Cleaning up tough Bare Stains

No prophet of economics

The layman observer economist in my dreams suddenly acquired a mitre to my collection of hats.

In fact, the economist part is not so much the science but the basic observation of human character and nature; the mitre infers the accident of prognostication.

Before anyone beats a path to the church of the prophetess of sub-prime consequences, I have nothing to offer you about the lottery numbers for this weekend or any other weeks in the future, the ones for last week, even you can find out.

Dishonesty breeds distrust

I had before mentioned in a series of blogs regarding the sub-prime mortgage crises; that the activity started off with dishonesty regarding means and ways, it lead on to greed regarding acquiring economically unsound customers and this was given a false copper bottom by slicing up the debts and repackaging it with the best ratings on the market.

In a bull market, a good number of banks bought that bull and have now been caught out without the bull but a pair of paper marché horns.

For over six months, banks have been wary of what other fellow banks have gotten into and how much of bull or horns they have got left. So, no bank is willing to lend to another just in case the money goes into a black hole – that is the loss of trust.

Throwing in everything

The horses have already bolted, I say, meanwhile, someone is trying to lock the gates anyhow. The black hole no matter how minuscule was created when banks and customers veered from trustworthy contracts at the beginning of sub-prime deals and this is just one of the many causative issues in what we now know as the credit crunch.

Escaping the gravitation pull of the black hole is tending towards to seriously expensive with almost $1 trillion thrown to the beast with sub-prime, credit-crunch, recession and inflation heads in monetary stabilisation, socialist amelioration, write-downs and bale-outs with no let or give of respite.

Bare Stains

So, whilst the Northern Dust in England received emergency funds that resulted in a bank-run last September, we have Bare Stains (Bear Sterns) granted such emergency funds sending a shudder through the markets and giving us a feeling of foreboding that we are no where near the end of the economic crises.

If honesty were still not the best policy, especially in business, what other policy do we have to do business and avoid this mess?

These are just bare stains which cannot be easily wiped off with emergency funds; the real muck is still somewhere out there waiting to be unveiled, no amount of throwing money and policy at it would solve it till the truth is out about how everyone got caught out.

Fixing Capitalist Errors with Socialist Favours

Reset and elevated

Prologue: I am not an economist, this is what I understand of the issues with an opinion of how it affects me.

I had done mental calculations but it was yesterday that I saw the exact figures as my account yielded what was literally a 50% hike in monthly mortgage payments after a reset which had me enjoying a fixed payment for two years and cumulative reductions of about 35% over the last 6 years.

I am thankful for the providence that allows for these obligations to be met, the matter is one has diligent kept up the obligations come rain or come shine.

The sub-prime mortgage problems generated by greed, dishonesty and suspect economic ideas in the United States is very much like a 10.0 magnitude under-sea earthquake creating tsunamis on shores so far away.

Northern Dust to dust

For example, the pulverisation of Northern Rock to Northern Dust was not so much about their being exposed to these sub-prime mortgage instruments but because banks had lost basic trust, confidence and transparency between each other – not knowing how exposed their co-banks were to these problems they were wary of lending to their fellow banks just in case the money went down a black hole.

Some banks could not even place a clear cost or value on the assets affected by sub-prime exposures such that the ability to meet obligations was almost indeterminate that banks have to cover these uncertainties with write-downs that would probably crest $400 billion.

When people then queued up round branches of Northern Rock Bank to take out their money as people had rightfully lost confidence in the bank to function and protect their savings, it was almost impossible for the government and financial regulatory institutions to allow economic realities to dictate the course of events as the market coughed up poor management strategy and liquidity controls – they stepped in to guarantee everyone’s deposits and now that is GBP 25 billion lent to a bank that might not be able to paid it all back.

Technically, the bank has been nationalised even though we are being regaled with tales that takeover bids are the better face-saving deal to safeguard taxpayers’ money.

Shareholders are wary of anything that would make them lose money, but half the problem is the relentless drive to grow shareholder value and the forces exerted by the markets to perform or lose market viability – their market model fell short and government intervention has been nothing short of a socialist solution to a capitalist problem.

Liar loans made true

The source of all these problems is driven by “liar loan” mortgages made in America to people who have over-stated their incomes and means, banks that have not properly verified the data provided and loans made on the thinnest of leeway for repayments so as interest rates have increased, fixed rate mortgages have come into an upward reset period where many would be blown-out by their inability to meet their obligations leading to difficulties and foreclosures.

