Monday, 24 August 2009

Building Society sector: Fail

A good recent report from KPMG, highlighted in the Financial Times, shows the continuing desperation of the sector. Just last week Chelsea Building society announced a huge fraud had cost it millions of pounds.
The nature of this fraud is itself quite suspect. Chelsea lent millions on buy-to-let mortgages to people who 'self-certified.' Now they call this fraud and the management leave, but one has to think that this was really an epic fail of risk management on behalf of what was supposed to be a prudential institution.

Other players in the sector have simply loaned out far too much money in mortgages and now with no access to the wholesale markets are effectively in stasis as businesses. With low interest rates making savers hard to come by and hard to profit from, these institutions seemingly have nowhere to go.

Now an M&A advisory business is going to suggest they all merge to make one bigger business which might have more room for manoeuvre.

However, the canniest thing to do for the CEO's is to wait it out. Interest rates will not be low forever and rising house prices in the medium term will fix the poor quality aspects of their books. Now is a crazy time to panic, unless like Chelsea or Dunfermline you have been run by avaricious fools in the recent past who have destroyed the business.


tory boys never grow up said...

Perhaps the one thing Building Societies should do in order to prevent failure is to stay as building societies and not convert to plcs as the record of those doing so has been nothing short of disastrous.

The problems at the Chelsea also point out the hazards of financial institutions diverting into areas where they did not have expertise - buy to let was not one of their traditional activities and I daresay they moved in when it became the fashion of the day.

Perhaps the directors at the Chelsea should be given some credit for falling on their swords when they make a loss of £26m - imagine if the same principled stance were taken elsewhere in the financial sector!

Not sure that wholesale mergers of Building Societies are the answer - since this usually means that smaller societies give up their specialist niches and local branches and the customer is usually the one who suffers - but there is probably a lot that can be done in sharing overheads and processing costs.

Budgie said...

The 'atmosphere' a few years ago was radically different. Then, apparently, Brown was the best Chancellor the UK had ever had. The majority view was that it was different this time.

Brown with his absurd vanity, boasting and, frankly, lies swayed the debate. Most normally truthful people are taken in by a liar, because they cannot believe the enormity of the lies.

No doubt some of the bankers, building society chiefs etc were themselves arrogant and incompetent, or even just plain naive, making them especially vulnerable to the con men Blair and Brown.

Now, of course few trust this wretched government. But it is only human nature to pretend after the event that they always did distrust Labour.

CityUnslicker said...

Tory Boys - not often that we are in agreement.
I don't think mergers are always the answer either, especially now the ig bansk have such huge market share.

This is showing through already, wiht mortgage spread profits up 300%.

Anonymous said...

I find the Chelsea BS results sadly predictable. I know for a fact that their standard fraud scorecard for new mortgage business was built on a sample of less than 50 frauds. That's accross the whole spectrum of applications.
There is very little chance that decisions based on a scorecard as robust as that would continue to be accurate. It is lazy risk management at its worst.

Steven_L said...

Why don't we just cut to the chase and merge all the banks and building societies into one. Have our salaries paid pre-tax into it and they can just credit our current accounts with whatever is left over once they've finished.

Mark Wadsworth said...

What Tory Boys says.

James Higham said...

However, the canniest thing to do for the CEO's is to wait it out. Interest rates will not be low forever

Unless the whole paradigm is changed along Gordonian lines, with a new financial system which made him the saviour of the world.

CityUnslicker said...

Anon - wow, I had guessed poor risk management, but that is something. A sample size of fifty!

Budgie said...

Mark Wadsworth said: "What Tory Boys says."

Well, hardly.

The whole point of the post is that building societies can be as stupidly taken in by con men as have bankers.

Of course "the continuing desperation of the [building society] sector" is one of the knock on effects of the depredations of the biggest con men in this whole sorry bust: Blair and Brown.

Letters From A Tory said...

"unless like Chelsea or Dunfermline you have been run by avaricious fools in the recent past who have destroyed the business."

The problem is distinguishing between badly run businesses and unlucky businesses in this economic climate. The headlines never differentiate between the two.

Anonymous said...

Suspect that they have way too many staff - a one year bond was processed within record time (and hence beat my cash into the bank account by a few hours incurring an £8 charge - thank you Barclays).

Calling them to sort out, they answered the phone on the first ring...spooky and definitely over-manned