Last night there was the first of a BBC 2 programme covering the bank crisis which led to the collapse of the financial system and economic meltdown around the world. The programme commenced with how the banking system came from China to Venice via Marco Polo where he had found that traders used paper, ‘flying money’ to represent the value of goods rather than transfer gold and silver. It was a short step from the use of paper money to want to charge interest and this posed a problem for the Venetian Christians, for as every Christian knows, money lending and charging interest was prohibited by Christ as recorded in the New Testament. The Venetians got around this by getting the Jewish Citizens to undertake the system for them which became established in the stalls at the Rialto hence the term Banco for Bank and which I understand is the word for stall. It was later that fixed premises were established to conduct financial matters of this nature in Florence, Lombardy. (Lombard Street in the City of London became one to the key address in the contemporary financial world).
The Programme had commenced with the loss of the first Mars probe which resulted in the rocket space craft gaining speed instead of slowing as it approached the Red Planet and 125 million dollars disappeared into space. The cause was a communications human error by those ordering the craft and those making the craft misunderstanding the specifications. This reminds when in Cheshire 1971 1974 during the creation and development of the first social services department in the county, a new residential home for people with learning difficulties was purpose built and cloakrooms were included with wash basins but with without the toilets which had been intended.
Evans Davis, the well known BBC financial expert, and author and presenter of the programme, The City Uncovered, Banks and how to break them, used this example of rocket scientists losing the plot for two reasons as those who devised the complex trading systems on Wall Street became known as the Rocket scientists and in their case it was not a hundred billion dollars that was effectively wasted, but hundreds of billions. Was the 2007 and 2008 financial crash the result of human error, of greed or the system being too clever and too fragile for humans to master at this time?
Mr Davis then explained that how the banking system as it developed two arms which converged with the development of computerised technology. Most people are familiar with the activities of banks on the High street although it was not until my care mother was 90 and my birth mother 92 that they held cheque book accounts for the first time, having relied on the Post Office saving accounts when they first came to England and then the building society for the purpose of savings. For the every day payment of bills and settlement of monthly accounts they used cash which my birth mother kept in envelopes.
The High Street bank was regarded as one of the symbols of British steadfastness and security. You could deposit money from earnings for the regular payment of bills and through cheque books for one off expenditure items and transfers into savings accounts which earned interest. You could borrow money to buy a homes or a car although Buildings societies and specialist car loan firms where the more likely call for the average individual and family. Banks were seen more as places which handled the finance of businesses and large corporations and provided them with the funds for expansion and to covering operating expenses. The bank card and the credit card changed the position in relation to individuals and families.
The second development was previously explained in the Nial Fergusson Ascent of Money series that the investment banking system was established in France by a Scotsman, prior to the French revolution, trading in shares and then in stocks and currencies and how the merging of these two functions coupled with the use of increasing complex computerised mathematical systems created the present collapse.
The BBC 2 programme then looked at the collapse of banks, Northern Rock and Lehman Brothers, one a traditional building society which became a bank and then an investment and trading bank, and the other a traditional investment bank which became involved in the property mortgage business. The two former chief Executives have been called to account by the respective political bodies of their countries. Both financial institutions commenced in 1850, a significant period in the history of my maternal family in Calne, The Northern Counties Building Society was established in Newcastle with the purpose of taking deposits and lending out money for people to buy domestic properties. The Northern Rock as it became re-branded, remained basically doing this until 1997 when to had become a highly respected and significant employer in the North East.
At this point it is important remind the essential nature of this form banking which is to lend long and borrow short. The money is lent for long periods at a higher rate of interest than the banks is prepared to borrow money, which is short, that to take your savings with the promise to pay back on demand instantly, or with notice for which a higher rate of interest is paid, for a week’s notice, a month, a year or for longer but usually not for more than three to five years in the form of a bond and sometimes with an interest bonus designed to encourage the investor not to cash in before the required period. This however means that even though there is a flow of income from loans previously made should everyone who has lent short term seeks their money back, the bank in question could find itself insolvent because no bank or financial institution, or business for that matter likes to have capital in the form of cash, liquidity the technical term, held, and not earning some income
The banks also have share holders who expect dividends and the value of shares reflects the value placed on the bank by the financial market and which in turn is influenced by profits which the bank makes on the difference between the interest it charges and the cost of the cash it needs to issue further loans and ensure it can meet its operating costs and fluctuations between the level of income from investments and repayments and interests and the demand for new loans.
