Today I learned that the Lib Dem Colchester Borough Cllr. Paul Smith - the same Cllr. Paul Smith responsible for losing Colchester £4m - offered to take a pay-cut if he did not perform well. Hurrah! He volunteered to be the “guinea pig” for a scheme which could be extended to other cabinet members if it proved a success. However, it was thrown out as “unworkable” by the council’s strategic overview and scrutiny panel.

Apparently, it would be too difficult to figure out whether he had done well or badly over the course of a year. Some might say that the judging process should take the following form:

Q. Did he preside over a £4m loss?

A. Yes!

Q. Should he therefore forfeit some of his pay?

A. Yes!  

But of course, this is history - it is his future performance that will be judged. Furthermore, it the decision to invest £4m into Icelandic banks was taken entirely by the council officers. But that does not mean Cllr. Paul Smith is completely blameless - he is indeed presiding over a situation where officers can take decisions, without informing the councillors, that could dramatically change the future financial situation of the council. Perhaps this is normal - but we can still question whether it is right.

However, the question of why the plan was rejected comes down to his assessing his future performance. Is he really that good at covering his tracks that it is impossible for his peers to judge him? Is his official role really that opaque that it is hard to define a firm set of objectives for him to achieve? I have never held a political office, so it is difficult for me to judge really what a councillor can and can’t do, but even I know that there must be both good and bad councillors. Is it really that hard to judge how well councillors in general perform, or is it something specific to Cllr. Paul Smith?

The really sad thing about this is that the committee that rejected his plan is chaired and co-chaired by the Conservatives. How much political capital will he get from this? After all, the introduction of performance related pay to our councillors has a certain “ring” to it that Joe Public could appreciate. I am sure that the decision to reject performance related pay was taken for very good reason. It probably is difficult to judge the performance of councillors, or perhaps Cllr. Paul Smith in particular. However, I can see it now at election time - the headlines on his campaign material could be “Tories reject holding councillors to account”. The explanation of this decision, or future decisions of the council, could easily be achieved if more councillors blogged… Let’s hope they will.

A couple of weeks ago, I sent a FOI request to Colchester Borough Council to try and find out some information about the £4m lost somewhere in Reykjavik. Below are the responses:

1. What financial advice was received by Colchester Borough Council on investments from 1st October 2007 until 10th October 2008?

CBC use Sector Treasury Services to inform our treasury management policy and strategy. This takes the form of half yearly meetings, monthly credit updates, ad hoc credit updates, ad hoc updates relating to all forms of treasury management.

2. What companies, individuals or government departments are responsible for advising Colchester Borough Council on financial matters?

CBC use Sector Treasury Services to inform their treasury management policy and strategy. In addition we comply with Government guidance and legislation on treasury management.

3. What councillors were aware of the large investment (or impending investment) made to Landisbanki before the 6th October 2008?

Under Treasury Management Policy documents, the policy and strategy is set by the Council and the implementation of this is delegated to officers. Under the current policy, short-term borrowing and investment is authorised by Council officers.

4. Who was present at meetings when the decision was made to make the investment? Copies of all relevant meeting minutes should be included, if available and possible.

There were no specific meetings relating to this investment, since it formed part of the day to day Treasury Management activity, delegated to officers. Members of the finance team discuss Treasury Management activity on a daily basis.

5. What was the purpose of the money deposited in Landisbanki - was it short term storage (e.g council tax receipts due to be spent) or long term investment/income?

The council has short term surplus cash mainly due to: timing differences as to when Council Tax & NNDR are collected and required to be paid over; S106 monies received but not spent; delays in Capital Programme spending. This investment was a short term cashflow one.

6. What credit rating agencies were used to judge risk associated with investments, particularly those made in Landisbanki.

The council uses data from Fitch (as supplied through Sector) or if no data is available from Fitch, then data from Moodys or Standard and Poors. The agreed Council policy sets out the total amount that can be invested with a counterparty and the maximum length of time that any monies can be invested. At the time of investment, Landsbanki had a Fitch rating of A, F1, B/C, 2. According to our policy, this meant that at the time of the investment we were permitted to invest up to £5M for up to 3 months.

Given these answers, I see two particular issues. Firstly, no Councillor was aware of the officers placement of £4m of tax payers money into an obviously dodgy bank. Secondly, and more importantly, said £4m was placed in the bank due to issues with short term cash-flow - that means that the Council had too much money coming in at once and had to put it aside to pay for future services. The question remains as to what will happen when they theoretically need to dip into the £4m to pay for services…..

When facing the prospect of being responsible for loosing £4m of tax payers money and asked where the money is now, what should the answer be? Should the local councillor, the Lib Dem Portfolio Holder for Finance Cllr Paul Smith, reply

Somewhere in Reykjavik, I suppose?

