Sunday, 12 October 2008

Barnet pays dearly for Council’s incompetence


Thursday 9th October 2008 - Black Thursday - will go down in history as the day the once proud Borough of Barnet was brought to its knees by the incompetence, negligence and sheer recklessness of those charged with running the council.

As residents awoke to the dreadful news that nearly £28 million of our money might have been lost on a high risk investment strategy, what words of comfort were there for those of us who will ultimately have to pick up the bill? None. Because the council’s spin doctors were far too busy trying to find other people to blame for this debacle.

Householders are now facing the double whammy of massive council tax rises and having front line services slashed beyond recognition to plug the gaping crater in the accounts if we don’t get all of our money back. And while Barnet burns, leader Mike Freer fiddles: “No council could have reasonably foreseen the collapse of Iceland's banks in what once were safe deposits” was his response.

Is that so, Mike? Then please explain how Brighton & Hove City Council managed to remove all its Icelandic investments a year ago when they had an inkling of the impending crash.

You’re supposed to be a banker, Mr Freer, or is that just a typographical error? What were you doing when credit agency Fitch first sounded warnings. Their spokesman Martin Winn told the Daily Telegraph “We have been highlighting a growing risk about the Icelandic banking system since February 2007. The rating BBB+ is very high risk for a Western European bank.”

Those warnings were passed on to many local council finance managers, prompting some, like Brighton, to stop investing in Iceland. Did Barnet miss that one, Mike?

Well what about the warning from the highly respected Moody’s Investors Service who cut their ratings on Icelandic banks eight months ago? Or the warning from the Conservative and LibDem parties who both sounded the alarm bells in June? Were you too busy watching the Chief Executive’s wide screen television to notice what was going on?

You can’t pass the buck on this one, Mikey. You hold the resources portfolio. Ultimately, it was your responsibility. If this money cannot be recovered - but let us hope that it can - then it represents the biggest case of gross negligence ever known to the Borough.

As Simon Heffer said in his weekly Telegraph column:
As for the councils who have lost fortunes by investing in Icelandic banks, even though it had long been clear these were risky: sack the officials who took such advice and surcharge the councillors who endorsed it. Too many people have forgotten what a serious business managing money is.”

In trying to defend the council’s recklessness, Cllr Freer - the Tory candidate for Finchley & Golders Green - told the Barnet Times: “Councils have been actively encouraged, and indeed praised, by Whitehall to undertake investments of this kind.” What a complete and utter fabrication! Since when did the government encourage councils to play the money markets and risk taxpayers money?

Did anybody in Barnet Council ever stop to ask why Icelandic banks were paying a higher rate of interest than UK banks? You don’t need to be a banker to know that it was because they were a higher risk.

In all Mr Freer’s excitement to blame other people, he forgot to mention that Barnet is involved in the high risk strategy of arbitrage - borrowing from one bank and lending to another at a higher rate. This is not what councils should be doing and the practice might actually be illegal. Western Isles Council had to be bailed out by the government in 1991 when it lost £24 million which it had borrowed and subsequently lent to the discredited BCCI to try and make a profit.

In 2002 when the Conservatives came to power, the council had borrowings of £39 million. That figure has now risen to an astronomical £215 million. Some of the money has been used to pay for infrastructure works such as the road resurfacing programme and some to repay other loans (perhaps Barnet was advised by Carol Vordeman?) But it is now clear that a significant proportion of this money has been spent on speculative investments.

Perhaps Cllr Freer can advise us precisely how much of our money has been gambled on the money markets, how much more is at risk and who authorised these transactions?

Barnet Council has been criticised by the TaxPayers Alliance for its reckless behaviour. Instead of addressing the TPA’s concerns, the notoriously thin skinned Freer responded “The TaxPayers' Alliance has little grasp of reality when it comes to the complex nature of local authority finances.”

I do not think you will find many people in this Borough who are particularly impressed with your grasp of local authority finances either, Mr Freer. You have not even had the decency to apologise.

15 comments:

Anonymous said...

Sunday's Politics Show on BBC1 was most interesting. It included an interview with the Leader of Kensington and Chelsea, who said that they had shrewd Financial Advisors and Councillors who had rejected offers from Icelantic Banks. He even hinted that the rates on offer were too high!

We are indebted to the Lib Dems who reminded us about something that Hammersmith and Fulham did some years back, when Labour controlled. They re-invested money, maiking a huge loss, which cost their ratepayers a small fortune in increased council tax bills.

Anonymous said...

