If you’re wondering what I’m talking about, today is Tax Freedom Day — the day when the average worker in Britain has earned enough to pay their tax bill.Apparently it’s fallen one day earlier than in 2007. However, it’s a full seven days later than it was when New Labour first came to power. We now spend, on average, one week more than we did simply working for the Government.

That’s why I admire Robin Tracey. Because for Robin, EVERY day is Tax Freedom Day!

I’ll explain what I mean by that below. First, though, let’s dive into today’s Big News…

Bradford and Bingley shares suspended

Bradford and Bingley (B&B) had its shares suspended by the FSA this morning, following a 30% fall. The mortgage lender, which is heavily exposed to the Buy-To-Let market, is expected to miss forecast profits by £100 million. Chief executive Steven Crawshaw has stepped down. B&B is expected to do a rights issue.

But amidst all the hullabaloo, Texas Pacific Group is buying what, to our eyes, looks like an eye-wateringly expensive 20% stake.

Do they know something the rest of us don’t? Theo Casey takes a closer look, and also makes the case for looking beyond simple value investing…

Has the tide turned for interest rates?

“Nobody can convince me that we’re able to boost economic growth with a lax monetary policy.”

The words of Klaus Liebscher there, one of the European Central Bank’s (ECB) monetary policy gurus.

Hear hear!

Liebscher went on to say that eurozone inflation is “very high” and that the ECB’s price stability mandate is “more than urgent” (what “more than urgent” means I’m not sure — perhaps this is a mistranslation…)

The bond market has the scent of a rate rise in its nostrils. Not that long ago, the market was pricing in a rate cut by the end of the year. Now the opposite position holds sway. Bond fans expect rates will rise.

Does this mean policy makers are finally taking inflation seriously? Well, the ECB has been hawkish for some time now. But what about closer to home? What’s happening on Threadneedle Street? Let’s take a look…

My oh my! We have a bit of a tussle on our hands, folks! A bone of contention has arisen between the Bank of England and the Treasury. Mervyn King, the Bank’s Governor, wants to promote Professor Charles Bean to the post of Deputy Governor when Rachel Lomax steps down.

But the Treasury is unhappy with the proposal. The other Deputy Governor is Sir John Gieve, whom the Treasury has criticised for not being ‘City-savvy’ enough.It fears promoting an academic to be the other Deputy will unbalance the Monetary Policy Committee. Cynics have suggested that the Treasury wants a City-friendly face simply because that’s more likely to lead to a policy the Government finds agreeable.

Though no-one’s said so (yet), I suspect they’re also uncomfortable with the idea of someone called Mr Bean wielding so much power over economic affairs…

Tension between a central bank and a government is a good thing. We neither want nor need monetary policy makers who kow-tow to politicians. King seems so far to be putting up a fight — perhaps he’s stung that I said he’s not as hard as ECB boss Jean-Claude Trichet…

It’s too early to say whether we’re now on a hawkish path. There’s a strong case to be made that rates should indeed go up — but whether that case has been heeded is another matter.

China on the cheap

Manraaj Singh had a quiet one last week. He was here, but spent most of his time holed up in his emerging markets den.

Today, we’re beginning to see the fruits of Manraaj’s labour. Two stocks which he believes typify why right now is a great time to be getting into China.

These aren’t formal recommendations, just interesting case-studies. But they make very interesting reading.

Find out why one of these stocks looks even better value than one of Warren Buffett’s new favourites!

Make every day Tax Freedom Day

OK, now I’ll satisfy your curiosity. Robin Tracey has a hobby which makes him hundreds of thousands of pounds a year. And he doesn’t pay a penny of tax on that money.

How? Because Robin makes his money from spread betting. And spread betting is tax free!

Spread betting is, of course, also risky. But Robin takes it all in his stride — because he’s been using his strategy for over a decade now, and knows that it works.

Recently he’s begun sharing his strategy with others, and the results have been phenomenal. One member of the public who’s copied Robin’s moves calls it a “near guaranteed income strategy”.

So if you’ve a bit of money to play with, and fancy putting it to work without the Government taking a bite out of the profits, why not check out Robin’s strategy?

Find out how, with only a few minutes a month, you could generate a tax-free second income from the comfort of your own home

Until tomorrow

Ben Traynor

Source: What If You Could Make EVERY Day Tax Freedom Day?