Is loosing £4m of tax payers money a laughing matter? One should point out that even though £4m sounds less than Kent’s £50 loss, relative to income, this is a critical blow to my new Borough. £4m is about 20% of the annual budget of the Borough Council and corresponds to a Council Tax rise of 3%!

As a result, I have put in my first FIO request to the borough:

To whom it may concern

I am writing to you under the Freedom of Information Act to request the following information with regards to the recent £4m “investment” in Landisbanki or one of its subsidiaries:

1. What financial advice was received by Colchester Borough Council on investments from 1st October 2007 until 10th October 2008?
2. What companies, individuals or government departments are responsible for advising Colchester Borough Council on financial matters?
3. What councillors were aware of the large investment (or impending investment) made to Landisbanki before the 6th October 2008?
4. Who was present at meetings when the decision was made to make the investment? Copies of all relevant meeting minutes should be included, if available and possible.
5. What was the purpose of the money deposited in Landisbanki - was it short term storage (e.g council tax receipts due to be spent) or long term investment/income?
6. What credit rating agencies were used to judge risk associated with investments, particularly those made in Landisbanki.

Whilst there are several requests for information here, these should be treated as individual and independent requests. They were collated into a single email for ease and convenience. If this email is treated as a single request and is above the £450 handling limit, separate emails will be sent containing the same requests.

I can be contacted via:
{my address}
All contact, including copies of the information requested, should be via email unless it is not possible. If you wish any clarification of the points, please do not hesitate to contact me.

Kindest regards,

Alan Drew.

It transpires that Colchester Borough Council has lost £4m, because of the many problems at the many Iceland banks. What’s more, according to Cllr Paul Smith, who is supposedly responsible for the finances, this money was only invested on the “1st or 2nd September”. Not only does he not know when he threw £4m of council payers money down the pan, it was obvious from as early as April there was a problem with the banks. There are several councils that withdrew money from the Icelandic banks, just as he made the decision to invest it! 

Just take a look at the following graph:

It shows you two things:

This councillor, the finance department that he is nominally in charge of and the incompetent administration that he represents, needs to be held to account. Yet when asked where the money is now, he jokes that it is somewhere in Iceland.

Just for the record, here is something that I have managed to dig up in the last hour of googling:

1. The Lib Dems (and Conservatives) knew about Iceland’s problem back in July:
Lord Oakeshott of Seagrove Bay here:
http://www.theyworkforyou.com/search/?s=Lord+Oakeshott+of+Seagrove+Bay+iceland

2. Some councils already acted and saved tax payers cash (this is a Conservative administration, although we should be careful as we have not been through the full list and idenified how many Conservative councils have lost out):
Brighton and Hove City Council, said it suspended transactions with one Icelandic bank - Kaupthing Singer & Friedlander - about a year ago amid concerns about the country’s banks expanding too rapidly.
“Our watchword is caution. We’re very aware of our responsibilities in managing taxpayers’ money, and are very careful both about who we invest with and how much we invest,” finance councillor Jan Young said. “We have no deposits with Icelandic banks.”

3. As far back as April, the cost of insuring the bank’s bonds against default rocketed:
http://www.ft.com/cms/s/0/162ac164-fb6a-11dc-8c3e-000077b07658.html

4. For the last decade, Iceland was deeply involved in the carry trade - meaning people would borrow in areas with low interest rates  to purchase assets in areas with high gain (Iceland). When the credit dried up, the investors had to unwind their positions, forcing Iceland (and their banks) into a slide. The carry trade was flagged up as dangerous when the credit crisis began a year ago. It was obvious that the banks were part of it:

“this decade [Iceland's] banking assets have grown at a speed rarely seen in the modern world. In 2000, the combined assets of Icelandic banks – mostly centred on Glitnir,Kaupthing and Landsbanki – were just below a year’s GDP. By 2006 they had risen to eight times GDP and the ratio i[n March was] thought to be near 10 times.”

5. The bank’s tier 1 capital (a measure of risk on the banks book, the lower the riskier) fell from 11.7% in 2006 to 10.1% in 2007 to 8.3% in July 2008.

