One of Britain's leading housing associations has taken the first steps towards the use of high-risk derivatives to help refinance its debts.
The decision by the London-based Circle 33, whose chairwoman is Labour MP Margaret Hodge, comes amid criticism that its new policy of "selecting" tenant representatives means the organisation now lacks appropriate accountability.
The association, which has a property portfolio of pounds 500m, recently appointed a derivatives and futures expert as its finance director. At its management meeting last week, Circle 33 agreed to prepare an application to the Housing Corporation "for a rule change to enable the direct use of derivatives".
In 1991, London's Hammersmith and Fulham council ran up losses of pounds 100m in transactions in the derivatives market. Last year the wealthy Californian local authority Orange County ran up equally spectacular losses in derivatives, prompting US legislative proposals to regulate their use.
In Britain, the Housing Corporation's recommendations state that housing associations should be "risk averse" and that derivatives "must and can only be used to reduce risk".
However, with Circle 33 currently in the process of arranging new borrowing of up to pounds 40m from City institutions, its finance director, Deanne Bergin, recommended to the association's management that the use of derivatives "could bring significant advantages not only in interest margins but even more importantly in the management of security and financial covenants and, therefore, significantly enhance Circle 33's ability to continue to develop".
The association has set up a private finance sub-committee with delegated powers to investigate the use of derivatives and to examine borrowing potential. The sub-committee includes Ms Bergin, banker Jonathan Norton, husband of Labour MP Mo Mowlem, City finance expert Charles Humphries and solicitor David Mills, whose wife is the Labour MP for Dulwich, Tessa Jowell.
Circle 33, of which Mrs Hodge became chair two years ago, is responsible for 9,000 homes with plans to build a further 250 this financial year.
Mrs Hodge last week described Circle 33 as "a blue chip organisation". She told the Independent that she had not fully studied the 150-page report presented to the management committee meeting as she had only just returned from holiday. And she said: "I'm not a financial expert, but others are."
The use of derivatives, she said, would be examined "only as a tool", adding that Circle 33 would also be increasing the use of floating interest rate repayments - a risk strategy recommended by Circle 33's financial consultants, Beha Williams.
Mrs Hodge and her chief executive, Donald Hoodless, have overseen a substantial re-organisation of Circle 33. This year, over pounds 200,000 has been paid out in redundancies. Of its former permanent staff of 45, only 12 remain following the introduction of compulsory psychometric tests for all jobs.
Mr Hoodless denied the validity of reports given to the Independent that the current use of untrained temporary staff has created a poor service.
Prior to Mrs Hodge's appointment, tenant representatives were elected, but are now "selected" by Circle 33's management. Mrs Hodge also described a group of aggrieved tenants as "nobodies".Reuse content