Given the principle of lending long which means it does not get its money back for decades, but it borrows short which means that if required to pay back suddenly and at less than long term value and with limited cash reserves banks are always at risk and vulnerable. This is not something generally appreciated by the public until recently, who I believe that the bank held the actual money which they had deposited with it.
Say a bank lends £100 million in mortgages to be repaid with interest in 20 years which will yield £200 million in total and does this every month. It has cash reserves of £10 million in relation to each month’s of new lending and capital assets but selling all its administrative buildings will mean the end of trading and take time to find a buyer and the if required because of an emergency the price obtained will be significantly less than at times of its making.
It order to finance new loans the bank has to borrow money which traditionally would come from money parked very short by businesses and public bodies such as local authorities, and individual savers.
Over the recent decade the volume of new savings was reported in the programme to have increased by 2% a year while the demand for new loans for properties increased from 10 to 15% approximately (I am not sure about these figures which I think applied in the UK rather than the USA), Moreover the banks had been searching for new ways to make themselves more secure especially as they were only allowed invest in the most secure of investments, I believe with a triple A rating which excluded investing is most if not all the stock market however much blue chip,
It is now appropriate to turn to Lehman Brothers which according to the programme commenced in 1850 as a store in Montgomery Alabama and which at the time of its collapse had a workforce of 28000, including 5000 in a tower at Canary wharf London. It had become one of great financial enterprises in the world, because early on in its history the brothers had started to trade in cotton, then moved into the railways, financing the once great store chains such as Woolworths, and into financing Hollywood Pictures with, RKO and 20th Century Fox, then the production of television sets and financing Intel the computer chip giant.
In the 1970’s there developed on Wall Street the way, it appeared, of lessening the risks which all banks are subject if the short term borrowers come knocking for the immediate repayment of their money. There are three steps in the process. First the bank borrows wholesale from other banks rather than individuals, say £100 million and this enables the bank to loan out to buy houses say at an average of £200000, that is to 500 customers, on a monthly basis. Under the old model it would retain the property deeds so if the loans went bad it had the property to sell. It established rules which attempted to identify potential bad risks and ensure that the value of the property, bought if immediately resold would bring in more than was lost in failure to make repayments and the interest.
The new development which I believe is called C.O.D Collateral Debt Obligations (the collateral is the property and the debt the loan) were then sold. The programme gave the example of David Bowie who on reaching his early sixties decided to sell his expected royalties over the next ten years from his previous work, calculated on the basis of returns over the previous decade. He did so for £55 million in the form of bonds which those purchasing getting royalties and interest. He preferred to have use of the funds now, less than he would actually come in while those buying Bowie bonds were promised a higher capital return and interest.
What banks did was to do this with mortgage loans, but to do so using the latest computerised technology devised by mathematicians some of whom once worked on the space exploration, The programme revealed that the prospectus documents can run into two hundred pages, Moreover the C.O.D were not just single packages of all the new loans made in a month graded according to assessed risk levels but mixtures which each C.O.D offering a different mixture. Working out if the promised investment return was likely to be realised and if there were risks was difficult to impossible.
Everyone started to make money, lots of money because the sellers, were getting in money immediately not just for the value of the loans repaid but also the interest that would be paid in, but they offered the paper at discount to allow for some bad debts and that the money would be repaid long. The banks also got rid of the bad debt risk which became the responsibility of the of the purchaser of the “securitization“. The selling banks had increasing amounts of cash to make further loans, to pay higher dividends and to reward employees with higher salaries and bonuses some as much and more than the basic salary. Those buying the C.O.Ds such as Hedge Funds and Local authorities thought they were getting a good bargain because they were holding the paper for assets which when repaid with interest was significantly greater than their current market value. If individual defaulted the property market was such that the asset sold would be worth more than the outstanding debt. The person or company that borrowed the funds to buy property, often to rent out in the UK was also not worried because even if the receipts were less than anticipated the asset was increasing in such value if sold they would have profit over the debt.