6. Moody’s, the credit rating agency, in January 2008 made the following statement:
“Moody’s has concerns with regard to the Icelandic banks’ market-sensitive business model, in which the
majority of income is derived from investment banking- and corporate banking-related activities. Given the
difficult market conditions going forward, this could bring additional volatility to the bank’s earnings in 2008.
Indeed, the banks’ Q4 2007 results were already significantly affected by adverse market conditions,”

“In addition to the above-mentioned rating drivers, Moody’s decision to place the ratings of Landsbanki on
review for possible downgrade reflects the bank’s growing reliance on short-term Internet-based deposits
(Icesave) from overseas sources for funding the bank’s loan book. Landsbanki’s short-term Internet-based
customer deposits grew rapidly in 2007 and account for nearly 20% of total funding. Although growth in retail
deposits is in general viewed positively, Moody’s has some concerns related to the “stickiness” of overseas
deposits due to their relatively short history. ”

from http://www.glitnirbank.com/servlet/file/Moodys_30-01-2008.pdf?ITEM_ENT_ID=6860&COLLSPEC_ENT_ID=156

Fitch and Moody (credit rating agencies) have made the following changes to Landsbanki:
8.10.08 Fitch downgrade
8.10.08 Moody downgrade
7.10.08 Fitch downgrade
30.9.08 Fitch downgrade
30.9.08 Moody downgrade
21.5.08 Moody stable
9.5.08 Fitch stable
1.4.08 put on Fitch negative watch
3.08 put on Moody negative watch
28.2.08 Moody downgrade
30.1.08 Moody downgrade
22.11.07 Fitch stable
22.5.07 Moody stable

from http://www.landsbanki.is/english/aboutlandsbanki/pressreleases/?NewsID=13221

In March 2008 Moody’s, the rating agency, placed the Icelandic banking sector on negative watch and the banks’ credit default swaps, which measure the cost of insuring against default, have soared.

According to the BBC, Kent CC has around £50m in the failed banks of Iceland. According to the 2007-8 budget statement of Kent CC:

At 31 March 2008 the Council has earmarked and other capital reserves of £60.3m as shown on page 20. 

This does not look good. Has Kent CC really put all of their eggs in one basket? If so, are Kent CC breaking government guidelines, where capital should be spread around amongst institutions? 

And there was me thinking that Conservative Councils were supposed to be competent…. let’s hope Colchester or Essex isn’t in a similar position, although Colchester is currently run by a Lib-Lab coalition.

** Update

It seems that they have not put all of their eggs in one basket, but the following nonetheless does make for sorry reading:

 Investment Strategy  

 The main aspects of our investment strategy will be: 

 7.19 Diversification 

 Up to now all of the investments made have been in cash based investments.  To give the opportunity to add to returns last year we introduced new asset classes into the portfolio to give the potential for increased returns.  With the potential for increased returns there is inevitably an increase in the amount of risk which we will take.  We intend to control the risk by: 

  Diversifying the investments made to take a number of positions and seeking to make investments in uncorrelated asset classes; 

 Use of pooled funds rather than direct investments; 

 Comprehensive due diligence being undertaken on any new investments made; 

 Allocating only a small part of the total portfolio to higher return, higher risk products; and 

 Approval by Members. 

To date we have not used any non-cash investments but we need flexibility moving forward. 

 

7.20 Types of Investments 

The available asset types at our disposal will be:  

Cash deposits – less than 365 day deposits with banks and building societies;  

Callable deposits – less than 365 day deposits with banks and building societies.  As at 31 December 2007 these stood at £117 million; 

Callable range accruals – over 365 day deposits with banks where the rate of interest paid depends upon LIBOR staying within a pre-arranged range.  We have undertaken two such investments worth £10 million; 

Money Market Funds – with Butlers support the JP Morgan Liquidity Fund is the preferred vehicle, but we have never used it as rates have not been competitive and fees are payable.  We also monitor the Goldman Sachs Liquid Reserve Fund and the Fidelity International Cash Fund; 

 Fixed Income and Corporate Bonds – a number of pooled funds exist and these would be considered with advice from Butlers; 

 Property – through the Superannuation Fund we have considerable experience now of indirect property investment via pooled funds.  These are also suitable for treasury funds.  Included in this category would be investment in infrastructure funds; and 

 Absolute return products – many leading investment managers now offer products targeting an absolute return, such as say RPI +3/4/5%.  To achieve such returns the fund manager invests in a range of underlying assets.  Again this type of investment is available via pooled funds with relatively small investments being permitted. 

If ever there was a sign that unemployment is on the rise, then a bubble in housing benefit is sure to be one. After a lovely beer or two with some Colchester Councillors, it transpires that there are currently 1186 outstanding housing benefit claims in Colchester. That means, there are 1186 new claims on the books that have not been processed yet.

To put it into context, last tax year (Apr 2007 - 2008) there were 10,827 total “live claims” and 8115 new claims. Note these numbers are total for the whole year - when weighted by the average claim processing time (as well as average new claim backlog), that means at any one time there would be on average 350 new unprocessed claims on the system in 2007-8 - a factor of 3.5 lower.