Well Adam, What a mess you've got us into! I can remember the secondary banking crisis of 73-75, but I can't remember any queuing outside banks. Slater-Walker, Keyser-Ullman London and County and all the other fringe banks had no high street presence. My Granparents told me a lot about the depression, but they never mentioned anything about a run on the banks, because there wasn't one. (America and Germany had a protracted run on their banking system though). My Grandparents weren't even at school when the banking crisis of 1907 occcurred but that was confined to North America. So we need to go back to the 19th century for a British historical president to what I have seen over the past few days. 1893 and the Barings crisis that nearly brought the banking system down when it lent money recklessly to Argentina was probably the last time British people queued outside banks to remove all their savings. Adam, I'm afraid we are definitely going to have a financial crisis and probably an economic one too. This is the end of a credit expansion which began in 1982 and has continued with varying degrees of euphoria since then. Its not the Jarrow marchers or the Oklahoma farmers that come in to my mind at those darkest hours during my worst nightmares, it's the German people in Berlin in 1923. Get your wheel barrows ready because you are going to need them when you are paid. Adam, I'm afraid you are going to prison.Your crime in my eyes is merely one of stupidity and lets face it there are plenty of stupid CEO's. Stupidity is however not what you will be prosecuted for. On Thursday and Friday you blamed Northern Rock's fate on the credit crunch. Northern Rock's problems do not stem from this, although they have been exacerbated it. Northern Rock's problems stem from a deliberate mismatch of assets and liabilities- an amateurish mistake. If you borrow short and lend long then you are asking for trouble. However had you been conservative in your lending practices you would have got away with it. Lending 125% on a house at 5X earnings to people with poor credit histrories, is not however conservative in my book. I personally wonder just how much your assets (the loans you made) are really worth. The unwinding of the credit bubble is going to take 5-10 years and its going to be very painful indeed. Northern Rock's savers may get there money back this week, but there will be considerable financial distress in years to come. The people will be looking for scape goats, and you will be top of the list. Although I don't doubt your integrity I doubt your mortgage book stands up to scrutiny and that will give prosecutors enough ammunition. Adam, don't worry though the cells will be full of bankers, particularly Investment bankers and you be will be able to have conversations about mortgaged backed securities and collateral debt obligations 23 hours a day. Wishing you all the luck in future, because you are going to need it. Yours faithfully Cardano
Bit harsh! I suspect most of their dodgy mortgages were packaged up into CDO's, so Northern Rock won't need to care if they default. Perhaps the regulator should be held to account for letting borrowing spiral out of control? Aren't they meant to promote stability and confidence in the financial markets? It seems the money markets are broken at the moment, LIBOR is > 1% above the BoE base rate (and there's nothing the BoE can do to lower it - even if they loaned out to everyone at 5.75% they would soon have to sell all the gold reserves to maintain that rate!). The UK is in for a really rough ride imo. Wait for property prices to crash once mortgage rates hit 7%.
King - I am deeply hurt by that comment. As a libertarian I stand against everything the authoritarian right stand for. The point I am trying to make here is not that Applegarth should go to jail, but that daily mail readers will want someone to pay an he is at present the most obvious target. As the tide of a financial boom recedes, the extent of fraud and mismanagement becomes apparent, so the scapegoating starts. The roots of this crisis lie squarely at the feet of Alan Greenspan. He is however bombproof and will only pay in the harsh regard in which historians will hold him. Some one always goes to jail after a financial boom. Think of the board members of Enron and Worldcom after the internet bubble. Think of Michael Milken at the end of the 1980's boom, think of the problems Jim Slater faced after the Barber boom collapsed (and his partner was a cabinet minister - Peter Walker). If he had not won his case against extradition to Singapore, they would have thrown away the key. Going back further think of Ivor Krugar the match king who got an 8 year sentence after the wall street crash. Gareth, Absolutely the defaults won't matter to the Northern Rock as they are mostly packaged on. However I believe there is a clause in these MBS to return mortgages that default within a given short period. The rapid expansion of the Northern Rock's mortgage book may very well have been an attempt to bury these returned defaulting mortgages in an avalanche of new business. This is purely speculation though
The MBS won't default that quickly, there's a good year before meltdown imo. I don't think any of the banks will be held to account for this - they have done nothing wrong legally. The truth is that interest rates should never have been allowed to fall to 3.75% and the FSA should have imposed limits on the maximum salary multiplier + stopped these self cert mortgages. That would have stopped prices rising by simply denying buyers the opportunity to offer over the odds. There's a nice article on wikipedia about this, which says 17 years later in Japan after their housing bubble, real property prices are still below what they were back then... and apparently the UK prices are currently on par with the height of the Japanese housing bubble. Combine this with the fact rents are now about 40% lower than current mortgage rates, it all points to an imminent crash. Question is, will you sell before this happens?
That's a little harsh, since according to the Telegraph over the weekend, Northern Rock have 0.57% of their customers in arrears, as opposed to an average of 1% over the sector as a whole, Thomas
Thomas I think there are two errors in that comparison. 1 Comparing inhomogeneous groups 2 Comparing select default rates (NR only has recently granted mortgages on its books) to average default rates It wold be very interesting to see comparisons of default rates by duration of mortgage. Getting this inforamation after the MBS's have been sliced and diced 3 or 4 times might be difficult though
The fraud investigations begin http://money.cnn.com/2008/03/08/news/companies/countrywide_FBI/index.htm I wonder how many bankers will end up in jail by the end of the credit crisis. I wonder how many quants will be forced back into academic mathematics too. The return of heavy regulation and 1950's style conservative banking is bound to be the price of a bailout.
At last it looks as if the Northern Rock board may face criminal prosecutions http://www.ft.com/cms/s/0/52235354-3ca9-11dd-b958-0000779fd2ac.html