This we all know. But what if all goes wrong? What if the people the bank lends to don’t pay them back? What if too many savers want their deposits back? Basically, what if the bank runs out of cash?

Northern Rock posed this question last year. As well as using deposits, the Rock also topped up its lending from the money markets. But then the money markets seized up, and it was game over.

So the question was asked – what should be done now that it’s all gone wrong? It stumped the powers that be. The FSA, the Government, the Bank of England – they all scratched their heads. They scratched and they scratched, for several months, until they’d worn holes in the tops of their heads.

A bank is a private business. A bank that runs out of money, like any business that fails, can expect to go bust.

But, as we all know, that didn’t happen with Northern Rock. Once the head scratching was over, Northern Rock was nationalised. This marked a major deviation from the way private enterprise is supposed to work.

So now, the Treasury is drawing up plans for something called the special resolution regime (SRR). The idea is that in future the SRR would swiftly liquidate a failed bank, strip it of its assets and appoint new executives. Just as would happen with a failed business in any other sector.

But there’s a problem. Who will run the show? The FSA didn’t come out of the Northern Rock crisis very well. But the regulator would no doubt argue that its past performance should not be taken as a reliable indicator of the future.

Bank of England governor Mervyn King has reservations. He suggests there could be reluctance on the part of the FSA to pull the trigger if another bank fails. His reasoning is that this would be an admission of failure on the part of the regulator who allowed said bank to fail in the first place.

But the FSA counters that involving the Bank with a final decision would mean it would also inevitably become involved in monitoring, duplicating the FSA’s role.

Personally, I don’t really care who wins this little turf war. If I had to pick a side I’d go for the Bank. Call me a traditionalist.

A more fundamental question is how on earth have we got into this situation? As noted above, a failing bank should… well, fail. Adam Smith’s Invisible Hand is supposed to allocate the spoils of business to those most deserving. Those who get it wrong get less… if they get it really wrong they get nothing.

But the workings of the market have been gummed up by regulation. That and political fear (runs on banks don’t look good on the telly. Better do something, quick!)

It’s this political fear that creates moral hazard. The banks knew the Government would never risk letting them fail. So they were happy to take big risks.

Now an institution, the SRR, is being created to effectively force punishment upon banks that mess up.

Welcome to the age of the Visible Hand.

Hold your nerve, Merv!

Hurrah! It’s the day before the Bank of England’s Monetary Policy Committee (MPC) meets to decide what to do with interest rates.

Because I’m a sad man, I set up our very own Fleet Street Daily shadow MPC. Better-looking than the official MPC, our committee comprises seven wise men, one wise woman and Glenn, a bloke from Grimsby.

And my, was it close! A five-four split in favour of a quarter-point cut.

Not that this is what we expect the Bank will do. Nor necessarily what it should do.

Become a part-time Forex profit raider – in no time: in fact within 30 days you’ll be trading an average weekly income of £550 – £1,100, depending on what you stake. That’s between £28,600 and £57,200 per year tax free!

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“And there’s also talk of US interest rates rising,” adds colleague Frank Hemsley. “That would put sterling in serious trouble! Especially if the Bank of England cuts our rates.”

Indeed. A weak pound would make imports – including food and energy – even more expensive. Meaning more inflation, and pressure to put rates back up if the Bank adopts a US Fed-style aggressive rate cutting policy.

Personally, I’d favour keeping rates on hold. Businesses and consumers are rational. They see the economy is struggling, and they’ve changed their behaviour accordingly. This is why each day we see new ‘bad data’. Cutting the base rate by a quarter-point will do little to change prevailing sentiment.

What it will do, though, is further undermine the Bank’s reputation as an independent inflation fighter. So I’m hoping the Bank stands firm and leaves rates where they are. It won’t be popular, but being popular is not the Bank’s job.

Given the attention focused on how creditworthy our banks are, some may well be tempted, as The Daily Telegraph’s Stephen Ellis notes, to “stuff it all under the mattress”.

However, that is not only rather risky, but also should be unnecessary, thanks to an investor safety net – the Financial Services Compensation Scheme (FSCS) – which pays out if a bank or building society holding your cash goes bust.