.
Then the situation became even more complicated as the financial rocket scientists worked out even more complex C.O.D which involved the reselling of packages of C.O.Ds known as C.O.D squares.
However even though there was a boom in getting loans for properties these were not enough to satisfy market demand and the profits and bonuses required. It was at this point the idea of giving loans to those previously denied them, called the sub prime in the USA was developed and using self certification of income, offering very low interest repayments over the first couple of years.
In 1997 Northern Rock became a bank with shares quoted on the stock exchange and all its savers were issued with shares which if sold gave a all profit. I was someone who had saved with Northern Rock and subsequently cashed in the shares. Northern Rock had a forceful creative shaper leader as Chief Executive who seized upon “securitization“, as they knew financial tool was called, and increased the banks share of the mortgage market from 2% to 17% making it the third largest mortgage lender in the UK. It offered a package of Mortgage for buying a home extra cash and a Credit card all with the same rate of interest.
Contrary to some media reports Northern Rock did not then issue loans to buy properties on the same basis as Lehman brothers and Bear Stems for example. What it did was to act as an agent for Lehman’s, for which it was paid a fee and therefore the high risk was taken by Lehman’s who made the funds available and by those who subsequently bought the C.O.D. Northern Rock was quite open about this saying in its annual report that among its services was to help arrange sub prime loans and self certified loans. It could therefore advise customers what to do if they did not meet the higher North Rock lending criteria.
A combination of developments created the crisis in individual banks. When banks offered a C.O.D they were offering a new paper security which was required to meet standards set by national governments through its regulatory agencies and with each security graded. The problem was that these regulation authorities were paid a fee not by the prospective purchaser for an assessment as we in the UK might use the A.A when buying a car or asking a valuer to assess a property under consideration, but by the seller; moreover instead of being able to lift the bonnet and inspect engine, or view the recent stock market history of a share or a stock, or examine the individual property being purchased, they were confronted with a detailed specification with mathematical formulas which it is now evident those creating them did not understand the risk. Next the banks themselves began to be buy the C.O.Ds thus getting profit twice. The profit from selling the C.O.D and the profit from buying it. Then the housing market plunged and those involved, the banks and their traders began to panic and rumours and fears bred fear not to be the one to be caught out first.
Then in September 2007 the great run on Northern Rock was created and the news programme showed lines of customers waiting outside its branches. One of the reasons why the customers became so visible was because of the shift away from lots of branches with lots of small and not so small savers to the issuing loans of via telephones, the internet and post buying in new money wholesale from other banks. I did this on my last loan and no face to face contact with anyone. Northern Rock was a target because of its runaway success, so when banks started to become more cautious about loaning money to other banks Northern Rock came under pressure and news of this led to demand to withdraw deposits and the government deciding to back depositors to a certain level leaving shareholders facing massive losses.
When The Chief Executive of Northern Rock was quizzed by a House of Commons Committee he was asked the question. When did you qualify as a banker? His reply was I did not qualify as a banker, and he could have added I trained as general manager and chief executive. I was reminded of the time at the International General Management Course attended in the mid 1980’s when asked if I was interested in becoming a Chief Executive of a local authority which then did not provide Social Services as one of its functions. I quickly thought about it and decided that I would stick to the knitting, doing what I had trained for and become an expert through long experience, but also decided to use the knowledge gained from the course to become a better manager and team colleague, and perhaps take on the challenge of a larger and better paid social service authority.
The former Chief Executive of the Northern Rock was also asked what could he have done, with hindsight, to have prevented the disaster and he was unrepentant, It was not his fault and this brought condemnation in the media. The former Chief Executive of Lehman’s adopted a different approach and admitted he spent his nights going over what happened and trying to identify where a different decision might have prevented the collapse. However this did not save him from the comment that he was regarded as the villain and not the victim, He and others are now to face a Grand Jury.
