Tuesday, October 14, 2008

Who Is to Blame for Council Investment Decisions?

A lot has been said and written in the last few days about the culpability of local authorities for deciding to invest in Icelandic banks. Indeed, much of it has been said by publicity-friendly LibDem Peer Lord Oakeshott. As I reported yesterday, he monstered the chief executive of the LGA on the Today Programme on the subject. But he did seem to be rather partisan in his analysis, blaming only Conservative controlled authorities for this error of judgement. He mentioned Winchester in particular. But of course, Labour controlled authorities are affected too, and, whisper it LibDem ones. Indeed, several LibDem council leaders have been on to Lord Oakeshott telling him to zip it.

LibDem controlled Sutton Council, in particular are not impressed by His Lordship's media appearances, which is hardly surprising as they invested far more than Tory controlled Winchester - and at a later date. Conservative Group leader on the council Paul Scully has blogged about the situation HERE and HERE.

The FT Westminster Blog reckons it is wrong of councils to blame Treasury advice for these ill thought out investments and says local authorities need to take responsibility for their own decisions. They have a point.

In Sutton's case they were taking advice from a company called Sector, which is part of the Capita Group. They held a meeting with Sector as recently as 7 October and no indication was given of what was to happen the next day. Councils, just like the rest of us, have to rely on so-called expert advice and it seems that just like for the rest of us, the expert advice was duff.

Whatever the rights and wrongs here, it is clear that councils of all political colours have made bad investments in Icelandic banks. Of course we need to know on what basis these decisions were made, but for any one political party to kick dirt at the others reeks of hypocrisy. Let's just accept that everyone has some explaining to do.

25 comments:

Blue Eyes said...

In many industries, professional advisers can be held responsible for the advice they charge for. I predict an avalanche of litigation.

MorrisOx said...

Were it not for the absence of them, I'd predict an avalanche of buck-passing.

Ratings agencies, the Treasury, consultants, next door's dog will all be blamed. But no individual will ever cough, despite the fact that questions were being raised about the methodology of ratings agencies last year, despite the deteriorating condition of the Icelandic economy and its banks monhs ago, despite the fact that some councils were still making substantial desposits in Iceland only three weeks ago!!

Where was the stress testing, the risk assessment, the honest-to-goodness prudence with other people's money?

The longer public authorities institutionalise blamelessness, the longer we will go on having costly and entirely avoidable crises.

This was ENTIRELY avoidable, ENTIRELY predictable and no one should pretend otherwise. These were high risk investments, end of.

Blue Eyes said...

By the way, why didn't the councils have insurance?

Anonymous said...

Its nooooo surprise that Tory Flag ship Bonkersminister has been caught up in this

Unsworth said...

"Let's just accept that everyone has some explaining to do."

And none more so than our local Kent County Council's Leader, the truly lovely Paul Carter.

A model of great probity and ability and with his history of financial and property dealings, who better to recover the £50 million from those dreadful Icelanders?

For further reading go to save-wye.org.

norman said...

anon 7.19

What about Two Jags who pontificated councils to get better value for savings and pushed them to do this?

Anonymous said...

I heard Lord Oakshott tearing into that pillock from the LGA. More power to him. We don't hear enough of these public servants being treated to a dose of their own medicine. It was a moment to savour.

Alan said...

The Lib/Lab coalition here in Colchester invested £4m (which is 20% of the yearly budget) in SEPTEMBER! He was complaining at Winchester investing £1m in September, but what about the Liberal Dem Paul Smith, who is portfolio officer for finance in Colchester Borough, investing 4 times that much? He even went as far as replying to the question "where is the money" with "Somewhere in Reykjavik, I suppose?". This is not a situation to be making jokes....

For a running commentary, see here.

Anonymous said...

Don't get so wound up Ian, the Iceland thing is small beer. All Councils did was to follow the credit raters advice, which turned out to be wrong. These banks were licenced by the FSA to operate in the UK, so why should depositors have been worried?

We now have a situation where Spanish Santander owns a massive share of UK banks. This should now merit some of your attention as spain's economy is going tits up in a big way.

Just another Council Tax Payer said...

Rather than asking who is to blame for Council(and not only Councils)Investments in Icelandic Banks what we should be asking is - Why did councils continue to make investments in Icelandic Banks post March 2008 when there were doubts being expressed regarding the viability and sustainabilty of the Icelandic Banking System and if Councils like Brighton & Hove knew enough to exit then why didn't other councils,public authorities and charities ?

They presumably have "professionals" either in charge of their investment policies or "professionals" advising them. Forget about Triple A ratings etc if one council was saavy enough to know then why weren't other bodies ? The strategy may have been flawed but to continue to invest(my local council investement £1M in a 3 month Bond as recently as August - 5 months after doubts were being expressed by some people in the know and it appears that the adage if its too good to be true it probably is seems to have been forgotten in the rush by Councils to squeeze and extra 0.5% interest on their investments regardless of the risk to public monies. That is the true scandal in all of this

NigelC said...

