The Big Short on my life and those of others

The patterns I see

When it comes to financial matters, I have always said my father is a brilliant accountant, but it did not come down through the genes. Successful as he was in his profession which he still practices on behalf of the Anglican diocese in which he resides, only one of my siblings took a career path that had any financial component.

However, I somehow have an affinity for noticing patterns, things that align and things that seem to be out of place, unfortunately, I have never exploited that knowledge to the full as over time I have watched things that were once an inkling become an industry where if I had been more driven by my deepest premonitions, I would have been one of the pioneers. No regrets.

In March 2000, I travelled to Munich for an interview with the now defunct Compaq Inc., I decided to spend a week there and during my visit I met with a futures trader who was heavily leveraged in dot.com stocks. My reading of the situation then was things were about to collapse, simply because I noticed a pattern.

My advice to him was to reduce his exposure, he looked at me with incredulity, within weeks the dot.com bubble burst and the rest is history.

As it touched me

I have a more personal story about how I was affected by the markets, just less than a decade later. I bought my apartment in Amsterdam 2001, having given my estate agent 6 weeks to complete the deal to pick up my keys on the 1^st of November 2001.

It was a 105m², 7th-floor apartment with large windows overlooking two old Amsterdam harbours, a wonderful place by any standards. My mortgage was at inception the same as paid for rent in another part of Amsterdam for about 18 months.

The trajectory as it then was, whilst the housing market seemed overheated, the interest rates were going down, and this happened progressively every two years until about 45% was shaved off my mortgage in 6 years.

That other marker

Meanwhile, there was an underlying current that should have sent alarm bells ringing that I ignored until it was too late. My mortgage was undergirded by a life insurance policy that I paid a hefty sum to every year and in the mortgage term of 25 years, it was supposed to have accumulated enough to pay off my mortgage.

Each year, accounting for administration costs and much else, nothing was being compounded into the policy, rather, I was seeing less of what I put in that I had to ask for a review of the conditions of my mortgage to ensure I had not been defrauded.

Everyone who had worked on my mortgage had already walked away with their commissions as the signs of a financial crisis appeared on the horizon with the sub-prime mortgage defaults in the United States.

The tsunami I could not outrun

I could not ignore what was happening, yet I felt like there was an earthquake somewhere far away and the water was receding from the beach in anticipation of a tsunami I could not escape, it was scary.

As so I wrote in August 2007:

Blog - Dishonest lending clue to market tremors

Then casually in October 2007:

Blog - Local situations in global straits

The tsunami had already come in and swept me away from my apparent comfort zone, a revision of my biennial fixed term mortgage saw a rise of 50 basis points, some consequent outgoings of about €550 a month in addition to what I was already paying.

No particular fault of ours, only the banks shoring up their books having messed up and gotten bailed out, with none of the people in charge of this debacle going to jail for anything, if any even got to be questioned for their atrocity.

Swept away

By then, it had become a case of Fixing Capitalist Errors with Socialist Favours which I wrote in December 2007.

Within two years of that, I was diagnosed with cancer, got treated, recovered, but the markets had dealt a blow to our livelihoods, the job markets also began to introduce unfavourable filters to eliminate foreigners from consideration where we once freely had access.

In the end, I sold my apartment at a loss after 10 and a half wonderful years, though barely covered by the insurance and eventually returned home to the UK to rebuild my life.

The Big Short

Earlier today, I went to watch The Big Short which is described as a biographical comedy-drama, and whilst I will agree it is biographical and it is a drama, it was no comedy when we look at the disaster it caused in millions of lives whilst those who found out what was wrong with the system walked away laughing to the bank.

At worst, the banks have been fined billions by the regulatory bodies, but there have been no major indictments, the legislative framework that was to help avoid a similar collapse of the banking system has been watered down and the banks have more or less returned to their brand of casino banking with new banksters slinging guns of dubious provenance as products of the highest quality.

We’re back on that merry-go-round of atrocity for which the generality of the populace has been made to pay dearly for in austerity and worse, whilst the politicians and the banks waltz away in illicit copulation.

Yet, in understanding this rotten and corrupt enterprise a bit more, history is probably going to repeat itself worse than before and the criminals will once again walk free.

