They say that when America sneezes, Europe catches a cold. In Britain, so tied to US and international finance, it's more like influenza...

Financial services: not so much an industry, more a short-cut to debt and dependency

WORKERS, JAN 2008 ISSUE

When US home owners can't pay their mortgages Northern Rock collapses, and the entire British economy, so reliant upon the so-called financial services "industry", is thrown into jeopardy. (See "Northern Rock: when the merry-go-round had to stop".)

Britain's sub-prime mortgage sector is 8 per cent of the housing market. But it is only a small example of the general overborrowing which underlies Britain's economic malaise. In the last two years, 360,000 households have taken out sub-prime loans, a fifth of all recent mortgages. These are high-risk, because they are either for more than four-and-a-half times the borrower's income, or they are for more than the property's price. In 2006, deposits rose by £70 billion, but the estimated net growth in lending was £90 billion.

In 2008, low introductory short-term fixed-rate deals at 4.5 per cent, taken out by 1.5 million people, will end. To continue their mortgages, they will have to borrow at higher rates, because the cheapest current fixed rate is now 5.4 per cent. So their mortgage costs look set to rise by 20 cent at least. This will lead to a wave of repossessions.

B&B sell-off
The buy-to-let sector's biggest lender, Bradford & Bingley, has sold off £4.4 billion worth of loan books at below their face value. The sector's third largest lender, Paragon, has drawn up plans for an emergency £280 million rights issue. Its fourth biggest lender is Northern Rock. These problems are making other banks adopt stricter lending criteria, so the buy-to-let market is becoming inaccessible to all but the wealthiest. The number of buy-to-let loans available has fallen by 40 per cent. In recent years, 60 per cent of City bonuses have gone into property, especially into this buy-to-let sector. Now, unrestrained greed is undoing the whole corrupt business.

The more that CEOs are paid in stock options, the more they want to risk investing in projects with the biggest potential gains, which also have the biggest potential losses. So when Merrill Lynch wrote down $8.4 billion due to losses on US sub-prime loans, its CEO got a $131 million payoff; Citigroup, the world's largest bank, wrote down $11 billion and its CEO got a $100 million payoff.

Unrestrained greed has fuelled the buy-to-let boom – now it is all going wrong. Photo: Workers

The Abu Dhabi Investment Authority has just bailed out Citigroup to the tune of $7.5 billion, borrowed at the painfully high rate of 11 per cent. Citigroup's total losses from bets on sub-prime mortgages and mortgage-backed collateralised debt obligations are at least $15 billion. Its "off-balance-sheet" financial vehicles, worth more than $80 billion, are also at risk and may well have to be bailed out or brought into Citigroup's books.

Swiss bank UBS wrote down $10 billion in December, after writing down £1.8 billion in October, due to risky debt holdings linked to the deteriorating housing market. Now sovereign wealth funds from Singapore and Oman are bailing out UBS, which has to borrow at 9 per cent.

Citigroup has sacked 17,000 workers. UBS is firing 1,500 workers, mostly in London. Bear Stearns plans to take a $1.2 billion write-down in the fourth quarter and has fired 240 workers. HSBC is taking a $3.4 billion charge against third-quarter profits. Barclay's announced a write-down of about $2.9 billion and 870 job losses since the start of the crisis. The bank Morgan Stanley has lost £1.8 billion in the last two months, and has fired 900 workers. Spivs get bonuses, workers get fired.

In 2006's mergers and acquisitions frenzy, $725 billion was spent on buy-outs, in 2007, possibly $1.5 trillion. Much of this is down to private equity firms, which get tax relief on the debts they use to fund takeovers. They hold their investments offshore to avoid tax: by December 2006, $491 billion was held in tax haven Jersey to "illegally avoid tax". according to US think tank Tax Analysis. Partners in private equity firms pay just 18 per cent on their "earnings".

It's a wonderful world
This is the wonderful world of financial services, on which the US and British states rely. Manufacturing now accounts for just 15 per cent of Britain's Gross Domestic Product, financial services for nearly 30 per cent. This exposes us dangerously to the financial markets, yet Brown and Bush recently blocked an attempt to put "financialization" on the G8's agenda. Finance capital rules, while we let it. So our trade deficits are at record levels, as we produce less and less of what we need. Britain's trade gap was a record £55.8 billion in 2006, £44.6 billion in 2005; the USA's was $764 billion in 2006. Yet both economies send vast amounts of cash abroad, seeking higher profits elsewhere. Some emerging economies are following this US–British model, sending their earnings abroad rather than investing them at home to increase production.

Household debt in Britain is a record £1.35 trillion (160 per cent of GDP) and public sector debt is rising to a record £40 billion. High interest rates are making it harder for these debts to be paid off. Higher food bills, petrol prices and utility charges (a 15 per cent rise in gas bills is threatened) add to the pain. According to official figures, real incomes, after tax and inflation, are rising more slowly than at any time since 1982.

As David Prosser wrote in the Independent on 4 December, "the benefits that privatisation of the energy industry was supposed to deliver have not materialised. Far from a market in which competition forces down prices, household energy bills in this country are among the highest in Europe. A handful of huge companies dominate the market, with power over energy production, supply and distribution concentrated in the same hands. This wasn't how the free market was supposed to operate." But it is exactly how the market operates – competition always turns into monopoly.

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