My understanding is that then reason why Bear Sterns was the first to nearly fail but was rescued and Lehman’s was allowed to fail is that they held more of the sub prime and self certified mortgages than other institutions and when the storm clouds gathered they were unable to offload as part of new C.O.Ds. I suspect the personality and approach of the both Chief Executive’s played their part, together the different approach of governments and different election time tables.,
But should the bankers alone be standing trial the media dock? The first question goes back to Pre Marco Polo Times and the fundamental point that what are people doing calling themselves Christian if one the of the main points made by Christ was that money lending for interest is wrong?
I am less convinced about the responsibility of governments whose functions is to provide for national security, to assist everyone to make money to provide for themselves and to provide help and care for those unable to look after themselves or their families. Given the economic failure of the communist/socialist model it is understandable if the democratic countries rooted in capitalism embraced financial innovations which appeared to eliminate boom and bust and to offer an ongoing economic growth which while enabling some individuals to become very rich provided the fund for the development of improving standards of living for everyone except at the lower 10 to 20% and with sufficient to also assist the less developed countries.
Similarly the function of Chief Executives and Boards of Directors is to protect and increase profits for dividends to the share holders. I can understand why traditional banks, especially those who were building societies became caught up the world of C.O.Ds and investment banking, and why investment banks became involved with the tradition functions of building societies and High Street banks and became involved in mortgage lending such has been the demand for mortgages.
I can also understand why salaries and bonuses escalated. If one successful firm pays x for the best managers, then it is inevitable that X plus 1 will be paid to attract the same calibre of managers to those firms seeking to achieve similar or better status and profitability.
Anyone who has lived in rented accommodation knows the difference in the sense of freedom to and the self confidence that paying to own property brings so, I have more sympathy with the USA approach to lend to the sub prime and for the right to buy local authority accommodation in the UK than I have for the development of the private landlord on either side of the Atlantic.
I also have sympathy with the position of the regulatory authorities and even for the financial rocket scientists who tried to work out systems which enabled everyone to make money while reducing risk. Individuals who knew what was going on and still went ahead or operated frauds clearly should be tried and judged as appropriate and when the crisis is over understanding what happened and where different choices might have avoided what has happened needs to be investigated in depth in order for everyone to learn for the future.
I am not in favour of scapegoating in principle I have argued that human beings tend to look for and need scapegoats to take away the blame from populations in general as in the Baby P case with the head of service, or the show trial which is the basis of the film- The Reader. However I also accept that the scapegoat can be a safety valve which prevents community disorder and revolution.
The emphasis has to be re establishing confidence and getting the economy moving forward again in concert with all other advanced economies. It struck me while writing that if the 28000 staff of Lehman’s had a total annual income with bonuses of only 100000$ that is close to 3 trillion dollars out of economy. A proportion of these will face loss of their main living accommodation and they will not longer be able to afford the other aspects of the current lifestyle, holidays, private education and medical insurance, new cars, lots of meals in restaurants and visits to top notch sport and entertainment events. But the 28000 at Lehman’s brothers is just the tip of job losses on both sides of the Atlantic and at 100000 job loess and then 1 million job losses one can begin to see the domino effect on economies.
Yesterday at Prime Minister’s Question Time the Conservative Party Strategy for the next 18 months before the next General Election became clear. Continually remind people who is to blame politically for the economic situation. not the bankers, the Hedge Fund managers and the public for borrowing too much, but the Government for not stopping what has happened. This is a valid attack if not fair because all government regardless of their party politics are in the same boat. It is a matter of debate if Barrack Obama would have become USA President if the financial crises had been delayed a year. Although in the .long run the absence from office may be upsetting to Republicans who would have been in the administration, from the longer viewpoint, they know that it will be difficult for a Democratic administration to survive the next four years and the worse it becomes the better politically for Republican party. The one difference is the personality of the next President, and if his party in Congress get behind him and his Ministers then an eight year term and further terms become a good possibility. Thus one can expect the Republicans to start to emphasise the political differences between them and the new administration.
This is the second prong of the Conservative attack. It is to argue that while Gordon Brown has set his stall out as a do something government, accusing the Conservatives of a do nothing party they are pressing him to show what his measures have achieved so far.
