The shame of smelly banks
That for the three-month loans on offer from the was wholly predictable. As I said in my note yesterday, if someone is charging you Β£6 for five-pound notes, but you can have them at Β£5.50 in the market down the road, what are you going to do?
The Bank was charging Β£6, in effect. And the only takers would have been those barred from the market.
So does the total absence of anyone wanting the Bankβs readies mean that the banking crisis is over, that itβs business as usual, that there are no residual liquidity problems for any small banks?
No, no and no.
Confidence is returning to markets. The rates being charged by banks for lending to each other have been on a steady downward path for a few days.
But credit is still pricier than it should be. And there remain serious challenges for smaller banks when endeavouring to finance their lending activities. They are succeeding by their skin of their teeth β but it isnβt easy.
The Bank of England isnβt abandoning the auctions. It will hold them on Wednesdays in each of the coming three weeks.
A reasonable criticism of the Bank is that it is charging too much for this money (see Banks' Scary Auction). The funds are attractive only for banks with the financial equivalent of devastating BO and which find it hard to raise funds from other banks. But, understandably, no bank dare admit it wants the Bank of Englandβs cash, because that would be the equivalent of sticking up a hand and shouting, βLook at me, I smellβ.
However it makes sense for the bank to offer the money again in coming weeks, just in case the BO is a symptom of a rather more worrying condition.
I'm 
°δ΄Η³Ύ³Ύ±π²Τ³Ω²υΜύΜύ Post your comment
"A reasonable criticism of the Bank is that it is charging too much for this money."
No that's a stupid criticism, a criticism you made at tiresome length yesterday. Several comments on the blog pointed out exactly why it was stupid.
The BOE has a hard job in this situation and it doesn't really help when the ΒιΆΉΤΌΕΔ's business editor can't distinguish banker's self-interest from the national interest.
The more you dig this hole, the deeper you get yourself into it, Mr Peston. It is the bankers and the regulatory system (eg the FSA and the government) that allowed this crisis to develop, not the BOE. The BOE is doing what it can to get us out of the credit crunch without rewarding excess risk. Your banker sources are just clamouring to be allowed to keep ramping their bonuses, and escalating risk in the financial system.
Robert Peston Says "But credit is still pricier than it should be"
Is this your opinion ?? What is a reasonable price for the 'current' marketplace ??
Robert Peston Says "smaller banks ... are succeeding by their skin of their teeth"
Robert your 'reporting'(?) has changed since your Northern Rock scoop !! Can you stick to the facts or at least back up your 'Tabloid' tendencies with actual facts.
PS Are you going to be under investigation for 'market abuse' for disclosing sensitive information ??
So the Banks are now sub prime as far as the BoE are concerned?
Can no takers mean that banks cannot supply robust collateral given that realty value is prospectively heading south.
Where does that saying come from: We will give you a run for your money? Not blummin likely the banks are saying.
Have you been on the sherry again?
Have you got a spread on Merv Kings regaining days in office?
This blog sounds more like daily mirror every day.
Why does Robert Peston see the fact that the Bank's loan facility found no takers as a sign of failure (because, he goes on insisting, the money should have been cheaper)? Surely the fact that no bank has wanted or needed to borrow is a sign of success - ie of normality returning to some degree. Would Peston have been happier if the loan facility had been fully taken up (whatever the interest rate)?
No - the crisis is not over.
In fact it's just beginning because public opinion has at long last and quite rightly come round to realising that the financial institutions may be making themselves rich but they are not making the country really any wealthier.
In the long run this can only be good news for UK Plc.
I agree with you, only a total fruitcake, who wanted to announce to the world that their businees was toast, would have taken up these kamikaze loans.
The BoE will be able to spin this and tell everyone that the "crisis" is over. Yeah right, only 'till the next time. Do they really think we're that stupid?
Hi Robert,
Love reading your blog AND the contributions to it.
You've come under a lot of criticism in the last week or so and I was just wonderring when you plan to respond?
If you refuse to, can't you at least say why
More quality reporting :(
"That no bank put in a bid for the three-month loans on offer from the Bank of England was wholly predictable.
"
I don't remember you predicting it Robert.
In fact I remember you saying that if the Bank had offered this facility earlier, the panic over Northern Rock would never have happened.
Another change of mind ? Or do you just have a short memory ?
My how the standards of journalism (and integrity) have fallen at the ΒιΆΉΤΌΕΔ.
"Credit is still pricier than it should be"??
This seems like an extraordinary position to take. The scale of the sub-prime crisis, and its elevation from what should have been a local issue around poor business practice into a global crisis, was down to the fact that credit was cheaper than it should have been. It was driven by the fact that banks could borrow cheaply and lend-on to sub-prime borrowers without properly pricing in the true risk of sub-prime lending. The myth about financial institutions being able to manage risk out of the markets is just that - its a myth and one that has been shown to be a myth by recent events.
Businesses that choose to run a riskier business model, need either to pay more for the priviledge of doing so, or need to be more vulnerable to the risks.
If these businesses are forced to pay more for the capital that enables them to adopt this business model, and this reduces their profits in a time of turmoil such as this, that surely is the correct and predictable consequence of their chosen business model.
The problem isn't that "Credit is still pricier than it should be", it is that we are having to get used to credit needing to cost more than it has done recently.
If Mervyn King does not provide any liquidity to the market then it freezes and our economy will be damaged.
If Mervyn King provides liquidity too readily then he encourages even more imprudent behaviour by banks which will lead to a bigger crisis in the future and our economy will be damaged.
It's a tightrope, which I think so far he has walked very well. He's made it clear that individual banks will not be shielded from the consequences of their own actions, but he has moved to protect the wider economy.
It is quite likely that the Bank's offer of Β£10 bn has eased conditions in the interbank market even if no banks have taken it up. Just knowing that the BOE's money is available makes less creditworthy banks more appealing in the interbank market, since there is now a backup source of liquidity.
Peston is clearly upset that he doesn't have an inside 'scoop' to divulge the identity of a recipient of the BoE's auction. So why not tarnish all smaller banks with an unsubstantiated comment like 'surviving by the skin of their teeth'. How irresponsible can you get Robert? Do you not care about people and what your careless talk can do?
Whats wrong Robert? I have now commented twice comparing you unfavourably with the lamentable Geoff Randall, and you have not allowed them to be posted on your blog.
Censorship at the ΒιΆΉΤΌΕΔ?
As well as tabloid journalism?
Gi
I believe the BoE is trying to do what it can under very difficult circumstances; what is a fair price (with a punitive margin) for 3 month lending? All the "experts" have failed to agree.
If we were to focus solely on a market-driven solution to this crisis of confidence, it should charge the same as LIBOR (and lend to the smaller players who are being shunned by the cash-rich players in the inter-bank marketplace) but then with LIBOR jumping around faster than most commentators are hopping onto this crisis "bandwagon", it can only use this as one indicator.