Woe betide them.

Dishonest lending clue to market tremors

Central bank influence

I am no economist but I know that one has to be a little smart about the handling of money and investments.

Somehow, I had be quite concerned about the way hedge funds and their private equity counterparts have been buying up companies in takeovers and buyouts with highly leveraged instruments that heaps debts on acquisitions and sells on debt though systems that eventually have one institution holding the baby with adequate baby nourishment.

Interest rates have been going up in all regions for the past few years as Central Banks work hard to keep inflation down with the blunt hammer of interest rate manipulation and the assessments written in a language that would make parseltongue sound like baby chuckles.

Central bank to the rescue

What really bothers me is the way these sophisticated debt instruments have now come full circle as these debts cannot be sold on to raise more capital that the markets are presumably suffering a credit crunch, as if that is not fearful enough, the Central Banks in Europe, the Americas and Asia have pumped $326.3 billion into the markets to maintain investor confidence to no avail, the markets are falling like flies.

For Central Banks to be pouring money into the markets in this manner, the one side of maintaining investor confidence should not obfuscate that deeper issue of the possibility of Central Banks knowing a lot more about the problems inherent in the market than they are letting on.

Sub-Prime lending farce

It is the accepted legend that this whole debacle was caused by problems in the sub-prime lending for mortgages in the United States. Basically, people who normally would not qualify for loans and mortgages are allowed to take on these liabilities with lax due-diligence and higher interest repayments with the banks hoping to cash in on these higher risk stupidities.

With rising inflation also fuelled by cheaper credit coming from the appreciated value of existing homeowners, interest rates are raised to contain inflation making sub-prime loan repayments unserviceable.

Avalanche effect

Foreclosures take homes from the borrowers who cannot keep up and banks are left with debts that cannot be repaid and houses that cannot been sold at a premium to cover their losses – the avalanche effect has had banks reeling from exposures that has tightened liquidity and in some cases closed banks.

I am not convinced that we have seen the extent of banking exposure to sub-prime loans and the existing contingencies obviously have not been enough to give investors any confidence as they are selling up before thy get more caught up.

Thankfully, it is Friday, another trading day this week could have meant a complete meltdown – well, something close to a run on the markets.

Dishonest and fraudulent

Some people have talked about predatory lending practices that take the inadequacies of borrowers, sweeten up their circumstances to fit within lending parameters to derive commission and profit at completion of the deal but leaving the borrowers with liabilities the brokers know for sure they cannot handle.

The Financial Times yesterday gave an insight into the workings of this sub-prime lending activity. I will quote the text exactly as it appears in the article – Payback time.

"At the height of the US sub-prime lending boom, taking out a mortgage could not have been easier. Low credit score and history of bankruptcy? No problem. Income too low to qualify for a mortgage? Inflate what you earn on a "stated income" loan. Nervous that your lender might check up on your "stated income"? Visit http://www.verifyemployment.net

For a $55 fee, the operators of this small California company will help you get a loan by employing you as an "independent contractor". They provide payslips as "proof" of income and, for an additional $25, they also man the telephones to give you a glowing reference should your lender need it.

But perhaps the most absurd aspect of the US subprime mortgage market in recent years is that lenders became so generous with credit provision for out-of-pocket borrowers that very few checks were ever made."

If this is not completely dishonest and fraudulent, I wonder what is. In all the analysis and reckoning from market experts everyone seems to have an explanation apart from the real truth, people have been dishonest, banks have collaborated in perpetuating a lie and conducted financial transactions that are no more borderline criminal whilst Central Banks are now trying to clean up the mess without addressing the cause.

This problem would continue until honest, principled, truthful and trustworthy men step up to root out fraudulent practises in banks and lending procedures whilst ensuring that sensible due-diligence guidelines are adhered to for every loan offered.

Now, this should not mean that credit should not be available to all who seek credit, it means if doubts of recoverability do exist more should be done to safeguard the manageability of the loan when times do get tough – if that cannot be done, it would be a field day for loan sharks and that would be unacceptable.

NB: Like I said at the beginning of this write-up, I am no economist and this is not an exhaustive analysis of the sub-prime lending debacle or market volatility, it is simply a layman’s perspective on contemporaneous issues.