordability is.

Until house prices are at a price where a 75 per cent mortgage can reasonably be expected to be repaid over 25 years out of tax-paid income there will be no return to normality. The days of housebuyers gearing up on the basis of their increased equity to buy a bigger house are over, and I cannot see many buyers for a house costing more than £600,000 after they have paid 45 per cent tax.

It has to be either house price deflation of income inflation. Please hurry up and make up your mind.

Michael Brooke, Ross Brooke Chartered Accoutants, Newbury, Berkshire.

* Mark Clare is Chief Executive of Barratts, so you can guess what his spin was.

** Here's that chart again (for full explanation see here), average house prices since 1952 adjusted for wages growth, which shows that a further one-third fall from current average value of about £150,000 is not unlikely (click to enlarge):

Parched lawns

In the first half of this decade, round where I live (East London/Essex), lawns just died in the summer. For months they were just baked earth covered with yellowing strands of grass; but come Autumn, they'd green up again.

I haven't seen a properly parched lawn for years now.

Is this a sign of climate change, global cooling or what?