This is a very dangerous strategy and potentially damaging not just for his party but to the country. It is potentially not just unpatriotic but reckless, As one previous President said at his inauguration there is nothing worse than fear itself. By continually criticising everything that the government is doing regardless whether it brings immediate result or does not, the Conservative Opposition leaders are at risk of ensuring that the action does not work by spreading fear and the lack of confidence. They may gain popularity in the media polls but at what long term price?
I did a little work and have not mentioned before that I have achieve 8000 work sets and officially one third of the project has been completed.
The Programme had commenced with the loss of the first Mars probe which resulted in the rocket space craft gaining speed instead of slowing as it approached the Red Planet and 125 million dollars disappeared into space. The cause was a communications human error by those ordering the craft and those making the craft misunderstanding the specifications. This reminds when in Cheshire 1971 1974 during the creation and development of the first social services department in the county, a new residential home for people with learning difficulties was purpose built and cloakrooms were included with wash basins but with without the toilets which had been intended.
Evans Davis, the well known BBC financial expert, and author and presenter of the programme, The City Uncovered, Banks and how to break them, used this example of rocket scientists losing the plot for two reasons as those who devised the complex trading systems on Wall Street became known as the Rocket scientists and in their case it was not a hundred billion dollars that was effectively wasted, but hundreds of billions. Was the 2007 and 2008 financial crash the result of human error, of greed or the system being too clever and too fragile for humans to master at this time?
Mr Davis then explained that how the banking system as it developed two arms which converged with the development of computerised technology. Most people are familiar with the activities of banks on the High street although it was not until my care mother was 90 and my birth mother 92 that they held cheque book accounts for the first time, having relied on the Post Office saving accounts when they first came to England and then the building society for the purpose of savings. For the every day payment of bills and settlement of monthly accounts they used cash which my birth mother kept in envelopes.
The High Street bank was regarded as one of the symbols of British steadfastness and security. You could deposit money from earnings for the regular payment of bills and through cheque books for one off expenditure items and transfers into savings accounts which earned interest. You could borrow money to buy a homes or a car although Buildings societies and specialist car loan firms where the more likely call for the average individual and family. Banks were seen more as places which handled the finance of businesses and large corporations and provided them with the funds for expansion and to covering operating expenses. The bank card and the credit card changed the position in relation to individuals and families.
The second development was previously explained in the Nial Fergusson Ascent of Money series that the investment banking system was established in France by a Scotsman, prior to the French revolution, trading in shares and then in stocks and currencies and how the merging of these two functions coupled with the use of increasing complex computerised mathematical systems created the present collapse.
The BBC 2 programme then looked at the collapse of banks, Northern Rock and Lehman Brothers, one a traditional building society which became a bank and then an investment and trading bank, and the other a traditional investment bank which became involved in the property mortgage business. The two former chief Executives have been called to account by the respective political bodies of their countries. Both financial institutions commenced in 1850, a significant period in the history of my maternal family in Calne, The Northern Counties Building Society was established in Newcastle with the purpose of taking deposits and lending out money for people to buy domestic properties. The Northern Rock as it became re-branded, remained basically doing this until 1997 when to had become a highly respected and significant employer in the North East.
At this point it is important remind the essential nature of this form banking which is to lend long and borrow short. The money is lent for long periods at a higher rate of interest than the banks is prepared to borrow money, which is short, that to take your savings with the promise to pay back on demand instantly, or with notice for which a higher rate of interest is paid, for a week’s notice, a month, a year or for longer but usually not for more than three to five years in the form of a bond and sometimes with an interest bonus designed to encourage the investor not to cash in before the required period. This however means that even though there is a flow of income from loans previously made should everyone who has lent short term seeks their money back, the bank in question could find itself insolvent because no bank or financial institution, or business for that matter likes to have capital in the form of cash, liquidity the technical term, held, and not earning some income
The banks also have share holders who expect dividends and the value of shares reflects the value placed on the bank by the financial market and which in turn is influenced by profits which the bank makes on the difference between the interest it charges and the cost of the cash it needs to issue further loans and ensure it can meet its operating costs and fluctuations between the level of income from investments and repayments and interests and the demand for new loans.