At first glance, the scheme is pretty simple; if a bank goes bust and a customer is unable to recover a cash deposit via the normal liquidation process, then they are entitled to claim 100% of any amount up to a maximum of £35,000. So far, so reassuring. However, there are some quirks to be aware of.

First off, the £35,000 applies per person and not per account. So if you have two accounts with a single bank, say a current account and an online savings account, the balances are combined to test the £35,000 threshold. Also, some banks, such as HBoS, have a single Financial Services Authority (FSA) registration for all of their operations – including the likes of Intelligent Finance, Birmingham Midshires, Halifax and Bank of Scotland. That means you only get a single £35,000 claim to cover balances across the whole group. So a cautious investor should limit single deposits to £35,000 and, ideally, spread them across different banks.

It’s also worth noting that the scheme only pays out if your bank is FSA-authorised. You can check this on the FSA Register, or call them on 0845-606 1234. Be aware too that certain banks, such as Bank of Ireland, ING, Landsbanki and Fortis, get their primary authorisation to operate here from local regulators rather than the UK FSA. Although you would still be entitled to claim from the FSCS should the local scheme pay less than £35,000, the process may take longer, given the complexities of dealing with two different regulators.

If this all sounds like a lot of homework for a simple cash deposit, remember that the Government’s bail-out of Northern Rock suggests a major UK bank is unlikely to be allowed to fail, so the FSCS may never be tested. That’s perhaps just as well, given that under new FSA rules from 1 April it can only raise a maximum of £4bn a year in funding, hardly enough to cover all the deposits in a major retail bank.

But if you still have doubts, consider investing with the Government-backed National Savings Bank instead. One savings product stands out if you don’t mind locking up your cash short-term – index-linked certificates. Running for three or five years, the investment limit for each is £15,000. They each pay tax-free interest at 1.35% above the retail price index (a key measure of inflation) currently sitting above 4%. For a higher-rate taxpayer that’s equivalent to a gross annual return of just over 9%, with your deposit guaranteed by the Treasury.

“We need concerted action by governments, central banks and market participants to help stop this wave [of liquidations]…”
- Josef Ackerman, head of Deutsche Bank, speaking in Frankfurt on 17th March

“The government is prepared to do what it takes to maintain the stability of our financial system…”
- US Treasury secretary Hank Paulson to Fox News, March 16th

“In every country in 2008, every government has one aim – to maintain stability through the world economic slowdown. Britain with its central role in the world’s financial system is no exception…”
- UK finance minister Alistair Darling, in his Budget speech of 12th March

Not quite with it yet? Check these examples: it’s already done for you!

“The US tax-payer last week agreed to help J.P. Morgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of US mortgage bonds. In an effort to shore up Wall Street’s other firms, you also agreed to become lender of last resort to all 20 primary dealers in Treasury notes…” (Bloomberg)

“US leveraged institutions, which include banks, brokers-dealers, hedge funds and tax-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday…” (Reuters)

“The [investment] banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And your money is rushing in to help, with hundreds of billions from the tax payer, and hundreds of billions more from tax-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks…” (Paul Krugman in the NY Times)

With it now? Great fun, isn’t it!

Just cut to the chase about bail-outs and financial aid by remembering what the state’s big generous hand-outs are made from – your tax payments, both current and future, plus the spending power of your savings, ripe for inflating away by elected officials and their unelected agents and staff.

This game beats playing “Spoof” any day, we reckon…which is funny again when you come to think about it.  Because Spoof – played in pubs and bars across the world to decide who buys the next round of drinks – is a game without winners, only a loser. Exactly like this game, then.

Let’s play again

“We need a continuing message from tax payers and cash savers around the world that they will do what it takes to support economic growth. That will not be easy. It may necessitate taking some risks with inflation. But the message has to be unambiguous…”

So said John Varley – or as near as damn it – in a long open letter to government, published by The Banker magazine at the start of this month.

Varley is group chief of Barclays bank here in London. According to the annual report released a couple of weeks ago, he took home £2.4 million last year ($4.8m), just down from his 2006 pay-out of £2.5m after annual group profits fell 1% to £7.08 billion “due to the global financial turmoil” as the BBC puts it.