If it were to charge something closer to LIBOR (& under the cash + 100 bps rate) the screams will be heard all the way from Northern Rock HQ about how other banks are being subsidised - unlike poor NR...who had to pay that rate. No need to characterise what will happen if it were to charge more than LIBOR (there are enough screams about it being unrealistic in its "expensive" pricing).
What is hampering the BoE is that it no longer has the remit to supervise banks under this crisis situation and we have a lousy depositor protection system.
So let's be balanced in the criticism of the BoE - it has already achieved a lowering of 3 month LIBOR - I for one say a belated hooray - without resorting to lowering the bank rate (& ultimately fanning inflation and shredding sterling).
Hindsight will ultimately prove whether letting one small institution come close to failure is better than pumping huge amounts of liquidity into the market straight away (like the ECB & Fed) and perhaps delaying the ultimate failure of some institutions who will be proved to be very poor managers of liquidity and credit risk.
I for one will wait and see.
As for Mr Peston's insightful / inciteful (take your pick) commentary - keep it up - and I enjoy the (often passionate) responses as well.
Robert why use the word 'shunned' in the headline.
Surely 'declined' or 'refused; would be better. After all its a well used banking term as in 'we are declining your loan application' or 'my mortgage application was refused'.
Still trying to over egg the pudding on the headlines?
Its as plain as day , that Mervyn lost the plot and should of followed the other central banks in lending the money months ago , to avoid the Norther Rock crisis. No bank will touch the Bank of England money , because their share price would go through the floor and with it their fat salaries and share options.
I don't believe Northern Rock did a lot wrong , except their business plan had no contingency plan for exceptional circumstances .
The reality is , for a business to grow fast you need to borrow a lot of money to grow . Without borrowing you don't grow and neither does the economy . The Bank of Englands job is to keep inflation below 2% and it failed . The quick rise in interest rates has caught everyone out and companies and individuals who borrowed heavily , who were under the impression that inflation would be contained , have been caught out and made to pay the price. The savers who don't take any risks are ironically the winners .
The shame of the banks does not reside with the "smelly" ones, it resides with all of them. They've increased their risk levels, largely through ignoring the one of the first principles of banking - matching length of lending to length of borrowing. Then they've got all freaked out about it - even though they all securitise mortgage debt in a similar way - and as a result are more inclined to protect themsleves and their own profits, even if this puts the banking / credit system at risk.
At the same time, the FSA seems to have ignored the fact that businesses usually go bust because they run out of money (yes, even profitable ones), not because they are technically insolvent.
Please can someone explain to me the point at which this is the BoE's fault?
The shame of it all is Mr. Peston's "fishy" ability to mis-interpret what he sees.
if you had a hard time getting money from one of the big four, but was able to take the BoE loan (at the higher rate since it was the only option open to me)... would you really show your hand like NR did, keep quiet, or deny any need for such a loan in the first place. NR took the loan and look what happened. I know what I'd do...
Ignoring the Chinese whispers e-mail suggestions from previous comments made and the healthy scepticism about financial services and banking in general, this whole credit episode since 9 August has been a basic problem of supply and demand.
Lack of money supply linked to increased demand forces up prices, right?
HMG and BoE has decided not to stoke up M4 - the actual supply of real liquidity beyond its already all time high levels of around 14%. Petrol on burning flame springs to mind.
Result of this. Illiquidity and panic.
The longer term implications of the credit squeeze (I am old fashioned and like this phrase better) and bank run on NR are really worrying.
1. HMG intervention with its "unlimited guarantee" to depositors has "quasi nationalised" our economic thinking. Money supply and demand is now controlled indirectly by State intervention. Judging by this week's rhetoric in Bournemouth, this is just the tip of a massive iceberg in free economic and political upheaval.
2. HMG is committed to borrowing more and more money to fund its political agenda pledges in the public sector for schools, NHS etc. Who pays the interest bill? We do. I am not even going to ask the obvious "value for money?" question. I'll leave that to others.
3. HMG tells us we are nearing full employment. Our UK social bill will rocket if unemployment rises through economic slowdown, triggered by the sub prime crisis and bank run. That is on top of the increasing overdraft of UK plc through Gilt issues to fund future social promises. Already house prices are falling...and that is before the HMG promises to deliver 2 million more new homes in the UK in the next 10 years (green belt and SE England question ignored here!). Who on earth is going to afford to buy them. If unemployment rises, more benefit claimants, less tax revenues collected, more HMG debt, and bigger interest bills HMG owes to Gilt holders. Housebuilders are already warning of slowdowns, and that means their landbanks will drop in value over time, their building costs remain fixed, so they run into losses building new homes as they cannot pass on their costs in higher prices as people won't pay. Oh, and I forgot, the demographics of the UK are shifting. From 1 in 3 adults not in work today, read 1 in 2 adults by 2027. More services, costing more money paid for by less people in work over the next 20 years. Yikes!
4. Debt is harder to come by. Our entire economy is built on the premise that our assets rise in value ad infinitum and we remortgage like crazy releasing cash into the economy to spend. Those days are now over, certainly in the next few years at least. Credit is tightening both in access and volume. Our economic growth targets now have to be met with good old fashioned trading. Luckily it seems, that part of the economy is holding up, and will become increasingly important over the next few years. Let's hope HMG does not bugger this up either.
5. No one yet knows the scale of losses from packaged US Sub Prime debt securitisations. 2008 may yield some answers (or some very clever black art accounting work by banks and hedge funds to cover or βdressβ the losses).
6. Many people have short memories. We have just enjoyed the most wonderful sojourn of our lives economically for the past ten years. Now things will change. All raw materials, foods and other basics are all rising in price for the first time in decades. The East is becoming a consumer economy, placing more stress in the developed West. The US is up to its eyeballs in debt. The Eurozone (Germany and Luxembourg excepted) are in a pickle β look at the French, they have run 25 consecutive annual budget deficits. Theirs is the ultimate overdraft and the country is looking like the UK did in 1976 β remember Denis Healey going to the IMF for a bailout loan? The US Sub-Prime problem is the start of something more strategic. The worldβs economic power is shifting to Asia. If Asia does not change its present consumption habits, we have a problem. If the US catches a big recession β the chances are great, then we and Asia suffer.
We are as a nation, sleepwalking into really turbulent times. I just hope we have the skills and resolve to navigate this period as a United Kingdom.
PS: If I was a hedge fund manager, which I am not, I would wait for the moment a predator makes a derisory offer for NR. After all, a largely fixed income portfolio of mortgaged assets will, in time, make money, especially when liquidity improves and borrowing costs fall. Trouble is, I am not sure if time is on NR's side. I suspect there are some irate shareholders who will place the final nails in NR's coffin shortly, once NR goes ex Divi - or not!
