Monday, 2 July 2012

On LIBOR, local councils, PFI and pension funds

The actions of supposedly 'rogue traders' should be dealt with, but from my position the LIBOR scandal has a long way to go.  A quick health-check on the impact of LIBOR on local authorities due to their position as large fund-holders, often depositing money in short-term accounts but also investing in PFI and via their large pension funds. 

At the timing of writing this it is likely that Barclays will not be the first bank to be fined for misdemeanours with respect to LIBOR fixing.   Further litigation may ensue both in this country and abroad. (At present it is not clear whether Banks colluded to manipulate the LIBOR rate fixings each day or just manipulated their own LIBOR rate fixings for their own loan/deposit facilities with clients. Barclays and RBS appear to be the two UK banks most culpable).  Due to rules around class action suits in America, action will proceed there - with interest parties including Baltimore City Council.

As far as Camden Council’s investments go, none of these are or have been linked to LIBOR - although some local authorities will have loans which are linked.  While the the margin of difference appears to be small - 0.10% -  for large volumes over time this will certainly add up.

However, PFI deals are sometimes linked to LIBOR – none in Camden - you might want to check in your own council.  The injury here could be a financial one and also a moral one - misquoted rates allow cheaper refinancing by banks, thereby making more money for themselves on deals struck with the state.  (This is particularly the case with older, more inflexible PFIs signed 1995+). 

Of more serious concern for councils is the erosion of trust in banking stocks.  We fear that Camden's Pension Fund (worth £995m, serving 16k existing and future pensioners) will be affected by banking stocks owned in the portfolio.  

Current estimates of the equity impact on RBS and Barclays are that this scandal could reduce these two banks’ share price by 26%.  

Unless the government takes swift action to help restore confidence in a sector which clear has confidence problems (that is, not in the economy so much as between banks), the taxpayer could suffer further.

But LIBOR is about more than just the money - it is about the confidence factor.  For three years 'confidence' in the economy was based on the argument driven by the financial sector that public debt was too high.  LIBOR shows that the reason banks arent 'confident' isn't so about the high levels public debt - they don't (and didn't) trust each others rates however much money we keep printing them.

As active shareholders, other authorities should follow Camden's lead and raises questions - as Cllr.Peter Brayshaw (Chair of Camden's Pensions, and Executive member of LAPFF) did - at the Barclay's AGM on Friday and through their fund managers.   

The Local Authority Pension Fund Forum has been consistent in criticising banks for their excessive bonuses; "padding" of results; hiding of deferred bonuses; utilising the IFRS to hide a "true and fair view", and other then known faults in Barclays.

As Peter said on ITV News at Ten on Friday:  "Heads must roll."

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