This debt has been traded on as sliced-up deals called Collateral Debt Obligations and fancied up by ratings agencies as A-grade instruments which financial institutions have soaked up - the tendency for people to default on these loans means this A-grade instruments are beginning to look worthless.

The President of the US along with is economic team have forged this plan to help certain house-owners who meet a certain credit score but are without the full means to keep their homes by freezing interest rates on adjustable mortgages for 5 years.

This big-time big-government intervention does not really address the core issues and may not save the homes of many who would not be able to scale the hurdles needed to qualify as those who have been prudent and smart about their mortgages like myself get hard done by – The Economist in March asked for markets to resolve this rather than politics.

One must not forget however, that Hillary Clinton – the aspiring Democratic Party Presidential contestant had asked for something to be done about this sub-prime crisis in March.

One can only say this move to fix capitalist errors with socialist favours will lead to more long-term problems – this case has not begun to unravel yet.

References

Subprime: first a crunch, now a catastrophe? – www.thisismoney.co.uk

British banks to reveal credit crunch hit – www.thisismoney.co.uk

The US Housing Bubble Timeline – WikiPedia

Bush details housing rescue plan – BBC

Credit losses 'may reach $400bn' – BBC

Sen. Clinton calls for subprime mortgage action – Reuters

Beware Miracle Cures – Economist

In subprime meltdown, lots of blame to go around – Reuters

White House unveils subprime rate freeze plan – The FT

Critics from all corners quick on the draw – The FT

Dishonest lending clue to market tremors – This Blog

Baling out trust

No man’s worthy word

Never has there been a situation where a bank and the whole financial infrastructure that supports the banking environment wanted to seek refuge and find strength in the credo “My Word is My Bond”. This is the motto of the London Stock Exchange which in Latin is “dictum meum pactum”.

It takes no rocket science of convoluted mathematical equations that govern the arcane and complex financial instruments popularly known as Collateralised Debt Obligations to realize that the man ingredient for any business transaction is integrity based on trust.

Trust is key

This may sound old-fashioned, but there is a need for trust in many undertakings of everyday life especially the old-time favourites as your priest, your doctor and your bank manager because they underpin a sense of guidance in life, quality of life and affordability in all eventualities; things that have subsumed into a compelling cynicism of humanity in recent times.

The credit crunch that is suffocating the financial markets like a large cloud of rolling mustard gas is a victim of the loss of trust, the fundamentals that allow banks to run through inter-bank lending mechanisms has seized up because banks cannot assuredly guarantee that the borrower banks are not overly exposed to the sub-prime mortgage frauds in the United States.

This becomes a problem when the borrower bank relies more of this borrowing facility than on savings it has accrued, such that in the case of Northern Rock the Bank of England instituted its first bale out since 1970.

Collapse of trust

This was supposed to signify that the Bank of England believes that the situation at Northern Rock is not as critical as to be irredeemable, in fact, it is confidence reposed in the bank and its business model that once this credit crunch is over the bank would be able to continue to continue business as usual.

Unfortunately, after the pensions mis-selling and other financial debacles where the governing bank, financial governance institutions or governments have been slow to guarantee or underwrite the risks that trusting citizens have had in their supposed protectors, people are no more willing to listen to assurances from the bank, the Bank of England or the government.

It is therefore no surprise that people have queued up at branches of Northern Rock to withdraw their nest eggs because if the bank does collapse the people would get nowhere near what they have put into the bank.

Vicious circle begins

There is too much of a track record to show that people have great cause for concern as they have shown with taking about GBP 1 billion out of the bank such that its value has fallen by a third which would eventually increase the need for the bank to draw on support from the Bank of England further diminishing confidence in the whole banking system, the makings of a vicious circle.

We have not heard the last of this matter because there is no doubt that more banks are exposed and as still using all sorts of financial subterfuge mechanisms to cover their exposure till it becomes untenable and the paps of the Bank of England are up for another suckling bank that has been engulfed by a global crisis that shows no sign of going away like a bad storm.

All because of the collapse of trust, the core ingredient for businesses to survive regardless of papers, contracts and assurances.

We need to return to these old-fashioned elements of integrity and good reputation because therein lies the redemption of this economic fallout – the quest for filthy lucre must not be above the need to maintain confidence and trust by doing things according to the rules, transparently and honestly.