I agree with you Robert although not many seem to these days. The ordinary person's lender of last resort is 'the loan shark' who charges a higher rate of interest than anyone else. Those seen borrowing from 'the loan shark' are deemed to be in dire straights. In this case surely the BOE is the loan shark.
I suspect most of the banks needing any money went across to Europe yesterday to shop at Chez Trichet. Why pay 6.75% to the BOE when those nice people at the ECB will lend you what you need for just 4.3%. On the way back you can stop of at Calais and pick up a couple of cases of red and some nice cheese to boot. Obvious really. We all know that loans are not the only thing that is over-priced in rip-off Britain. Unlike our banks it seems we have become too accustomed to paying through the nose for everything we need. Good on them.
Just what planet are you on Robert, and do you know anything about banking at all?
Why would banks borrow money at 6.75% if they can borrow at 6.34%? And in the light of LIBOR rates coming down again why is it a matter of significance that the banks chose not to make a commercially stupid decision?
It would have been far more significant if banks HAD taken the Bank of England up on the chance to borrow at a premium rate of interest.
I'm sorry but it has to be said. Robert Peston's style of reporting is not suitable to the formerly objective and independent ΒιΆΉΤΌΕΔ.
An article entitled "Shame of the Smelly Banks" does the ΒιΆΉΤΌΕΔ a great deal of harm following on from Mr Peston's "scoops", incessant attacks on Mervyn King and the BoE, and circumvention of normal channels for price sensitive information.
Who are these sources Robert? Your father who sits in the Lords as a Labour peer and your Party contacts will otherwise come under suspicion. We know you are keen on transparency - so come on Robert.
Maybe I am missing something here, but if the BoE pours Β£10bn into the markets following huge loads of cash from other central banks, then the supply of the commodity - money - is growing when international nervousness means that demand is falling. That would in any market lead to a fall in the price of the commodity, which is exactly what the cenhtral banks intended.
Why then have an auction at somewhat above market prices? The only buyers would be those rejected by the marketplace, but where there are buyers, there will always be sellers, who know that the central banks are not going to all any bank to go under. To make money, banks must lend money, so they can lend with impunity now right up to BoE auction rates.
Why then did the BoE hold an auction to which nobody came?
The website of Denmark's financial daily newspaper Borsen posted a story just before 6 pm today 26/09 > referring in rather tacky terms to today's hike in share price due to rumoured takeover talks - which concluded with the sentence (my translation of the Danish text): >
Is this story accurate? If so, what does the 'the right track' mean and what is Goldman Sachs' role in this? .... Robert?
Niels, Denmark
Personal attacks on Robert Peston are unwarranted. The bankers and financial smart Alecs who bought into the junk offerings from the other side of the Pond are much more worthy of our contempt. Why let the rating agencies off the hook? They allegedly gave much of this toxic financial sludge their seal of approval. I wonder how many MBA's failed to spot the potential hazards in the new offerings from the financial alchemists on the Street? I wonder how many of these boys and girls had any idea whatsoever that they were playing a very dangerous game of pass the parcel? I certainly cannot remember them crying wolf. Niether the Old Lady, the Treasury nor the FSA caused the credit crunch in the interbank market. It was the lack of due diligence by senior managers throughout the financial services industry. The losses which are now accumulating at Britain's major banks were caused by their own staff taking risks gambling with financial products that they clearly did not understand.
@24 "Why pay 6.75% to the BOE when those nice people at the ECB will lend you what you need for just 4.3%."
2 more questions for you to ponder.
The interest rate difference between the ECB and BoE has existed for a while now so why start borrowing from the ECB now?
Why not travel furthur east to borrow from the Bank of Japan at 0.75% as long as you're travelling east to borrow from the ECB?
I hope Nr will send these vultures packing. Why cant a bank like NR (finance company really) with this business model get in a new chief and trade its way out of this crisis.
If NR had sought permission for a 1 for 2 rights @ 6pnds and a 750 M bond issue at beginning of Sept they could have raised 1.26 Bn + 750 M pnds= 2 Bn pnds.
The share holders might learn to agree to this in future. Reason the issue:- to put the "bank" on a more sound footing with the take over of a cash rich entity a possiblity. The share price wont support this now that short selling (which should be a criminal offence for banks at least) and the4 like has ripped thro the shre price. Can I challenge you RP to come up with a Uk style Chapter 11 type solution for NR now;
New key Directors and atractive deposit rates. A Bond issue (a pricey one of course). Use your imagination.
THANKS POSTERS excellent comments.
By the way, I have been wondering how much of the money in Northern Rock (or any other building society) might be the untaxed result of cash-economy work and whether some of the withdrawals were due to people worrying that benefiting from a deposit guarantees might lead to undue attention from the authorities.
Not all of it of course, but perhaps enough to create a queue...
@24 (simon davis) (and @30 who probably already knows this)
The problem with borrowing money in another currency (such as Bank of Japan) is that you do not know what FX rate you will have to use to pay it back in the future.
So I can "borrow" GBP by borrowing Yen today, and then use those Yen I borrowed to buy some GBP. But in three months time, when I have to pay back the loan (in Yen), I don't know how much it's going to cost me to buy the yen back (using pounds).
If you shop around for a FX "Forward" contract that will lock in this future GBP-JPY rate, you'll find (surprise surprise) that it will cost you exactly what it saved you to borrow the money at the cheaper rate of interest in the first place.
This is just another application of the "no-arbitrage" (or "no free lunch") principle ;-)
That being said, by not locking in this forward rate, if the FX rate does *not* change, you can (or were able to make) serious money, at the risk of a rise in the Yen...
If you were going to do that though, why bother investing your borrowed Yen in GBP when instead you could invest it in a much higher interest rate currency such as Aussie Dollars (whose interest rate is somewhere around 7% I think).
This is what the so called "Yen carry trade" people were doing.
A lot of them lost a lot of money recently though when the yen started to rise against other currencies.
BTW, Robert, I really like your informed and intelligent commentary on this situation.
If the BofE is now taking sub prime mortgages as collateral, then 6.75% is not high. Peston is not listening to his own company's broadcasts; after listening to File On Four this Monday, I would think about 8% would be nearer the going rate. Or was that just another ΒιΆΉΤΌΕΔ programme to wind us up, Bob?
John White (post 29)
You miss the point. Perhaps a few of the attacks on Mr Peston have been personal, and of course it's those senior managers' fault.
But most of the attacks are based on the perception that when the chips were down, Mr Peston has simply acted as a spokesman for those very senior bankers who are responsible. They are the ones bleating about Mervyn King and clamouring for more money to be made available at non-punitive rates, because they want us to bail them out for their mistakes.
