Pound & Euro Saver

The facts

Numerous city councils in the UK were investing their money (the proceeds from the taxes paid by people) with some the Icelandic banks who went bust last week. Those councils are now asking for the government to "guarantee" their deposits. .

So far, the Chancellor refused to give them financial guarantee and judged that these councils should have get sounder financial advice. Margaret Eaton, chairman of the Local Government Association, said that councils are spreading their assets to ensure the maximum return for their investments.

A few comments

I think this is a very odd situation.

On one hand, we have been recently hearing politicians from each side calling increasingly for the persons "responsible" to be punished. I think those kind of comments are very stupid especially when this crisis is the result of several years of common hysteria. Politicians will point out a few culprit whereas they will never take heir responsibility for not enforcing the insufficient regulation they had designed in the past. They purposefully closed the eyes on a situation that was favorable to them: voters are usually more easy to handle when they are enjoying a strong growth period (even if it is a growing bubble).

On the other hand I am still scrutinizing the newspaper to read about the resignation of the people that where managing the money in these councils. If we are about to do a which hunt let's start with the easy culprits They were not innocent victims.. If you are managing someone else money you are required to be a fully qualified investors. You have to know there is no free lunch and if you are getting a higher return their is a higher risk. Do they even know about risk adjusted returns?

Newspaper have been discussing about a potential collapse of this bank for more than a year now. You can gamble with your own money (and its even easier when there is a compensation scheme to help you) but things are much different when you are paying with tax payers money..

ps as I am reading this article I just discovered that Universities and hospitals money managers were also investing in these banks ...

I have been reading quite a lot about Zopa, I am about to put a little amount on the system but I have little hope regarding to the whether my offers will be accepted.

What is ZOPA

ZOPA means Zone Of Possible Agreement. It is a web site that can match offers from people who want to lend money (or invest in in a sense) to people that want to borrow money. This is exactly the role played by a bank usually. A few difference though:

• the bank will always accept money from savers and will pay them interest without having neccesarrily individials ready to borrow it as it has other activities to finance and can still invest the money on the wholesale market.
• it will also lend money independantly as once again in can borrow on the wholesale market.

Zopa, the company will cover its costs earn money by receiving a fee when a loan is agreed and by receiving a maintenance fee on all money lended by lender. As Zopa is not taking risks, and therefor there is no real difference between the interest rate paid by borrowers and the interest rate received by lenders.

How does it work

Zopa is ranking borrowers in four categories by looking at their credit record and maybe (I am not sure) by looking at the self certified income declaration done by the potential borrowers. Lenders will have to select the borrower categories, the loan maturities and the rate they are ready to lend to/for. When a borrower is asking for a quote, Zopa searchs to match the offers with the borrower ranking and requested maturities and proposed him the best available rate depending on all the outsanding offers. If you are lending at an higher rate that other zopa lenders you are less likely to have your money lended though. Market law.

There is also another system (the listings) where instead of zopa pooling the money on offer to quote a loan, a potential borrower can have a page on zopa with some details about his project, why it is safe and with the whole story about him and lenders will then be able to work on a case by case basis and tell how much and at which rate they lend to this person (instead of a group).

What is the big mess

On a borrower point of you, no problem. Go for it, ask for a quote, also go for a listing, compare with your bank and why not borrow from Zopa if they are the best offer you have.

The mess is on the lender side and I don't think it is really the because of Zopa but because of really stupid persons hanging around:

• When you are a member, you can download detailled statistics on the market about money on offer and the recently matched loans. Some of the lenders here are totally out of the market. Too high ? I don't care about people that are asking the highest interest rate. They have their own felling about the risks. I am much more concerned about people asking not enough. as of now people are lending at 4.6% to the A* category (the supposedly best borrowers). Zopa will suck 0.5% and in the end you will have 4.1% before tax. You can find more than 60 saving account offers on money supermaket yielding over 5% and with no notice (money lent on Zopa cannot be released ahead of scheduled repayments yet) and have you already filled your ISA for the year?
• The listings is another big mess too. It is an auction system very similar to ebay and as with any of these systems the "game" factor comes into play and you are not reasonable anymore. Borrowers usually come with an indicative interest rate. Where does it come from ? My guess it is the best of all the offers by other banks and zopa, with a small negative spread. So why are Zopa lenders are on average pricing the loan below this indicative offer ?
• this currently under auction offer is one of the too many exemple.
  • All the Zopa lenders are bellow the asked rate
  • It is a debt consolidation loan. (I think you should be more carefull)
  • A lender is proposing 1.00%

Is Zopa bad

No. Click here and register now

• If you are a borrower, go for it, at least ask for a quote.
  • If you have enough time always run an auction (listing) and leave it on as long as possible.
  • Have your auction ending when you think you are mors likely to have plenty of crazy lenderS ready to cut their price in order to be in. Avoid the friday night as hey are all in the pub
• If you are a lender, go for it but:
  • Price you risk correctly (define a grid and stick to it, and adjust it to reflect economic conditions). You can define your rates as a spread that you add on tome of the rate proposed by your best saving acount.
  • Don't forget the price of liquidity (zopa are not cashable in advance of the schedule even if these guys seems to be working on it)
  • Don't be mad if you are not lending your money (don't poor too much money so you don't have too much money sleeping here).
  • Think about your own situation. You have your own cost of financing. Would the mone be better on a "security fund" ?
  • When participating to the listing (the auction process), don't go nut. First define your limit for the given borrower (according to your grid and feeling). Then play the auction process but never go below your limit. Think about the risks (you may not see your money back) and you will be better of if you move the money to a saving account than going too low.

I am working my pricing spreadsheet right now and I will publish it if there are people interested by it around.

You are likely to have heard about the rogue trader of Société Générale (SocGen) that lost €5 bn. So do you think that banking at SocGen is a good idea ? Here are my thoughts.

Did he really do it ?

• He really lost €1+ bn and the remaining was lost as the position was unwind in a very difficult market. Fu$#ing hell. One guy can do this without being noticed. The bank should really change its control procedures and it surely will. Let's hope that other banks will benefit from this too.
• He did not lost the whole thing and the bank is hiding something else with it. There is going to be some inquiries and I hope that this will be noticed.
• He did it and the bank knew but did nothing until the things turned really ugly. Once again I hope that this will be noticed by the police and by Banque de France.

My opinion is that the right solution is the first one. The two other one would represent too much risk for the bank. Loosing money and trying to hide it by publicly killing a pour guy may be hidden but truth will surely resurface one day and would this time kill the company.

Will I change bank? Clearly not. I assume that SG will or hopefully has changed its control system and that this is less likely to happen here again. It will also be more careful and will not let this happen with other stuff (if solution 2 is the right one)

• The capital increase made the bank stronger.
• This bank is proposing me the best expat package compare to others (No fee on payments and withdrawal anywhere in the world)
• Deposits are covered according to the French government. "There is no need to run at the bank" is printed on all the news paper (at least on their web site). There is a €1.5bn fund that will easily cover the €200bn deposits (There is no typo src: French newspaper "Les Echos"). Honestly the only parts of the bank that seams to have been badly wounded its ability to remain independent and its ability to keep its employees are bonus are likely to be impacted to preserve the bank positive net income.

Need to be vigilant

• Mind the small fees that may be added to the bill of retail customers in order to announce a fantastic come back in a year from now.
• Wait for communication from the bank concerning the strength of the new system to be implemented if you have more than a saving account.

And you what do you think?