Akin Akintayo: sub prime mortgages

Seaworthy in stormy seas

One has to wonder if Central banks are so beholden to the markets that other fundamentals are ignored to our peril.

In his speech yesterday to the Institute of Directors in Bristol, Lord Mervyn King, the Governor of the Bank of England suggested that the policy framework of the Bank provides a seaworthy vessel to reach the calmer waters.

Indeed, I truly hope so, but it is one thing to have a seaworthy vessel and another to be able to weather the stormy seas – there is no doubt in anyone’s mind that the seas are hosting Force-10 gales and some vessels are out at sea sending in distress calls.

Nowhere is the distress call so evident than in the United States where the hard-graft laws of economics and monetary policy are being defied by political expediency.

Inflation still matters

To a layman like myself, I have been made to understand that the central bank lever used to control inflation is usually the interest rates, with inflation running nominally at 2.1% in the UK, 4.1% in the States, 3.1% in the Euro area and 6.9% in China [Economist] – I do not think this is the time to throw money at consumers such that they have more spending power to raise inflation even more.

This means the Bush economy stimulus package, which is to boost the American economy by 1% of GDP (about $145 billion) may not have the money in the hands of the people and businesses for at least another quarter and is probably a little too late whilst it could get stunted through the legislative process.

No one can say that this move is the right one to take until we see the results at the end of the implementation - it is a gamble as good as the Iraqi surge and George W. Bush is one gambler if you ever saw one.

Interest rate panic

Since as it appears, the interest rate mechanism is very much the hammer by which every economic problem nail is hit; but which nail should be hit when inflation is soaring and markets are in free-fall turmoil?

Time will tell if the benchmark interest rate cut by 75 basis points by Ben Bernanke of the United States Federal Reserve yesterday morning before the markets opened was the right thing to do.

I am not convinced by that move and it looks like panic or as the Economist opines “Desperate Measures”, methinks the hammer has hit the nail dead-centre but that nail is on the thumb.

It is really bad out there

I cannot however ignore the opinion of the likes of George Soros who suggests that the current market crisis is probably the worst in 60 years that the question about recession or no recession is leading to a point that analyst denials would have us deep in recession before we realise we are drowning.

Before I get into any analysis beyond the remit of my understanding, I would wait and see how the thumb goes black and blue after that almighty groan of excruciating pain and the mandatory dance-around.

Did I not say this thing has a long way to run? We are preparing for a long bear market and seriously rough seas. Whichever Bank Governor still has a nerve , please hold it.

Baling out trust – September 2007

Local Situations in global straits - October 2007

Fixing Capitalist Errors with Socialist Favours – December 2007

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