By reiterating their arguments with his own spin, Mr Peston has thrown his lot in with the the guiltiest parties of the lot. And by participating in the scapegoating of Mr King (which also serves to exonerate the senior bankers, FSA and govt of their faults) he acted pretty badly in my opinion.
29 - John W, you are right. It is silly for anyone to suggest (#2) that RP should be investigated by the FSA as his information was instantly published to the whole market! However, much depends on your MBA - I was taking the Finance unit when the same silly people were jumping into dot.bombs, but the unit clearly showed that the share prices were just irational. Harvard (one grad: G W Bush) used to teach Enron as the "new" business model, son that might explain the contagion startinng in the US, but don't tar all MBAs with the same brush. Mine is about to start its Credit Risk Management unit - the planning started at least two years ago, so a pretty astute move really!
30 - There is always the risk of exchange rate movements and exchange cots, but then the bankers behind this crunch couldn't manage simple int rate risk. It is all very well the DOW Jones being up so high, but price it in UKP/Euro terms and your investments are performing rather badly.
Read this weeks Private Eye on the ins and outs of Northern Rock then ask yourself why the taxpayers money was used as a guarantee.
"But credit is still pricier than it should be."
Utter rubbish. It's a free market, and banks can choose whether to borrow or not. I'm still confused as to why the ΒιΆΉΤΌΕΔ Business Editor is calling for state subsidy of UK banks.
What everyone suggesting borrowing in foreign currencies fails to have appreciated is the actual needs of the banks. If they need Sterling, not the foreign currencies. So, they swap it into Sterling, What is the price of that Swap based on? The interest rate differential between the two currencies.
Therefore, if Sterling rates are X, and foreign rates are Y, you will end up paying Y to the foreign central bank, and X-Y to the swap counterparty, i.e. a synthetic Sterling interest rate. The bank's won't have actually reduced their cost of borrowing, and instead will have paid a whole load more fees to keep the cost the same.
I feel very sorry for you, Robert. The sheer volume of hubris being hurled at you daily from the angry investor/money manager fraternity is staggering. Ranting about your journalistic style is a lazy diversionary tactic intended to draw attention away from the fact that the ongoing financial upheavals spell the end of the boom times and actually begin to reveal just how shaky our economy really is. If confidence is so very easily knocked, perhaps the time has finally come for the fat cats to take a hit where it hurts - their wallets. I'll happily give them a good kicking for making my tax underwrite their short sightedness.
Robert Peston has the responsibility and privilege of reporting important information and to write editorial comment for the British tax paying public. I find it very disappointing that he should fail so badly at this.
Comments such as 'Credit is still pricier than it should be' indicate that Mr Peston has a complete lack of understanding of the credit markets and the role of the Bank of England.
The editorial betrays the Left Wing bias inherent in nearly all ΒιΆΉΤΌΕΔ coverage and editorial.
And worst of all, such incompetent and uninformed editorial does a gross dis-service to the British public who ultimately pay for Robert Peston's 'services'.
Why can't the ΒιΆΉΤΌΕΔ stick to reporting facts and information like they are funded to do, rather than factually incorrect Left Wing opinions?
#40 - since when has backing up the big banks, over the state-paced apparatus been left wing?!
Most of the Media seem to be going along with the notion that it's all Merv's fault, while most individuals on here or in the real world seem to think exactly the opposite.
Interesting... Maybe it's an elite thing rather than left/right?
To Mr Peston & my fellow bloggers
Why have there been no takers of Mervβs loans?
Because fractional reserve banking is built on confidence, not deposits.
Where does the money come from that is loaned to a consumer or house buyer?
It comes, and this is the most important single thing to know about modern banking, it comes out of thin air.
The mortgage deed you sign creates the money that is leant to you, your promise to re-pay is the security for the creation of the money you borrow.
And if that isnβt enough the banks assets are always βlongerβ than its liabilities. Put another way, a bank is always inherently bankrupt, and would actually become so if its depositors all woke up to the fact that the money they believe to be available on demand is actually not there, hence causing a bank run.
Fractional reserve bank credit expansion is always shaky, for the more extensive its inflationary creation of new money, the more likely it will be to suffer contraction.
For every business cycle is marked, and even ignited, by inflationary expansions of bank credit. The basic model of the business cycle then becomes evident: bank credit expansion raises prices and causes a seeming boom situation, usually in house prices as credit is often taken out to purchase property.
In respect of fractional reserve banking and house prices:
Property prices have been increasing faster than peopleβs incomes for ten years, and yet still they houses have sold, because people have access to ever increasing amounts of credit [money]. For example:
John Smith earned Β£25,000 p.a. in 1997 and could borrow 3 x his gross income.
His house cost him Β£75,000.00
John now earns Β£35,000 p.a. in 2007 and can borrow 6 x his gross income.
The house is now worth Β£210,000.00
Unfortunately John Smith has become a poorer man, because where his wage would buy a third of his house ten years ago, now it will only buy a sixth. He has in fact lost out to inflation, but probably doesnβt realise it.
One question often asked is, why have the amounts borrowed been increasing over the years?
Firstly the lenders make a larger profit, and secondly the F.S.A. has turned a blind eye to it all, because increases in the money supply, increases consumer spending, which fuels the economy, which in turn creates tax revenues.
Will it all end in tears? Probably not, but if you increase the money supply further you will need also need to have low interest rates, to enable the borrowers to keep up with repayments.
Unfortunately if you have low interest rates, the value of the Β£ will likely fall, and imported goods such as food and oil will rise.
So thereβs the dilemma.
Ultimately fractional reserve banking and increasing the money supply facilitates inflation, particularly in house prices, where the borrowed money is first used, which causes a boom which ultimately must end.
Looks to me like the BoE held an auction hoping/knowing that noone would come.
Merv can hold his head up again as being a punitive lender of last resort while suffering the likely indignity of Govt pressure to intervene when he knows he - ideally - shouldn't and the FSA not really doing what it is supposed to be doing.
since US housing market is on the decline, could UK market follow since we are also vunerable to sub-prime.....
will a cut in interest rates actually make things worse!
Dave H wrote "It is silly for anyone to suggest (#2) that RP should be investigated by the FSA as his information was instantly published to the whole market!"
NO it is not silly - there are proper procedures in place for when 'market sensitive' information is released. Putting out information on a ΒιΆΉΤΌΕΔ Blog is not to the 'whole market' - Is the information fact or fiction ? Is the information being relayed in a calm and precise manner or is it sensationalised which could (did !!) cause a panic !! Could information put out in to the public domain create an advantage/disadvantage for investors ? (remember those Daily Mirror share pundits ?)