Given the principle of lending long which means it does not get its money back for decades, but it borrows short which means that if required to pay back suddenly and at less than long term value and with limited cash reserves banks are always at risk and vulnerable. This is not something generally appreciated by the public until recently, who I believe that the bank held the actual money which they had deposited with it.
Say a bank lends £100 million in mortgages to be repaid with interest in 20 years which will yield £200 million in total and does this every month. It has cash reserves of £10 million in relation to each month’s of new lending and capital assets but selling all its administrative buildings will mean the end of trading and take time to find a buyer and the if required because of an emergency the price obtained will be significantly less than at times of its making.
It order to finance new loans the bank has to borrow money which traditionally would come from money parked very short by businesses and public bodies such as local authorities, and individual savers.
Over the recent decade the volume of new savings was reported in the programme to have increased by 2% a year while the demand for new loans for properties increased from 10 to 15% approximately (I am not sure about these figures which I think applied in the UK rather than the USA), Moreover the banks had been searching for new ways to make themselves more secure especially as they were only allowed invest in the most secure of investments, I believe with a triple A rating which excluded investing is most if not all the stock market however much blue chip,
It is now appropriate to turn to Lehman Brothers which according to the programme commenced in 1850 as a store in Montgomery Alabama and which at the time of its collapse had a workforce of 28000, including 5000 in a tower at Canary wharf London. It had become one of great financial enterprises in the world, because early on in its history the brothers had started to trade in cotton, then moved into the railways, financing the once great store chains such as Woolworths, and into financing Hollywood Pictures with, RKO and 20th Century Fox, then the production of television sets and financing Intel the computer chip giant.
In the 1970’s there developed on Wall Street the way, it appeared, of lessening the risks which all banks are subject if the short term borrowers come knocking for the immediate repayment of their money. There are three steps in the process. First the bank borrows wholesale from other banks rather than individuals, say £100 million and this enables the bank to loan out to buy houses say at an average of £200000, that is to 500 customers, on a monthly basis. Under the old model it would retain the property deeds so if the loans went bad it had the property to sell. It established rules which attempted to identify potential bad risks and ensure that the value of the property, bought if immediately resold would bring in more than was lost in failure to make repayments and the interest.
The new development which I believe is called C.O.D Collateral Debt Obligations (the collateral is the property and the debt the loan) were then sold. The programme gave the example of David Bowie who on reaching his early sixties decided to sell his expected royalties over the next ten years from his previous work, calculated on the basis of returns over the previous decade. He did so for £55 million in the form of bonds which those purchasing getting royalties and interest. He preferred to have use of the funds now, less than he would actually come in while those buying Bowie bonds were promised a higher capital return and interest.
What banks did was to do this with mortgage loans, but to do so using the latest computerised technology devised by mathematicians some of whom once worked on the space exploration, The programme revealed that the prospectus documents can run into two hundred pages, Moreover the C.O.D were not just single packages of all the new loans made in a month graded according to assessed risk levels but mixtures which each C.O.D offering a different mixture. Working out if the promised investment return was likely to be realised and if there were risks was difficult to impossible.
Everyone started to make money, lots of money because the sellers, were getting in money immediately not just for the value of the loans repaid but also the interest that would be paid in, but they offered the paper at discount to allow for some bad debts and that the money would be repaid long. The banks also got rid of the bad debt risk which became the responsibility of the of the purchaser of the “securitization“. The selling banks had increasing amounts of cash to make further loans, to pay higher dividends and to reward employees with higher salaries and bonuses some as much and more than the basic salary. Those buying the C.O.Ds such as Hedge Funds and Local authorities thought they were getting a good bargain because they were holding the paper for assets which when repaid with interest was significantly greater than their current market value. If individual defaulted the property market was such that the asset sold would be worth more than the outstanding debt. The person or company that borrowed the funds to buy property, often to rent out in the UK was also not worried because even if the receipts were less than anticipated the asset was increasing in such value if sold they would have profit over the debt.
.
Then the situation became even more complicated as the financial rocket scientists worked out even more complex C.O.D which involved the reselling of packages of C.O.Ds known as C.O.D squares.
