Tuesday, October 14, 2008

Call For Icelandic Losses Investigation

Sutton's £5.5m exposure to the Icelandic meltdown was the big topic of discussion at last night's Executive (Cabinet) meeting. You can see the statement that the Council have issued following UK based Heritable Bank's slide into administration here.

Tim Crowley, Conservative Finance spokesman has several years of Treasury experience in the City. He addressed the cabinet at the meeting covering the following bullet points:-
  • We, as Conservatives, will do all we can to support any Government initiative to retrieve frozen monies – this is the important thing at this time.
  • Transparency in Sutton Council on this issue is of paramount importance because we are dealing with taxpayers’ public funds and we need to engender confidence and trust. This must be our next priority.
  • This is a reputational issue which could attract attention from other Council services, and potentially overshadow its work elsewhere.
  • As the Opposition we are concerned and disappointed with the public pronouncements in the national media of the Liberal Democrat Treasury Spokesman Dr Vince Cable who has described councils who deposited funds into Icelandic Banks and their subsidiaries as “unbelievably silly”.
  • We also note the comments of The Lord Oakeshott of Seagrove Bay on the Today programme who attacked Tory-lead Winchester Council which had deposited one million pounds into an Icelandic bank’s subsidiary, Heritable, two weeks before the crash as “blind and deaf.”
  • We are disappointed that the national Liberal Democrat leadership has decided to revert to crude political point scoring in a time of crisis, and that by doing so they are undermining laudable efforts by all concerned to get this taxpayers’ money returned.
  • We would prefer to concentrate on investigating under what circumstances we lent this money to Heritable Bank, and to ensure that proper procedures were followed.
  • To enable this to happen it is imperative that all paperwork relating to these transactions be secured and that an independent investigator be seconded to provide the answers to these questions.
  • As the Opposition, we would like hardcopies of all money market transactions that the Council has taken in the last calendar year and the weekly counterparty risk limits to enable informed decisions to be made.
  • Only by us having this paperwork will we be able to ensure that scrutiny process is carried out in comprehensive and competent way.

On the party political point, it is interesting to see Vince Cable quoted in the Telegraph as saying "In a crisis like this I don't think people would warm terribly to my running around saying 'I told you so'" The LibDem parliamentary finance team certainly did not warm themselves to Sutton's Lead Finance Councillor who told Lord Oakeshott yesterday afternoon that his comments were less than helpful.

Although the Cable & Oakeshott double act is an interesting diversion, the matter is too pressing to concentrate on partisan politics. Tim is leading our investigation into the matter with considerable vigour. I am pleased that officers recognise the need for a robust and transparent enquiry. In the meantime, we will continue to support moves to get our money back in order to minimise Sutton taxpayers' exposure to this. It is important to stress that this loss will not have an immediate impact. I know that some council employees have been spooked by reports of losses in other local authorities affecting payroll. This is not the case here in Sutton.

9 comments:

Bob Briant said...

The official advice to councils in England from the Office of the Deputy Prime Minister, issued on 12 March 2004 and signed out by Trevor Emmott, included the following passage:

14. The general policy objective is that local authorities should invest prudently the
surplus funds held on behalf of their communities.

15. The guidance recommends that priority should be given to security and liquidity. However, that does not mean that authorities should ignore yield. It will be appropriate to seek the highest rate of return consistent with the proper levels of security and liquidity.

Source:
http://www.local.communities.gov.uk/finance/capital/data/lginvest2.pdf

The usual rule of prudence is to bank and hold balances in the same currency as most revenues/income and spending accrue. Now try hard as I may, I have serious difficulty in believing that Kent CC, Transport for London, the Metropolitan Police and LBS council etc had much income or spending in Icelandic Kronor. I think we as local residents are entitled to know who or what part of the LBS Council authorised the investment of £5.5 million funds in an Icelandic institution when Iceland is not even a member of the European Union with the legal protection that brings.

As careers of those posting or quoted here appear to be relevant, my career includes periods as elected member of two local authorities, nine and a half years as a senior official in a third and nearly twelve years as an economic adviser in central government in London.

Anonymous said...

Cheltenham Borough council invested £11 million, or 12% of its entire annual spending, in Icelandic banks.

http://www.cheltenham.gov.uk/libraries/templates/options.asp?URN=5200&FolderID=0

Anonymous said...

Cheltenham = Lib Dem btw

Bob Briant said...

Well, Anonymous, from the many news reports about the financial crisis that I've read, it would be equally possible to find examples of large Conservative and Labour controlled councils with substantial holdings in defunct Icelandic banks.

The crucial issues IMO have less to do with the partisan control of councils and rather more to do with whether we have the appropriate calibre of people in local authorities either as elected representatives or as officials.

Tim Crowley said...

Bob
I couldnt agree more with your last paragraph.
Many Local Authority Treasury Managers are paid over 50k annually plus benefits.You might as well have treasury clerks and save money though if all they are going to do is act on external advice.
Treasury management is also risk mangement and to do that correctly the individual needs to have a deep understanding of risk and risk reward.
Without that they are pointless.

Bob Briant said...

Tim - I agree. Even the external official advice stressed the need for prudence when seeking high-yielding investment opportunities. The first and obvious question to ask is why does an investment need to offer a high yield to attract funds?

Rather than remark on the political control of the many local authorities which invested in Icelandic banks, perhaps we should look instead at what features characterised the councils that didn't.

Councils sometimes do really daft things - I can elaborate with links if anyone here is interested. Consider, for example, the massive fraud in the case of the Doncaster council where an estimated £60 millions was lost through fraud:
http://www.guardian.co.uk/society/1999/aug/08/1

If anyone here knows what happened to the £14 millions missing from the accounts of the South Yorkshire trading standards unit, there are some senior officials there who would probably appreciate the information:
http://news.bbc.co.uk/1/hi/england/south_yorkshire/5149450.stm

Bob Briant said...

But all that looks relatively trivial compared with the case of the Hammersmith and Fulham Council:
http://www.cipfa.org.uk/panels/treasury_management/download/derivatives_oct07.doc

Bob Briant said...

What I can't figure is what all those highly paid financial economists, with their MBAs and PhDs from prestigious unis, who are working for financial institutions on both sides of the Atlantic were doing. It's been known for a while that investment yields don't have a Gaussian (normal) distribution and I came upon this illuminating paper from 2004:

"In the sixties Mandelbrot already showed that extreme price swings are more likely than some of us think or incorporate in our models. . . "
http://lstat.kuleuven.be/research/reports/2004/report2004_08.pdf

Why weren't alarm bells ringing?

Bob Briant said...

For information:

"Here are the councils which, the BBC understands, have revealed deposits in the collapsed Icelandic bank Landsbanki or its UK arm Heritable, or in other threatened Icelandic institutions: . . . "
http://news.bbc.co.uk/1/hi/uk_politics/7660741.stm

It seems that Croydon council wasn't caught out.