Robert, your insight has been wonderful your reporting lucid...but steady on. As a taxpayer, you expect me in the form of the BOE to 'lend' money to commercial Banks at a rate of their choosing (low), so that for a healthy profit they can lend it to a fellow citizen for their mortgage. The BOE is spot on here. There is a story somewhere, but it isn't that the BOE is doing its job. It could well be that we have a government who presided over the first bank run in 140 years and nobody noticed (yet).
I work in the markets affected and I'd like to say that Robert Peston's reporting has been timely and accurate. He didn't cause the run on NR. The bank's management did, and so did the governments and central banks whose policies have directly encouraged the orgy of speculation and debt creation. The credit crunch isn't over yet - it's just taking a pause. Chapter 2 starts soon.
"I don't believe Northern Rock did a lot wrong , except their business plan had no contingency plan for exceptional circumstances ."
Ummm...that's a bit like saying that you don't believe a compulsive gambler who bet all his friends' cash on black did anything wrong other than have no money in place to pay them back when it came up red.
Whole issue of BOE supporting Banks sounds fishy and needs to be look after by independent committee and for sure those are not FSA and MP's committees.
#47 Antonio - You clearly do not understand the offence of "market abuse". It may sound an easy term to bandy about, but in fact, under s.118 of the Fin Services and Mrkets Act 2000, it is a civil (and therefore easier to prove, but with no prison sanction) version of the criminal offence of insider trading. the offences for market abuse are: Acting on info not widely available, behaviour likely to give a regular user a false or misleading impression, Behaviour likely to distort the market.
It has to be in relation to qualifying investments on a prescribed markets. While that would include NR shares, the information was published fully on the news wires, so it is not acting on restricted info; the info was correct (NR had gone to he BoE for a loan as no-one else would lend) and would it have misled a regualr user? No, as there were already rumours circulating that a bank was in trouble (the same kind of rumours were swirling round A&L and have continued to do so).
So, no, there was no market abuse - and don't forget that it would be enforced by the FSA and due diligence (ie: not believing it would abusde the market) will usually lead to no action by the FSA, especially where the person involved did not gain from it (eg: by shorting the shares).
Easy term to throw around - perhaps it would be better if the term were understood.
Robert, your predictions have not materialised because there is sufficient liquidity in the system.
The BOE is not going to make it easy for the ones that took too much risk. It would not make for a fair and free from Govt. interference Banking system, now would it!
Robert Peston has a lot to answer for. While he did not cause the credit crunch, nor influence NR's business model, he most certainly did break the story in an uber sensationalist way, contributing to the fall in confidence in NR and directly in the run on the bank. Peston's comments are nothing short of chav-esque and not what is expected of the ΒιΆΉΤΌΕΔ. His latest mumblings on the Smell of the Dirty Banks is disgraceful and he should be brought to book forthwith. If he isn't, this tarnishes the ΒιΆΉΤΌΕΔ.
There are 6,500 jobs in jeopardy. They are MORE in jeopardy because of the low class reporting of Robert Peston. When will something be done about this ?
There seems to be a tendency to find scapegoats ina crisis. The BoE is a soft touch in this case. The Banks's remit is agreed by the Chancellor. The Govenor has a personal opinion on 'moral hazards', the only commendable and rationale agrument presented by a central banker. Mr. King deserves a Noble prize for his free market economic thinking. When the risk takers reaped the benefits in the boom, there was applause. Now that the risk premium has risen, why blame BoE. Wither capitalism!
Like many others on here, I find Mr Peston's reporting unbalanced, tabloidesque and at the very least, irresposible!
Quite probably, his sensationalist reporting is the catalyst behind the panic that followed!
So credit is "pricier than it should be", is it Robert? Pray tell, O wise one, what price "should" it be? And what makes you think you know the "correct" price better than the entire marketplace.
When apportioning blame, people talk of Merv alone for allowing inflation to rise sharply which required interest rates to rise sharply. There are 8 other people on the commitee that controls rates, who voted and kept them low. If rates needed to rise earlier to avoid this problem then blame them all not just poor Merv.
I think Paul Emery at post 49 is basically correct.
Except I do not think there is a pause in the credit crunch.
With the collapse of Net Bank in the USA we are seeing an acceleration of the problem.
Acceleration is a serious engineering function and in its early stages is difficult to detect, especially for politicians and Bankers etc, a Doctor of Engineering such as myself is well able to detect it. In its later stages acceleration leads to destruction.
It is similar to the quest for growth, a path to destruction.
Well it looks as if we are entering the next phase of the demise of Northern Rock. Slowly but surely the takeover artists are closing in for the kill. Pricing the prey will be tricky but Invisible Brown will not want the Old Lady involved as lender of last resort for too much longer. The political fallout will need to be limited and a "buyer" will be found. Apparently Lloyds may be in the frame but let us wait and see. As for Robert Peston tarnishing the
ΒιΆΉΤΌΕΔ yougottabejoking. The financial alchemists who have polluted global markets are nothing more than three card trick spivs. Unfortunately gullible punters in major financial institutions have bought in and now it is posterior covering time. Many innocent non-combatants are going to lose their jobs because of this stupidity and that is the real crime.
Ive never seen so much rubbish printed and talked about as over the NR and BoE issue.
As for RP/ΒιΆΉΤΌΕΔ role in all this, talk about shooting the messenger!
The fact is that the directors of NR are soley to blame for the crisis. They should all resign NOW. Their business model must have been written by a barbarian at the gate.
As for the BoE role, the use of taxpayers money to reward incompetant banks, must be accompanied by severe penalties to the banks directors.
Taxpayers money should not be used for shoring up ANY private sector companies, but I do understand that the whole banking system has to have public confidence.
The role of the FSA was/is woefull in the extreme.
I think the attack on ΒιΆΉΤΌΕΔ, Peston for sensationalizing NR is more of a "if anyone is to blame its you Mr. Peston more so than the BOE, King" i.e BOE is not out there to make sure bad biz models are backed by a central bank but if you want to play that game the press is far more culpable for helping cause the run by sensationalizing the issue.
It's not only appallingly stupid but completely irresponsible to lay blame on Preston for what after all is reporting the facts. In fact, he has been enlightening people to a potentially grievous risk- the very thing you expect a responsible bank would do! The responsible questions that SHOULD be asked is HOW COME these supposed responsible and upright institutions were able to take on all this toxic paper (WHY would also be a valid path of questioning if one wants to learn all about greedy commissions and bonuses), whilst portraying themselves as solid protectors of the peoples investments? Banking is a cosy cosy world with much back scratching going on. There is PLENTY of blame to go around here, but NONE of it for those who expose these "behind the cutains" schemes that now are blowing up. Netbank, UBS et al... watch this space for more being flushed into the open. And so they should be if we want a healthy banking system to be available to us, those who actually earn our money. Yes, there will be plenty of Banker and Political types who squeal and moan, that is because they are being held to account over (mis?) manageing/overseeing YOUR money. No one enjoys being exposed in so brutal a manner, but exposure is exactly what is requirednonetheless. Bravo UBS.
i am on the side of those who point out the ill-informed comment, from whatever source, and the style in which the NR issues have been reported(including in this blog) caused the run.
