10,000 face axe as City panic spreads

Richard Wachman, City editor and Lisa Bachelor

The Observer, Sunday March 16 2008


Banks are to swing the axe in the City with 10,000 jobs expected to disappear this year amid signs of growing financial turmoil and fears that the US is already in recession. The forecast comes from the Centre for Economic and Business Research (CEBR), which estimated that redundancies would top 6,500 by October, but now expects to revise that number sharply upwards when it publishes new data early next month.

Several thousand have already lost their jobs at Citigroup, Morgan Stanley, Goldman Sachs, Deutsche Bank and Merrill Lynch following the shutdown of debt markets, the run on Northern Rock, the collapse of hedge funds and the implosion of several private equity deals in the wake of the worst liquidity squeeze since the 1970s.

Doug McWilliams, head of CEBR, said that banks, insurers, hedge funds, financial recruitment firms and venture capitalists were shedding staff 'at a faster rate than we expected at the end of last year, and will continue to do so'. But he says job cuts will still come in below the 40,000 axed in the recession of 1991-02 and the 20,000 shed during the dotcom and technology crash of 2000-02.

The extent of the panic in financial markets was underlined on Friday when the US Federal Reserve was forced to use a 1930s Depression-era procedure to bail out Bear Stearns, the seventh-largest US investment bank, after hedge fund clients and other investors withdrew funds, leaving it on the brink of insolvency.

Fears for the US economy, which has been slammed by a worsening housing slump, saw the dollar crash to a record low last week against the euro and its worst level against the Japanese yen for 13 years. Stock markets fell around the world, with investors seeking a safe haven in gold, which hit $1,000 an ounce for the first time, and oil, which hit $110 a barrel. President George Bush will meet Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke tomorrow to discuss the crisis.

Lenders such as Scottish Widows have been withdrawing some of their most competitive mortgage deals as severe funding constraints mean that they have been unable to meet the high level of demand. Bank of Scotland and Woolwich have also withdrawn rates after being flooded with applications.

Yesterday it was revealed that homeowners who have been given mortgages they cannot afford to repay could be in line for thousands of pounds of compensation in what could be the next big financial misselling scandal. Lenders have been helping vast numbers of first-time buyers on to the property ladder in the last few years by given them mortgages up to six times their salary.

Now, the head of the Financial Ombudsman Service says he will not hesitate to give 'significant awards' to customers who he believes have been missold mortgages that many of them are now struggling to repay. 'We see cases where I find it difficult to imagine how the lender could have considered the customer capable of maintaining payments,' said Tony Boorman, principal ombudsman. 'It seems that the advice has been more about generating commission or fee income than a fair assessment of the interests of the customer.

The Financial Services Authority estimates that nearly a third of all mortgages sold in the last two-and-a-half years put the borrower into a high-risk category.