“The privatization of profit and the socialization of loss”

Don’t get us wrong here; I have no problem – moral or otherwise – with the concept of multi-million-dollar salaries. Executive pay merely puts flesh on those inequities which life itself thrives upon. The profit motive in finance is precisely what created the joint-stock company, mortgage lending, the safety-net of insurance, credit cards, overdrafts and all the other monetary tools developed by homo economicus in the last five hundred years.

But what sticks in the craw, however, is the “privatization of profit [and] the socialization of loss” as Martin Wolf calls it in the Financial Times. Every time the bankers screw up, your money steps in to patch up the losses. Letting the crisis wear on is simply not possible, because no one has dared to try it before.

“The authorities feel compelled to intervene,” writes Charles Kindleberger in his history of Manias, Panics & Crashes. “The dominant argument against the view that panics can be cured by being left alone is that they almost never are left alone.” That’s why we get the pleading from Wall Street and Washington alike today.

Please sir, can I have some more?

“Tax-payers need to continue to supply liquidity,” Varley’s article in The Banker very nearly goes on, “and they can help the restarting of the residential mortgage-backed security and commercial mortgage-backed securities markets by being prepared to accept this paper as collateral.”  More than that, “it would have a significantly (and disproportionately) positive impact if your cash savings were to buy commercial paper.”

Ain’t you brave, gentle reader, stepping into the breach so gamely like this! And so modest, too. Thanks to you covering Wall Street’s losses with your tax-dollars, “we’re going to have maybe a mild recession, but we’re going to avoid anything worse,” reckons Jeremy Siegel, professor of economics at Wharton.

Yet the plaudits will go to somebody else, with nary a murmur from you, reckons Siegel. “[Ben] Bernanke may very well easily turn out to be a hero here,” he explains. Which I guess was precisely your aim in putting money aside to provide for your future.

No redemption without legislation

“Systemically important institutions must pay for any official protection they receive,” Martin Wolf continues for the Financial Times. “Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted.  “This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidized, casino will not allocate resources well.”

This quid pro quo – the “this for that” stated so bluntly by Varley at Barclays and Ackerman at Deutsche Bank – is fast-becoming the surest financial consensus in history. If we bail out the banks to stop their stupidity creating a second Great Depression, they must accept far tighter regulation by those governments and bureaucrats who step in to save the day. No redemption without legislation.

There’s always a new way to gear up

Thing is, of course, we’ve all been before. Across the world, hundreds of times. New regulations come in to stall the last crash…and a new complex system of finance sprouts up, thriving on excessive risk which ends up needing your money – your tax receipts and your savings – to mop up the mess when it explodes in turn.

From Barnard’s Act of 1734 – which sought “to prevent the infamous practice of stock-jobbing” that had already peaked and exploded with the South Sea Bubble 14 years earlier – through to Sarbannes-Oxley in 2002, which tried to stop Enron and Worldcom once they had crashed, new standards come in after it matters. Financial risk-taking, meantime, simply moves on to find new ways to gear up, using the latest regulations to pin-point those loopholes that will, in due course, be closed up when it no longer counts.

Just what were the FSA thinking? Or were they not thinking at all?

“After the collapse of Equitable Life in 2000,” notes a letter to The Times of London last week, “the Financial Services Authority [UK watchdog] set up a review team on the regulation of the assurance society. Among the important ‘lessons to be learnt’, identified in 2001 were – and I quote verbatim – that ‘the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge…. “

[Yet] from the recent internal audit by the FSA on its regulation of Northern Rock [the top 5 mortgage lender which blew up in Sept. 2007] we learn that the bank ‘was monitored by supervisors with expertise in insurance, not banking’…”

More than that, the FSA failed to conduct a proper review of Northern Rock’s operations for the entire 18-month period leading up to its collapse. Even then, prior to that last full review of Feb. 2006 – and “contrary to standard practice” as this week’s official report into the scandal revealed – “formal records of key meetings were not prepared.”

Thus the quid pro quo of bail-outs for new rules becomes, in the end, a straight swap of excessive risk for incompetence. Underpinning this long-run historical fact you’ll find the assumption that “if one cannot control expansion of credit in boom, one should at least try to halt contraction of credit in crisis,” as Charles Kindleberger concludes.

For you, the tax-payer and saver, all that means is you get to pay twice – first in higher deductions and then through inflation.

Bet you’re glad Ben Bernanke will get all the thanks.