One question is how much more interest did the Council hope to get than if they had invest with say, Barclays or HSBC?

Was this diffeence worth the commercial risk.

And just who (names) makes these investment decisions?

Rog T said...

Mike Freer uses the justification that the treasury praises councils for doing this. I suppose if you are a Brownite (or a Stalinist Beanite), then this is high praise indeed from Gordon Brown's treasury.

Mike Freer got us into this mess, his comments indicate no remorse, he even seems to still think he did a good job. If the fugures for the debt are true, they are appalling. When Freer staged his coup against Salinger, he said he was a Thatcherite. Now I'm not a Tory, so I'm not overly familiar with Thatcherism, but I don't recall massive debt to pay for public spending being part of the equation.

You mention that the loans were used to pay for the road resurfacing. Am I correct in thinking that much of this program was driven by the desire to eradicate road humps?

In my little dream world, I had this strange idea that Labour were the party of public services and the Tories were the party of low tax and fiscal responsibility.

Please can a loyal Freerite Tory post something that tells me what Mike Freer's Tories actually stand for because if David's post is true, then it certainly isn't Conservatism.

I expected many things I disagreed with from the Barnet Tories, but financial ineptitude on this scale.

Adam said...

Dave

FWIW, my view is that the Council must meet a very high duty of care when dealing with the money of its residents. A complacent investment strategy led the Council to invest in Icelandic banks with debts five times larger than the Icelandic economy (although Fitch and Moody-both well respected and mainstream ratings agencies-had already pronounced them as risky investment vehicles months ago. So too had Brighton & Hove Council). If that were not bad enough, Mike Freer deals arrogantly and patronisingly with the Taxpayers Alliance:

QUOTE

The TaxPayers' Alliance has little grasp of reality when it comes to the complex nature of local authority finances.

UNQUOTE

Clearly, in recognising an incredibly risky investment strategy (albeit with hindsight) it has a better grasp of reality of the complex nature of local authority finances than Cllr Freer and his advisers.

Finally, we are left with the Council's hypocrisy because those responsible have not yet resigned.

So, the Council has a duty of care towards its residents, there is overwhelming evidence to show that the duty has been breached, and damage (to the tune of £30m but, who knows, it could be more) has flowed from the breach. If this were the private sector, Cllr Freer would be gone already and, if this were the USA, Cllr Freer would already be in an orange boiler suit, on his way to prison, perhaps to that nice camp on the tip of Cuba (because, after all, this appears to be financial terrorism on the good residents of Barnet) but, if not, a nice state penitentiary. Here, he is still leader of the Council and a PPC to boot. Incredible....

David Boothroyd said...

Hi Rog. I'm a councillor on Westminster, which has £17m locked up in Icelandic bank accounts which have been frozen. Like Barnet, Westminster's leader is involved in the profession - he's an investment manager. You might want to check Barnet's investment strategy, which has to be agreed every year by full council, because Westminster changed it this year to allow them to take more risks.

I've compiled a briefing on all the warnings which ought to have been heeded on investing in Iceland. If you give me your email address I'll send you a copy. (Email me at david (at) election.demon.co.uk)

Chris-S1977 said...

"When Freer staged his coup against Salinger, he said he was a Thatcherite"

For the record Rogt Cllr Freer actually did not stage a coup over Salinger for the leadership, the group voted in a vote of no confidence which they are entitled to do so.

No further challenge was made once Cllr Freer put his name forward to become leader and they could have done!

Rog T said...

Dear Chris-s1977,

Welcome to the party, always nice to meet an new FOF (Friend of Freer). Did you guys all meet at the same remedial linguistics class?

Anyway as I'm always keen to assist the educationally challenged, here's the Cambridge On line dictionary definition of COUP below the 1st dotted line.

You can check this for yourself at

dictionary.cambridge.org

Now as far as the regular voter in Barnet was concerned, we didn't expect him to suddenly take over the Barnet Tories (we had no notice and no say). As it was sudden and unexpected (to us) and successful (from his point of view) I think that the term coup is most apt.

If you would prefer you could use the term Palace coup - a situation in which a leader is removed from power by the people who have worked with him or her

I would agree that Coup d'etat would be inappropriate, which is why I didn't use it.

I'm not sure about Coup d'grace, which is why I didn't use that - an action which ends something that has been gradually worsening or which kills a person or animal in order to end their suffering:




------------------------------
coup Show phonetics
noun [C]


an unexpectedly successful achievement:


---------------------------

End of English lesson. next time look it up yourself before posting silly comments.

