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Mortgage-backed securities, the financial products credited as a main catalyst in the 2008 global banking crisis, are back in the news and back in favour with the investment community.

Last week Lloyds Banking Group agreed to offload a portfolio US residential mortgage-backed securities it inherited from Halifax Bank of Scotland for £3.3 billion.

These securities are reported by Lloyds to have a book value of around £2.7 billion, meaning the sale will deliver a pre-tax gain somewhere in the region of £540 million.

So, good news for Lloyds, which has stated it will put the proceeds towards raising its tier one capital and putting some money towards its £957 million pension deficit.

Among the purchasers of the Lloyds portfolio of securities is Goldman Sachs International, which has paid around £200 million for a portion of the portfolio.

Which brings us to another fascinating bit of news to come out the US courts in recent weeks in which Goldman Sachs successfully argued some historical revisionism in its involvement in a notorious mortgage-backed securities deal Royal Bank of Scotland traders lost an estimated $870 million on.

The Bank of England has agreed to pump another £50 billion of made up money into the flagging UK economy in an effort to kick-start economic growth.

UK interest rates have also been held at a record low of 0.5 per cent - the rate it has been since March 2009.

This, of course, is terrible news for savers, and indeed pensioners, as the buying up of gilts - UK government bonds - artificially depresses annuity rates.

Quantitative easing is basically the creation of new money - literally out of thin air.

The Bank of England creates this new money by way of a sale of Treasury investment bonds - basically a promise to pay later for cash now.

It has been interesting watching the reaction over the past few weeks to some fairly hefty payouts across the corporate sector.

Bankers like Bob Diamond, Stephen Hester and Eric Daniels all walked away with millions of pounds worth of benefits and shares.

Alongside them hundreds of other bankers were paid more than £1 million each to a collective outcry of horror.

Compare and contrast this to the joyous outpourings shown in newspapers and broadcast media when John Lewis announced all of its staff - including the executive team - were getting the equivalent of 18 per cent of their salary.

Royal bank of Scotland will take little comfort from its $100 million settlement award from the US Securities and Exchange Commission from Goldman Sachs admission it was economical with the truth in its selling of toxic bond deals wrapped up in Abacus 2007-AC1.

RBS is now "considering all options" which obviously includes the possibility of pursuing Goldman's for a considerably larger chunk of the $870 million it lost in the Abacus investment deal.

Those losses stemmed from the fraudulent omission Goldman's hedge fund client, Paulson & Co was not only selecting mortgages for the portfolio, but was also making side bets those mortgages would drop in value.

A very cosy arrangement for Goldman's, which also charged Paulson & Co $15 million for the privilege of selecting mortgage backed securities to go into Abacus both Goldmans and Paulson must have known were at the very least suspect.

HSBC's Scottish chief executive John Rendall was in few different parts of the bank's Edinburgh office for this photo shoot.

Staff on the floor of the branch were happy to melt into the background when shot were being taken there.

Photographer Lesley Martin was also taken by the unusual lighting in the lift which gives a nice backdrop to some of these pictures.

The interview which goes with the piece is here.

Rendall2.jpg

They say what happens in the United States eventually filters through to the UK.

So the evidence given by the United States Federal Reserve chairman, Ben Bernanke to the Committee on Financial Services, U.S. House of Representatives in Washington, D.C on February 10 makes for interesting reading.

In his written submission to the committee on the Federal Reserve's exit strategy from what he describes as the "extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity" he adds an interesting footnote.

He states: "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

The full text of Mr Bernanke's evidence to the committee can be read here

THE news Scottish banks have been "unfair and aggressive" towards their most vulnerable retail customers will come as little surprise to their business customers.

The Scottish affairs select committee, made up of a panel of MPs, has found the taxpayer supported banks have been using what it described as "unsavoury practices" against its most vulnerable customers.

Examples provided by the Citizens Advice Bureau made for grim reading, with some customers complaining they were forced into taking loans to avoid defaulting on non-related financial products, excessive charges for overdraft extensions and rate hikes on credit cards - to name but a few.

Colin Borland, public affairs manager for the Federation of Small Businesses in Scotland said he welcomed the views expressed by committee.

He said the FSB in Scotland has for the last 18-months been highlighting similar "unfair and aggressive" practices levelled at small business customers by their lenders.

Revealing details have now been published by HM Treasury on exactly what sort of assets Royal Bank of Scotland will put into the government's Asset Protection Scheme.

The due diligence of the assets RBS proposed to add to the APS, conducted by Ernst & Young and KPMG for a collective £16.4m fee, identified £43bn of assets they either rejected from the scheme or deemed to "no longer require protection."

So this reduced the £325bn in toxic assets RBS hoped to dump into the APS to £282bn.

However, the Treasury report documenting which of the Scottish bank's assets are entering into the scheme is rather scant on the details of those assets which the auditors refused to add to the APS.

In the wake of the 1929 stock market crash, banks in the United States were banned from mixing commercial and investment banking for more than 60 years.

The first of two Bills which made up the Glass-Steagall Act was brought into law in February 1932 in an effort to curb deflation and increase the US government's ability to provide financing to the banking sector.

This was followed by the second Act, passed in June 1933 separating banking types according to their business.

The argument being the new law would protect shareholders from undue risks made by the investment side of the business which investors had no voting control over.

But the separation of investment and commercial banking enshrined in the Glass-Steagall Acts of 1932 and 1933 were repealed in 1999.

The Treasury appears to have won its battle with the Board of Royal Bank of Scotland over a speculated £1.5bn bonus pot for its investment banking arm.

RBS, having bowed to intense political pressure, has now agreed to pay bonuses at the "low, low end of the scale" - even if this means it will lose staff to better paying rivals.

Lloyds have also announced a bonus package for its top 200 executives of up to 80 per cent of their salaries, in a shares only package spread over three years.

And this on the same day the National Audit Office revealed the actual cost to the taxpayer so far for the banking crisis currently stands at £850bn.

Authors

Alasdair Northrop

Alasdair Northrop

Editor of Insider, editor in chief of Business7 and business editor of the Daily Record provides his take on the big stories.

View all of my postings.
Scott McCulloch

Scott McCulloch

Delivering a no nonsense view on the Scottish business community.

View all of my postings.

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