A run is not caused by the management...it is caused by perception. If the perception is that people could lose money then of course they are going to lose confidence and withdraw their fund.
As i understand it NR didnt have a liquidity problem. Normal withdrawals could have been met, it was only when the media started reporting a short term liquidity problem as a major crisis and suggesting that the run started.
It is amazing that people continue to entrust their financial well-being to sensationalist reporting from people who's only job is to sell papers/get hit's on their blog. still, i suppose thats easier than people actually trying to have some vague understanding of their own finances
GSM,(post 63)
what are you talking about?????
Banks, like all other businesses are out to earn a profit. to do this they, like all businesses, take varying degrees of risk. the higher thwe risk the higher the potential profit (or loss).
All that has happened in this instance is a misjudgement pof the risk of a particular area of the market which has caused a short term liquidity problem (not solvency) which didnt threaten anyone UNTIL (as you like capitals so much) the media started (as they so often do) a small problem to make it approach a crisis.
If the media simply reported the facts and didnt put commentary/spin on it to make a juicy story then we woudl all be a lot better off.
So Facts...not spin, not opinion, not trying to tell the future...Facts.
RP, and to be fair many others, hyped it up. Talked about emergencies, and created the run.
I am sorry GSM, since your post is well written, but i think you are wrong.
I am all for reporting which exposes illegalities but this isnt illegal, it isnt really even political...it is the BoE..traditionnaly the lender of last resort, lending to a solvent business which will most likely show profits this year, but which had a short term cashflow problem.
But that isnt how it was reported.
GSM,(post 63)
what are you talking about?????
Banks, like all other businesses are out to earn a profit. to do this they, like all businesses, take varying degrees of risk. the higher thwe risk the higher the potential profit (or loss).
All that has happened in this instance is a misjudgement pof the risk of a particular area of the market which has caused a short term liquidity problem (not solvency) which didnt threaten anyone UNTIL (as you like capitals so much) the media started (as they so often do) a small problem to make it approach a crisis.
If the media simply reported the facts and didnt put commentary/spin on it to make a juicy story then we woudl all be a lot better off.
So Facts...not spin, not opinion, not trying to tell the future...Facts.
RP, and to be fair many others, hyped it up. Talked about emergencies, and created the run.
I am sorry GSM, since your post is well written, but i think you are wrong.
I am all for reporting which exposes illegalities but this isnt illegal, it isnt really even political...it is the BoE..traditionnaly the lender of last resort, lending to a solvent business which will most likely show profits this year, but which had a short term cashflow problem.
But that isnt how it was reported.
The fallout from the Northern Rock circus continues. Invisible Brown and his dynamic Chancellor are already reneging on last weeks utterances designed to assure a suspicious public. It looks as if the idea to guarantee savings up to Β£100,000 has already been kicked into the long grass aka downgrading to an aspiration. How very New Labour indeed, say one thing and do another. The new policy is to provide 100% cover for Β£33,000 which is not much improvement on the current arrangements. You can almost hear the sighs of relief from Canary Wharf as the banks will now be spared the task of ponying up a much more comprehensive cover. No mention either as to when this Β£33,000 would be paid. Would it be days or months? Who has been leaning on who I wonder? Robert Peston I take my hat off to you for your restraint despite the humbug which is aimed in your direction.
I was a bank examiner and a banker in the U.S. for over 20 years. Let's look at the terms of the BOE's offered credit.
1 The rate is 6.75%. The Bank obviously doesn't want any "wise guys" playing the spread between an emergency loan and short-term paper. 0.25% on a billion or two is a significant profit!
2 The term is too short to support mortgage lending. You simply don't support 20-year mortgages with three-month money. That is one of the causes of this entire mess poor asset-liability matches.
The U.K. may need something similiar to the Federal ΒιΆΉΤΌΕΔ Loan Bank system. It is owned by banks and thrift institutiions (guilding societies). The owner institutions are entitled to get term loans from their regional ΒιΆΉΤΌΕΔ Loan Bank secured by qualifying mortgages.
And, as a Government Sponsored Institution, the ΒιΆΉΤΌΕΔ Loan Bank system has accss to the credit markets at rates above the U.S. Treasury BUT still below that of corporate borrowers.
The Chancellor of the Exchequer (CoE)said on 17 September that the Treasury and BoE had put in place arrangements to guarantee existing deposits in NR 'during the current instability in the financial markets'. Everyone has been wonderfully reassured by that, but wait a sec - whose assessment of financial market instability is this guarantee based on? And who decides when it is no longer current? It seems to me that CoE/BoE have employed some clever semantics which could easily transmute today's rock-solid guarantee into tomorrow's quicksand.
Hans Redeker, currency chief at BNP Paribas, has blamed the British media for British banks not taking up the BoE's 3 month loans offer.
'"Nobody wants to take up the Bank of England's three-month tender because of the stigma. They will be punished immediately by the markets," he said.
While the Bank of England says it will not publish names, there are concerns that the British press will unearth the story somehow. It is safer to stick to Frankfurt, where the ECB does not even reveal the nationality of banks coming to the window -- masking the picture.'
So, Robert, are you reporting the news, or are you creating it ?
According to other sources the UK banks have been borrowing on the Euro market instead - to such an extent it's measurably pushing sterling up. People seem to be keeping it quiet around here though...
HI tech RollsRoyce to build plant in Germany.
Jitters in our finance industry.
Two industries Britain is relient on for our future.
Get your act together G.B.plc.
Or is it time to sharpen my turnip knife and repair my spinning wheel in time for the cottage industry boom?
There's some talk on the comments about borrowing from places other than the BoE.
AFAIK this has already happened.
"EU sources say Britain's banks have been clamouring for money in Frankfurt, accounting for a substantial chunk of the β¬190bn (Β£132bn) lent last week in the ECB's variable tender operation. "It is fair to say they have been borrowing from the ECB on a very large scale. It's cheap, so why not," said one official."
See
You worry about nothing more than your own self importance, the banks will be fine as they always are, this is a mini crisis, why bother writing such an over the top scaremonher blog?
Emergency liquidity is said to be priced too highly .The implication is that this is squeezing banking margins for a period whilst they all recalibrate the risk and reprice the cost to each other. Surely this is perfect? We want them to survive but we also want them to take the hit not the tax payer . Why should the tax payer subsidise the bankers funding when it is they that got it wrong ?
"Credit is still pricier than it should be"
NO - NO - NO !!!!
The problem has been and still is, that credit has been cheaper than it should be - for ages !
My goodness!
