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Articles By John Smith |
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Don’t bank on it! (June 2nd 2008) |
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You could always bank on a bank. It
was as safe as houses. Or rather it was until a combination of banks
and houses got their knickers in a twist. A bank called Northern
Rock (standing for rocky not solid) started to hand out mortgages at
125% of the house value. Lucky recipients used the extra 25% to buy
flat screen televisions for their new flat and in order to fund this
outflow to these new yuppy flat dwellers in Newcastle and Manchester
city centres, this whizzy bank borrowed on what we now know was the
wholesale money market. That was done in preference to attracting
savers which was the way the old fashioned building societies
worked. All went well until the world discovered a whole raft of poor people. We knew about Africa and India and other places but we did not know about the shanty towns and slums of North America. How could we, we only see the affluent bits and after all the whole place must be rich since otherwise how do they fund all that military might abroad? What made the American poor different to the African and Indian poor was the smart tactic of persuading them to borrow money like the flat dwellers of Newcastle and Manchester. Only they had less chance of paying the money back. Furthermore, their “debts” to the loan sharks were bundled into “exotic packages” and sold on to the likes of Northern Rock. That was the wholesale money they went for and when the balloon went up, it had to be paid for faster than the yuppy flat dwellers could pay back their 125% mortgage. This little exercise proved to be both good and bad. Good for the exotic bankers who made huge “profits” (see accounting terminology) and bad for just about everyone else who coined a collective phrase “credit crunch”. Today Mr Bradford and Mr Bingley are also in trouble and the boss man has angina or maybe heart-ache and most other UK banks are having to re-finance their activities by appealing to their shareholders for more funds. They call it a “rights” issue. In truth it is more the opposite since they are not right in the corporate head. |
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