However even though there was a boom in getting loans for properties these were not enough to satisfy market demand and the profits and bonuses required. It was at this point the idea of giving loans to those previously denied them, called the sub prime in the USA was developed and using self certification of income, offering very low interest repayments over the first couple of years.
In 1997 Northern Rock became a bank with shares quoted on the stock exchange and all its savers were issued with shares which if sold gave a all profit. I was someone who had saved with Northern Rock and subsequently cashed in the shares. Northern Rock had a forceful creative shaper leader as Chief Executive who seized upon “securitization“, as they knew financial tool was called, and increased the banks share of the mortgage market from 2% to 17% making it the third largest mortgage lender in the UK. It offered a package of Mortgage for buying a home extra cash and a Credit card all with the same rate of interest.
Contrary to some media reports Northern Rock did not then issue loans to buy properties on the same basis as Lehman brothers and Bear Stems for example. What it did was to act as an agent for Lehman’s, for which it was paid a fee and therefore the high risk was taken by Lehman’s who made the funds available and by those who subsequently bought the C.O.D. Northern Rock was quite open about this saying in its annual report that among its services was to help arrange sub prime loans and self certified loans. It could therefore advise customers what to do if they did not meet the higher North Rock lending criteria.
A combination of developments created the crisis in individual banks. When banks offered a C.O.D they were offering a new paper security which was required to meet standards set by national governments through its regulatory agencies and with each security graded. The problem was that these regulation authorities were paid a fee not by the prospective purchaser for an assessment as we in the UK might use the A.A when buying a car or asking a valuer to assess a property under consideration, but by the seller; moreover instead of being able to lift the bonnet and inspect engine, or view the recent stock market history of a share or a stock, or examine the individual property being purchased, they were confronted with a detailed specification with mathematical formulas which it is now evident those creating them did not understand the risk. Next the banks themselves began to be buy the C.O.Ds thus getting profit twice. The profit from selling the C.O.D and the profit from buying it. Then the housing market plunged and those involved, the banks and their traders began to panic and rumours and fears bred fear not to be the one to be caught out first.
Then in September 2007 the great run on Northern Rock was created and the news programme showed lines of customers waiting outside its branches. One of the reasons why the customers became so visible was because of the shift away from lots of branches with lots of small and not so small savers to the issuing loans of via telephones, the internet and post buying in new money wholesale from other banks. I did this on my last loan and no face to face contact with anyone. Northern Rock was a target because of its runaway success, so when banks started to become more cautious about loaning money to other banks Northern Rock came under pressure and news of this led to demand to withdraw deposits and the government deciding to back depositors to a certain level leaving shareholders facing massive losses.
When The Chief Executive of Northern Rock was quizzed by a House of Commons Committee he was asked the question. When did you qualify as a banker? His reply was I did not qualify as a banker, and he could have added I trained as general manager and chief executive. I was reminded of the time at the International General Management Course attended in the mid 1980’s when asked if I was interested in becoming a Chief Executive of a local authority which then did not provide Social Services as one of its functions. I quickly thought about it and decided that I would stick to the knitting, doing what I had trained for and become an expert through long experience, but also decided to use the knowledge gained from the course to become a better manager and team colleague, and perhaps take on the challenge of a larger and better paid social service authority.
The former Chief Executive of the Northern Rock was also asked what could he have done, with hindsight, to have prevented the disaster and he was unrepentant, It was not his fault and this brought condemnation in the media. The former Chief Executive of Lehman’s adopted a different approach and admitted he spent his nights going over what happened and trying to identify where a different decision might have prevented the collapse. However this did not save him from the comment that he was regarded as the villain and not the victim, He and others are now to face a Grand Jury.
My understanding is that then reason why Bear Sterns was the first to nearly fail but was rescued and Lehman’s was allowed to fail is that they held more of the sub prime and self certified mortgages than other institutions and when the storm clouds gathered they were unable to offload as part of new C.O.Ds. I suspect the personality and approach of the both Chief Executive’s played their part, together the different approach of governments and different election time tables.,
But should the bankers alone be standing trial the media dock? The first question goes back to Pre Marco Polo Times and the fundamental point that what are people doing calling themselves Christian if one the of the main points made by Christ was that money lending for interest is wrong?