What's all of the fuss about. Sub-prime this, money auction that! Where's all the cash gone? Who's had all of the cash? Come on guys, close the laptops, put down those monetry models and I'll tell you a tale that may enlighten you. It'll explain how we ended up here and how to put it right. are you sitting comfortably? Then we'll begin. There were these three bears. Spendy bear, Gold Card bear, and I Can't afford that house but I'll buy it anyway bear.
Now the three bears all went along the road merry as you like, and met mr rock and his mates mr barclay and mr nwest for tea and buns. 'I'd like a new car' said spendy bear, 'A new car', said a stern mr rock, as his mates mr barclay and mr nwest looked on in surprise, 'yes, said spendy bear, the bigger the better'. 'How much do you earn spendy bear' said mr barclay? 'I don't know, how much do I need to earn to buy a Hummer'. 'Forget it', said kindly mr Barclay, one of my mates will fill out the form and we'll get you that Hummer you so deperately need to take baby bear to school and back, which is of course a far flung mile from your home. 'Oh thanks', said spendy bear, I'll be on my way, and off he skipped up by the balls road..
'I neeed to increase the limit on my card' said gold card bear. 'I badly need some shoes from Jimmy Choo and a top from Armani, they're in the sale, and even though I don't need them and certainly can't afford them, they're a steal at the price'. 'Good thinking' said mr nwest, and his mates all agreed, this was a fine bear buying things he doesn't need in the sale. 'Any changes in circumstances at home'? Asked mr nwest. 'Yes, replied gold card bear, we have a cat now'. Oh no problem', said kind mr nwest, 'we'll increase your limit by a further 3k, buy the little fellow wee cat coat from gucci, and pay us back over the next thirty-five years at an annual rate of 14.bla bla bla percent'. 'Oh thanks ever so', said gold card bear. And off he popped up Albatros road happy in the knowledge that he'd never live to pay off his gold card.
'Yes, said mr rock, what can we do for you mr I can't afford that house but i'll buy it anyway bear'. 'Well mr rock I've seen this overpriced hovel in Fulham, which the agent says is actually Chelsea but they haven't gotten around to changing the name yet', and it's only Β£800k, and the good thing is that I'll be dying to get out of the place by this time next year because I can't even swing the cat we've just got around in it, but by then some other sucker will give me another 20% for it, that you'll loan him no matter what he earns, and I can move up again. Just one problem, I only earn Β£35k, inc. my London weighting allowance, per annum, please help me please mr rock!' 'Oh don't worry said a caring mr rock, we'll make up your income, sorry, I mean write down the income you'll require to service the loan we'll give you that is based upon a mortgage set over 1500 years but, and here;s the good news, is fixed for the first 2years, by which time you'll have to sell the property because you can't possibly afford to repay the real repayments when they kick in. But as you rightly said by that time some other silly bear will hopefully come along and buy it from you at an even more inflated price and we'll make even more money on the same property'. 'Oh thanks', said I can't afford that house but I want it anyway bear, and off he popped up purgatory road, stopping off at the grocers on the way home where he bought enough bread and water to last him for the next 2 years.
Der! it doesn't take an economic genious at the BOE, a contradiction in terms, to see that the housing market and economy was heading for a fall on the back of over-inflated house prices, usually set by just wet behind the ears estate agents, with their finger in the wind valuations that bear little resemblance to the true borrowing power of the purchasers they're selling to. Backed up by lenders who are breaking every rule in the book when it comes to doeling out mortgages that cannot possibly be afforded by much of the populace who's earnings lag behind house prices by a minimum of 5% percent and in some cases by as much as 35%.
It's also obvious that banks are tripping over themselves, in league with a spin government, attempting to hide the real sub-prime lending that is not just apportioned to borrowers with a risky credit rating but includes those who have borrowed more than they can afford to repay when interest rates rise.
The BOE raise rates! Save on the tea and biscuits boys and girls, don't even hold the meeting, think of the carbon footprint. You wouldn't dare raise rates no matter what course of the data implies you should take. America is setting the rates now. Crisis! What crisis? Independent! Not on your nelly matey! America sneases and we all catch a cold!
Also, It doesn't take a brain surgeon, or a whily pensioner for that matter, to work out that the first lender that takes up the BOE money auction loan will be the next Northern Rock.
On fear of rebuke, anyone out there who says that the financial crisis is over, and that we're in for a soft landing is undoubtedly misleading the public. Better consult my Hansard tomorrow. The only way out of this crisis is to put tighter controls on future lending, coupled with a realistic reduction in house prices, already happening, despite what anyone says, bid 5-10% percent under the asking. Vendors slash and burn if you want to sell.
Added to this, the government, if one can actually call it that, more akin to Spin United with the Marks brothers playing in midfield, adds fuel to the housing inflation flames by introducing HIPS. What the hell is HIPS? I hear you say. Well it's a sort of survey. Isn't it? Is it? Are you sure? No? No one really is sure. But What's new! Can you still hunt foxes? Well it's similar, you can but you can't. you know! It's the law but no one really knows what it is, it's a bit like the metric system, but you can still use pounds and ounces. It's a survey but it's not, well not for every house anyway!
I think the hounds can follow a dummy fox, and if they see a real one by mistake then I think it's OK if they chase that because they didn't really intend to go hunting.The fox just turned up, perhaps it was lonely and fancied a bit of company, you know, I miss my old friend the hounds. Gi us a Job?
I'm not sure on either count but anyway you know what I mean. But who cares except those poor country folk who tend our countryside which they won't have much longer if old Prescot has his way. What ever happened to him? Just goes to show as soon as poor old 2 jags leaves we find ourselves in a financial crisis. First time he can say 'It wasn't me'.
So Please! To all the finace gurus out there. DER! This is nothing more than sweety shop accounting. No need for a first from the LSE for this one. You cannot spend more than you earn! House prices can only, to a point, realistically rise inline with incomes. You can't continue to hit the credit cards without reaching a point of redemption.
Credit can only fuel economic growth in the short term. And there's no such thing as interest free credit. You pay! You always pay!
Hello! The much maligned U.S., I'm english, will lead the recovery, they've been through more financial crisis than Gerald Ratner, and are much better equiped to deal with it the rest of the world. The euro and pound are at very false highs, driven by the Forex, so take advantage while the sun shines.
Will we feel the pinch? Hello!
No one in the U.S. is going to buy brit or euro goods, not that we export that much to them anyway, but there's a big knock on effect, at 1.4 euros to the dollar, and over two to the pound. The best thing coming out of the UK is Sottish whisky and the range rover sport, and we don't even own the latter company, the yanks do. As for Europe, I don't think the french are going to lead a mammoth recovery on a 35 hour week producing Evian and dodgy hatchbacks, or the german powerhouse that's controlled and held back by overly high wages and welfare costs. nice work if you can get it. And then of course there's the rest of our european partners all beavering away and producing, er,now let me think. I know it's something to do with with subsidised mountains of produce, I'm sure it is. And then there's the italians, fabulous clothes, great cars, gorgeous women, or men, whatever takes your fancy. But I'm back to those bloody credit cards again, so not much there. The 430's taking a tumble just now.