I would love to know how many councillors were actually involved in these decisions and how many were simply delegated to officers within a broad policy framework that has not been reviewed for years.
I know of a council that simply receives a report on the results from the prior year. As long as things have been fine everyone pats everyone else on the back in mutual appreciation.
I hope things will be more proactive in future butI won't hold my breath.

Anonymous Eurocrat said...

Why am I surprised that Capita were giving crap advice?

weggis said...

And, more importantly, the decisions of Football Club Owners?

rob's uncle said...

I'm happy to report that the very well-run Lib Dem Richmond upon Thames council didn't lend to the Icelanders. Here's why: 'The credit rating criteria the Icelandic banks fell below are the long term rating where they were an "A" and we required a minimum "AA-" and the short term rating where they were "F1" and we require a minimum "F1+"."' [Cllr S Knight, Deputy Leader]

David Boothroyd said...

Councillors are involved in setting the investment strategy, which decides what sort of financial device the council uses, and how safe it has to be rated. Executive members may also have to approve more risky investments personally.

Six days after Northern Rock crashed, Westminster proposed changing its investment strategy to go for more risky investments. I warned against it. They went ahead anyway. They had money in Northern Rock. They lost money in Lehman, they lost money in AIG, and now they have £17m in locked accounts in Icelandic banks. Entirely the responsibility of the cabinet.

trevorsden said...

Sod all that - I have just been reading that Mr 'I don't use my family as props' Brown is telling his MPs that he is campaigning with his wife in Glenrothes.

Presumably he needs his wife to help with carrying the suitcases full of all the money the English are giving to two Scottish banks.

Sort that one out Mr Salmond.

Time will Tell said...

If you have tears, prepare to shed them now.

North Ayrshire Council has £15m deposited with two Islandic banks.
With a population within the council area of 135,000, that equates to around £110 for every man, woman and child. Labour is the largest party and so the council was obviously following government guidelines.

The crucial question is where North Ayrshire and other Scottish authorities will benefit from preferential treatment.

I think we all know the answer.

Anonymous said...

trevorsden said...
"Sod all that - I have just been reading that Mr 'I don't use my family as props' Brown is telling his MPs that he is campaigning with his wife in Glenrothes"

I think you'll find he said that he didn't use his children as props.

Anonymous said...

I love the press release put out by the leader of Westminster:

"It's important to clarify that we had invested a total of £17m in two Icelandic banks - £7m in Landsbanki and £10m in its UK subsidiary, Heritable. Nearly £10m of these deposits were placed in August when both banks had excellent credit ratings of the highest standard."

In other words £7m was placed when the credit ratings weren't good. It is a scandal that Westminster has the nerve to call itself a "flagship council".

Anonymous said...

I wonder how many other councils were advised to invest in Icelandic banks by Sector?

And whether they received any commission?

Anonymous said...

oooh hindsight in 20/20.
morrisox talks of high risk investments. since when have fixed rate savings bonds been high risk. if Councils had been buying stocks in Icelandic banks - risky - but any riskier than HOBOs or RBS?? the vast majority of investments are several years old when there were no commentaries on Icelandic Banks. the 'alarm bells' started rining this March - ish. Investments in the last few weeks look unsound but 2 years ago? get real.

Anonymous said...

This talk of ratings agencies is just wrong in this case. Definitely rating agencies need to be taken to task on their rating of some structured products but when it comes to rating individual companies and banks the signs were there.

Just looking at the ratings of Landsbanki for instance...

Moody's have been reducing the rating since 3 April 2007 (previously Aaa). They were downgraded to A2 on 28 Feb 2008. As examples, Barclays and RBS are still Aa2, 3 notches higher.

There was no excuse for depositing large (i.e. uninsured levels) funds with Icelandic banks. Rating agencies are far from perfect, but a simple, minimum rating of Aa3 would have caught things. It didn't need expert advice.

Kevin Davis said...

The really interesting part of this scandal is that some councils who lost money had borrowed the money they lost. They were told that it was a great wheeze to borrow the money from one bank and then stick it into another bank with a higher inerest rate and pocket the difference.

Sounds like a Local Government verion of short selling to me!!

Anonymous said...

I emailed the CEO of Kent CC last friday, and asked why, the investment of £50 million had been made with the Icelandic banks, bearing in mind that there was suspicion in August 2007 that things were not quite right, and they were downgraded to BBB in march of this year. I was amazed that I received a reply from his PA in a matter of hours acknowledging my email.

Mmmm, councils do not act as quick as this usually I thought. Tuesday I was even more amazed to receive an Email from the head of finance attempting to address the points I raised (He failed). They must be running around like headless chickens I think. I wonder if it could be that I gave them seven days before I invoked the FOI act and that I was going to contact the Standards Ombudsman to find out if they could be be prosecuted for misconduct of the public finances.

tory boys never grow up said...

I wonder when the Cllr Chard the Tory Councillor with cabinet finance matters on Kent County Council will be offering his resignation - surely putting over 20% of the council's cash reserves into a small economy such as Iceland shows that he has no understanding of concentration or sovereign risk. Given this is Iain's own county council perhaps he might wish to comment?