I am less convinced about the responsibility of governments whose functions is to provide for national security, to assist everyone to make money to provide for themselves and to provide help and care for those unable to look after themselves or their families. Given the economic failure of the communist/socialist model it is understandable if the democratic countries rooted in capitalism embraced financial innovations which appeared to eliminate boom and bust and to offer an ongoing economic growth which while enabling some individuals to become very rich provided the fund for the development of improving standards of living for everyone except at the lower 10 to 20% and with sufficient to also assist the less developed countries.
Similarly the function of Chief Executives and Boards of Directors is to protect and increase profits for dividends to the share holders. I can understand why traditional banks, especially those who were building societies became caught up the world of C.O.Ds and investment banking, and why investment banks became involved with the tradition functions of building societies and High Street banks and became involved in mortgage lending such has been the demand for mortgages.
I can also understand why salaries and bonuses escalated. If one successful firm pays x for the best managers, then it is inevitable that X plus 1 will be paid to attract the same calibre of managers to those firms seeking to achieve similar or better status and profitability.
Anyone who has lived in rented accommodation knows the difference in the sense of freedom to and the self confidence that paying to own property brings so, I have more sympathy with the USA approach to lend to the sub prime and for the right to buy local authority accommodation in the UK than I have for the development of the private landlord on either side of the Atlantic.
I also have sympathy with the position of the regulatory authorities and even for the financial rocket scientists who tried to work out systems which enabled everyone to make money while reducing risk. Individuals who knew what was going on and still went ahead or operated frauds clearly should be tried and judged as appropriate and when the crisis is over understanding what happened and where different choices might have avoided what has happened needs to be investigated in depth in order for everyone to learn for the future.
I am not in favour of scapegoating in principle I have argued that human beings tend to look for and need scapegoats to take away the blame from populations in general as in the Baby P case with the head of service, or the show trial which is the basis of the film- The Reader. However I also accept that the scapegoat can be a safety valve which prevents community disorder and revolution.
The emphasis has to be re establishing confidence and getting the economy moving forward again in concert with all other advanced economies. It struck me while writing that if the 28000 staff of Lehman’s had a total annual income with bonuses of only 100000$ that is close to 3 trillion dollars out of economy. A proportion of these will face loss of their main living accommodation and they will not longer be able to afford the other aspects of the current lifestyle, holidays, private education and medical insurance, new cars, lots of meals in restaurants and visits to top notch sport and entertainment events. But the 28000 at Lehman’s brothers is just the tip of job losses on both sides of the Atlantic and at 100000 job loess and then 1 million job losses one can begin to see the domino effect on economies.
Yesterday at Prime Minister’s Question Time the Conservative Party Strategy for the next 18 months before the next General Election became clear. Continually remind people who is to blame politically for the economic situation. not the bankers, the Hedge Fund managers and the public for borrowing too much, but the Government for not stopping what has happened. This is a valid attack if not fair because all government regardless of their party politics are in the same boat. It is a matter of debate if Barrack Obama would have become USA President if the financial crises had been delayed a year. Although in the .long run the absence from office may be upsetting to Republicans who would have been in the administration, from the longer viewpoint, they know that it will be difficult for a Democratic administration to survive the next four years and the worse it becomes the better politically for Republican party. The one difference is the personality of the next President, and if his party in Congress get behind him and his Ministers then an eight year term and further terms become a good possibility. Thus one can expect the Republicans to start to emphasise the political differences between them and the new administration.
This is the second prong of the Conservative attack. It is to argue that while Gordon Brown has set his stall out as a do something government, accusing the Conservatives of a do nothing party they are pressing him to show what his measures have achieved so far.
This is a very dangerous strategy and potentially damaging not just for his party but to the country. It is potentially not just unpatriotic but reckless, As one previous President said at his inauguration there is nothing worse than fear itself. By continually criticising everything that the government is doing regardless whether it brings immediate result or does not, the Conservative Opposition leaders are at risk of ensuring that the action does not work by spreading fear and the lack of confidence. They may gain popularity in the media polls but at what long term price?
I did a little work and have not mentioned before that I have achieve 8000 work sets and officially one third of the project has been completed.
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