I know. I'll check for the solution with one of those genious economists who with the aid of reams of data, as well asd help from the countless financial minions at there beck and call, and not forgetting the untold technological resources and financial models that they drool over, yet still never saw this crisis coming. When any pensioner with an ounce of common sense could have forseen this occurrence a country mile away, spec savers permitting of course. Indeed, judging by the demography of the ques at Northern Rock, there seems to be an abundance of canny common sense laden pensioners around so befriending a few of those shouldn't be a problem. did this government really offer them a 75pence increase in there pensions or am I dreaming. No! no one could possibly be that stupid and out of touch with reality as to even consider proposing a policy like that, I mean, it would have to go to consultation before that proposal hit the streets.Yes sure it would! wouldn't it? I digress, again, I find it helps take my mind off the crisis.Pensioners, that's who I'll consult, they have the answer. Quick find one before they all go.
Yes that's it! I suggest the gurus at the BOE consult with a few Saga members before making any more speaches or strategic decisions on monetry policy. They'll undoubtedly be of help when attempting to formulate much more prudent and realistic monetry policy than has been afforded to us by the independent BOE and it's economic advisors. How many economists sit on that panel? Goodness me! Glad I'm not studying under any of that lot or my finances would be in a mess. If you can manage it guys, count the cups at the next meeting, something just doesn't seem to add up.
All in good fun. James
So we all have been allowed to smirk over Northern Rocks flawed managements business plans, but we are still in self denial about the british sub-prime borrowers.
From carefully listening to these smart borrowers who have never wanted to repay any capital, but just pay 'interest as this is cheaper than rent', and they reason that if they default somebody else will bail them out. The latest dillusion they have come up with, is if a bank fails then the loans where they only pay interest will be cancelled, and everybody else paying off capital are fools. Perhaps the FSA need to rebrand an interest only mortgage, as a perpetual never ending (subprime) loan vehicle.
Then perhaps the lenders could attempt to quantify how large the subprime bubble has grown over the last decade. Robert Peston is correct in still worrying this smelly mess until it has been resolved.
Notification as to whoβs borrowed from the BOE should be deferred for 90 days?
Whilst I know nothing at all about banking it would seem rather stupid to place a sign outside of your business informing everyone that youβve temporarily run out of cash.
The stock markets are back up again due to speculation that the fed would cut interest rate.In my view, the fed should not cut interet rates. Except financial sectors, all other sectors such as technology are doing well at the moment.Besides, corporate earnings are looking ok. Also, the employment report is looking healthy. Further rate cuts would upset few things such as inflation and falling dollar.The fed should consider these things before announcing a rate cut.
Hi Robert, I love reading your blog - i really dont understand all the criticism !
Hello Robert
This is rather a late post to this thread but I have not seen it expressed in the comments of others here.
The real stink is that banks have been creating their own fiat currency. They do this in a convoluted way to avoid the attentions of HMRC and others.
The process runs like this:-
A debtor defaults, lets say for Β£10k for this exercise. The bank assigns the debt to a third party 'security' firm (the new name for debt collectors). It sells the debt for about 10% of the headline figure, Β£1k. It writes off the debt and gets 30% tax benefit on the Β£9k write off.
The security firm then write off the Β£1k and wait for a year or two. Then they go to court and get a judgement for Β£10k. the courts go along with this part because the debtor is obviously the villain because they owe the money. Note that no documentation of the assignment is necessary beyond a simple statement saying the debt has been assigned.
The new shiny Β£10k debt, endorsed by the courts, is then bundled with lots more into a security.
Now this is the clever bit, that security, with a brand new identity, is sold back to the bank for 20% of the face value, Β£2k. The security firm are happy, 100% profit in a year or two, the bank is happy because it then uses the security as collateral against borrowing real money at 60% to 70% of the face value, Β£6k.
This of course is fraud, the obligation to pay cannot be separated from the underlying account (written off for tax benefits). The identity change fools HMRC because all the debt has been written off. The bank have in effect created their own money, very naughty.
This will hit the fan, the FSA are trying to hide it (they sanction it), the courts will be livid at their abuse and the fiat currency will evaporate leaving more than Northern Rock stranded.
Interesting post, I'm sure it's not the only way banks make their own money.
Surely BOE's loan offers at higher rates are a safty net for the customers of Banks temporarily blighted by their "sub-prime" risk blindess.
Hence its right to offer them, and its good news that no Bank has been caught short enough to have to use them.
Responding to Thalia May, the interests of the BOE are most certainly those also of the government and have been for hundreds of years. Remember that the royal family basically owns the BOE and before 1689 were the government, Georgy the Turd notwithstanding even though even he had to eventually listen to parliament and let the American rebels go their own way. If you want a real taste of absolutism, take a short Channel boat ride to Sauk. The queen owns that too, lock, stock, kit, and your laundry. Same story also for you tobacco, as the government through the queen owns the British American Tobacco monopoly cartel.
Re impact of weak $
I think people are missing the point exactly how damaging this is to our exports. We are a small company who are 100% export orientated and sell to markets either in $ or in Β£. Either way we loose both ways with the weak $. People seem to think it only affect companies who deal with the USa but this is not true it affects virtually the rest of the world outside the EEC.
If it goes to $2.40 will the last exporter to go out of business please turn off the light!
The crisis in the sub prime markets was predictable, inevitable and avoidable.
Irresponsible lending by banks and building societies (up to 7 times income) mis-selling by questionable FSA's and the overpricing of housing all play their part.
One well known national house builder I visited last week is offering for example, a three bed roomed semi at Β£157,000. As a sweetener they offer a kick back of Β£12,000.00 in the first year. Why not take it off the price of the house? Because they want the mortgage loan to be as high as possible for the reason that their commission on it is higher as a result.
The practice of dumping money at the local building society which then provides the valuation and supplies the mortgage to the client (loan sucker) referred by the builder, works against the interest of the buyer and all contribute to higher loans, higher interest charges and higher risk.
Now that the sub prime debt bundling and selling on has in itself become very high risk for the banks and building societies, maybe they will consider more carefully to whom they lend, the conditions of special relationships with builders, and the real value of the property they are lending against. The result would be lower house prices on new builds and less risk all round.
It wonβt happen.
What will happen is that interest rates on mortgages will rise so the banks and B/Sβs recover the losses and the consumer at large will foot the bill as usual.
Corporate irresponsibility, huge bonuses and greed all paid for by the consumer. A good business, Banking.
John Pearce
Richmond, Surrey.