When the world biggest bank called a crisis board meeting about bad debt and sub-prime mortgage exposure I guess we should all start worrying a little more. The Bank of England have made it pretty clear that things are going to get worse before they get better, the question I wonder is whether Britain is sitting on it's own "sub-prime" type crash.
Northern Rock, whilst maintaining the line that it was only ever a liquidity cash flow issue, have been notorious for lending money to high risk client - hence their repossession rates having been so high. It seems unlikely, in a climate of low interest rates, that the bank is the only one that done this. So as the credit crunch continues to crunch what might happen next?
10 comments:
If you believe the monetarists, and increasingly I do, banks are the cause of the problems, but very rarely the victim. I can't remember ever seeing an ex-bank director begging in the street.
The tempation banks have to suffer is overpowering: what would you or anybody else do if given the power to create almost unlimited amounts of money, simply by bookkeeping entry?
Watch what happens after the Olympics.
I do not think the British public, nor the MSM, have woken up to what is going on in the credit markets.
Especially Alistair Darling's bail out of Northern Rock.
The Bottler's decision to hive off some of the BoE's responsibilities to the FSA was ill conceived.
It resulted in both bodies taking their eye off the ball as far as some of the more fancy financial packages were concerned.
Now it looks like it is coming back to haunt him. No doubt Darling will be set up here as the fall guy.
But the prospects for a Merry Chrimbo do not bode well.
Had a look at the small print on my various savings banks'terms of business, Dizzy, and was decidedly alarmed that most banks effectively state "If push comes to shove, we can do what we Bl**dy like with your money, you fool".
So it's no surprise that money mad bankers and government aren't at all fussed about driving UK's and the world's economy down the pan via an orgy of debt creation as they con the majority of us with their great lie that our money/country is safe in their grasping hands.
Little wonder too, that bankers and government have been so eager to generate a phoney boom based on criminally wreckless levels of immigration, house prices, debt and sub prime style borrowing as long their personal coffers groan with our money. Why should they give a toss since they aren't the ones who will ultimately pay for this insanity when the debt mountain disintegrates, we will.
Auntie Flo'
we do not have the same problem as the US. The US has mortgages resetting from around 2% to around 5% and the borrowers defaulting.
We have lenders lending twice as much as they did 6 years ago to people who do not need to prove thier income and do not need to show how they are going to repay the loan.
The income proof was tightened up in september and has resulted in mortgage approvals plummeting.
God help homeowners if the lenders go back to lending what they did 6 years ago.
Next stop house prices plummeting. Then normality will be restored.
I was just blogging on the general issue myself (although not about Citi). It is something of a conundrum.
It seems to me that the Northern Rock problem was the 'credit crunch' that resulted from bad debt being sliced and diced into products with a AAA rating, that were bought by many banks as investments, rather than from the amount of bad debt that Northern Rock held itself.
If the UK had had something like FDIC, the run on Northern Rock wouldn't have happened (although it would still have had to go to the Bank of England, the news of which precipitated the run because there isn't a UK version of FDIC but rather a slow and only partial guarantee). Northern Rock's business model (heavy on loans, low on deposit business) was clearly a mistake because it made it vulnerable to a tightening in the credit market. Alistair Darling's panicked over-reaction didn't help either, although something like this was clearly possible given the current situation in the UK regarding depositors of any size (FDIC only guarantees $100k per account).
As for UK sub-prime loans, it's interesting. Some of the market conditions here in the US have been there in the UK for longer than has been the case in the US (wild speculation on property, for example, and significant rises in house price). On the other hand, most British mortgages are variable-rate in some sense, wheras the move to variable-rate mortgages in the US was a change (most mortgages prior to this were fixed-rate over the entire term); some of the increases after initial terms, though, were ruinous (I am not sure whether similar increases are legally restricted in the UK).
It'll be harder to quantify what is, and isn't, 'subprime' in the UK, because credit ratings aren't so important in the UK as they are in the US (I wrote a bit about that here, in humorous vein). On the other hand, the UK market may be a little more natural in some sense -- in the US, the fixed term loans, up to some amount, are underwritten by government-created institutions and there are relatively strict requirements for getting them, but once you step out of those, it seems that anything goes (and has gone). For whatever reason, even the arguably irresponsible UK lenders don't appear to have been quite as nutso as some of the US lenders, although events could prove me wrong.
The bigger issue is that responsible people who take out responsible loans can end up as screwed as the others if the whole economy goes down as a result of irresponsible lending and borrowing, particularly when property is at stake. I doubt there's a really clear answer, marrying ideology, efficacy and sustainability, that fits with the desired requirements of the average citizen.
There is a world of difference between Citicorp and Northern Rock. Citigroup probably recruit more talent in a week than has ever been seen in the management suites at Northern Rock.
It looks like they are going to take a big write down on some of their debt, but their chairman is going to get it in the neck.
Northern Rock is a one trick pony (mortgages), whereas Citi plays in many games (equities, bonds, FX, corporate lending, credit cards, insurance) and is not going to be brought down by its mortgage business.
Unlike Northern Rock it looks like the Chairman will do the right thing by the shareholders and resign.
Watch the markets stagger for the next year as more and more bad debt unwinds. This would appear to be one of the longest economic train crashes in history.
I had a perception that mortgage fraud would be high and have subsequently read reports of large scale fraud in both the UK and the US. What percentage of those loans do you think the banks will get back?
$25 billion worth of US mortgages a month for the next year will see the end of their teaser rates. The owners can't sell and can't refinance. Much the same will start to happen in the UK.
Wish I could cause 8 Billion losses at my company and then be 'sacked' with a paltry payment of only 100 Million. Poor Poor Man. Laughing , as they almost said, all the way from the bank.
Just to agree with adam that my understanding of the Northern Rock problems is that their default rate on their mortgage lending is fine, they were banjaxed by the US problems causing them difficulties in bank-to-bank borrowing.
A few days ago, there was a nice article in the times about northern rock:
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article2872434.ece
alice cook
http://ukhousebubble.blogspot.com
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