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 opened a spread betting account tonight.

For those who don't know spread betting is a very popular way to trade in the UK. This popularity is explained by several reasons:

• It is tax free. You are actually not buying or selling financial instruments. You are just betting that their price is going to go up or down.
• It is highly levered. You can bet £10 for every £1 change on the price.
• You can lever the leverage Why not spread betting on the price of options?

I haven't funded yet. A few remarks though:

• Give me access to real time pricing
• I am very looking forward to receiving the training materials they provide you with. Two of the biggest providers here in the UK are providing their new customers with binders and special trading conditions for the first few weeks after subscribing.
• Their is a lot of warning and they are providing you with options to limit your losses but two clicks and it is actually done: you can have opened a positions. If you passed the company's credit check you don't even have to have the money on your account. One loss? I'll do better on the next one. It is really crazy and losing a lot may actually be stupidly easy.
• Even if the spreads are tight, lots of fees around. Leverage has a cost.

Will keep readers posted on the experimentation.

Barclays Global Investors have recently launched two new ETFS:

iShares € covered bonds (ICOV.L & SCOV.L)

This fund replicates an index tracking the performance of € denominated covered bonds. Covered bonds are debt securities issued by corporates entities and are secured by a pool of assets. They are very similar to asset back securities created in a securitization process but there is a major difference: the bonds and the assets that back them are still on the balance sheet of the issuer (banks) and therefore:

• Assets have to be replaced if they are defaulting or prematurely reimbursed
• You have recourse on the bank and on the assets.

Covered bond where the preferred solution in Europe whereas seuritization was more popular in the US.

• On the investor point of you they offer more recourse than securitized assets
• On the bank point of you the mortgage are still on the balance sheet whereas it would prefer to have them off.

The good:

• The recourse on the pool of assets and on the issuer are likely to mean a AAA rating for these bonds (92% where AAA-rated at the time the fund factsheet was written)
• Those kind of securities are likely to yield slightly more than government bonds even if they have a similar rating.

The bad:

• They are riskier than AAA-rated government debt securities.
• 30% of the portfolio is made of Spanish covered bonds. My guess is that a significant part of it are mortgage based and we must seriously question and today there are serious questions about the strength of the Spanish housing market and the Spanish banks.

iShares Global Inflation Linked Bonds (IGIL.L)

This fund is replicating the performance of an index of Inflation Linked Bonds issued by various government (AAA-rated government are accounting for 83% of the bonds in the index). Those bonds are mainly libelled in all the major currencies (USD, GBP, EUR) as the US, the UK and France are the biggest issuers of inflation linked bonds. You will nevertheless have exposure to some more exotic currencies like the Australian dollar (AUD), the Canadian dollars (CAD).

The good:

• The coupon paid by those bonds depends on the level of inflation observed in the country. It helps to mitigate one of the risk when investing in bonds: your investment may lose value when it yields less than current interest rates and the current rates generally depends on inflation.

The bad:

• You are blending in one index and therefore one product several investments in different currencies. You will therefore be exposed to a currency risk while investing in this kind of product.

More

• iShares web site
• Covered bonds