Don't Call Me Dave said...

Just a few comments in response to the above:

In 1990, the High Court ruled that Hammersmith & Fulham’s interest swap agreements were illegal because the council was not authorised to trade speculatively. The Appeal Court subsequently ruled that they were only legal if they were used to limit interest rate risks but remained illegal if they were used for speculative trading for profit.

It is one thing for the council to invest any surplus cash on a short term basis until the money is needed, but there is evidence to suggest that Barnet borrowed more than it needed purely to re-invest in other banks in order to make a profit on interest rate differentials. That sounds suspiciously like speculative trading to me and should be investigated by the appropriate authorities.

In January 2006 the council borrowed £20m at 3.70% (fixed), £5m at 3.52% and £5m at 3.67% (variable). No doubt someone noticed that this represented a big margin on what could be earned in interest in Iceland. But as any fule no, things that sound too good to be true, generally are. Iceland was offering higher rates because they were higher risk. The council should not have been taking any risks whatsoever. Nor should they have been involved in speculative market trading.

Rog, I don’t see a problem with the council borrowing money to repair roads provided the term is less than or equal to the lifespan of the road - 10 years or so. Some of the borrowing has been for terms of between 50 and 60 years. We are burdening future generations with our debt. Borrowing should only be for specific approved capital projects and funds drawn down only as and when needed. The council is not employed to gamble with our money.

You comment that Mike Freer has shown no remorse. One week on and there has still been no official response on the council’s web site to advise residents of the steps being taken to try and recover the money, or the consequences if the deposits are lost.

Adam, I agree that the council has failed in its duty of care. The conduct of the chief finance officers was irresponsible, reckless and reprehensible. If the council is found to have acted illegally, then I hope prosecutions will follow. The lessons of Hammersmith seem to have been forgotten.

Cllr Boothroyd - welcome to the blog! I never knew that councils were required to have an investment strategy. It will be interesting to see Barnet’s. In the light of what has happened we need to know who took the investment decisions, on what basis they were taken and what scrutiny (if any) exists of the decision making process.

Chris, you are correct in that nobody challenged Mike Freer after Brian Salinger was deposed. Nobody challenged Gordon Brown either and look at the mess we are now in! Have there been any other instances in local government where a leader leads his party to a stunning victory with an increased majority but is then thrown out straight away? Ken Livingstone ousted Andrew McIntosh after Labour’s victory in the 1981 GLC elections, but everyone knew that was going to happen! Coups after an election victory are the exception, not the rule.

Anonymous said...

So you are claiming Brighton & Hove withdrew from Iceland in the knowledge of a banking meltdown? Not seen their Treasurer come out to laud his own financial nouse. Fixed term deposits mature and are drawn down, this is a more likely scenario than some deep insight by a council bod sat in a Town Hall.

Don't Call Me Dave said...

Dear Anon

If you go onto the Brighton & Hove Council website, there is a statement from Cllr Jan Young who says:

“We have no deposits with Icelandic banks. We suspended transactions with the one we had on our books Kaupthing, Singer & Friedlander about a year ago after picking up concerns in the marketplace about Icelandic banks expanding too quickly.”

Anonymous said...

http://www.brighton-hove.gov.uk/index.cfm?request=b1153364 so you believe B & H spin. Do you really believe they would come out and say "phew, we got lucky"?

MichaelH said...

Even the Audit Commission's been at it: http://news.bbc.co.uk/1/hi/uk_politics/7673248.stm

Don't Call Me Dave said...

Anon, are you suggesting that Councillors might try and take credit for something not of their doing? Surely not!!! Whatever the reason, Brighton got its money out a year ago and reinvested it elsewhere (I wonder if was in Lehman shares?)

Michael, thanks for that link. This is such a serious matter, but you have to laugh at the irony. A spokesman is quoted as saying: “Like other public bodies, the commission is obliged to maximise returns on its working reserves.”

Is that a legal obligation? If it is, the law needs to be changed. As individuals, we can choose whether our investments carry low, medium or high risk. Public bodies should only be allowed to invest in no-risk schemes.

Anonymous said...

If you look closely at the B & H investment profile and budget monitoring documents they didn't actually take their money out until March 2008 when they could get their hands on it without penalty.....they just chose not to invest more.

You also continue to say that this cash is lost......it isn't yet.....I say yet......

Don't Call Me Dave said...

If you look above you will see that I was careful to say “might have been lost” and obviously I do hope we will get most, if not all, of the money back.