Credit Crisis 7/11/2008

Credit Crises – Who Said The Banks Are Not To Blame!

Six weeks ago it was all; Credit Crunch, Credit Crunch, Credit Crunch.   Now it’s all Recession, Recession, Recession.  It’s enough to make you want to dig a hole and jump in.  I wouldn’t mind but none of it came about because you, me nor anyone of a normal disposition (with a few exceptions) made the conscious decision to spend beyond our limits.  And yet you, me and everyone else will most assuredly pay the cost for a number of years to come. 

I say it will be us who foot the bill not just because the cynic in me shouts it out but because of a recent meeting in the House of Lords attended by Angela Knight, Chief Executive of  the British Bankers Association, Thomas Huertas; Director, Banking Sector of the Financial Service Authority and Lord Northcott who hosted the meeting where I was enlightened as to the realities of the banking thinking process.  The meeting had been set up some months previous when none of the participants could have foreseen the sensitivity of their position. 

Of course the issues of the Governments bail out ‘oops’ I mean support mechanism was quoted time and time again as a positive move which will enable the banks to find a comfort factor in lending to each other.  Refusing to talk about individual banks Ms Knight was swift to assure those present that banks had always adopted a belt and braces approach to their financial status and the current crises was totally unforeseen. The way forward now was not to go out buying gold bars (not yet anyway) but to adopt a more traditional approach similar to that of building societies.

This alone is a mighty condemnation of the hitherto approach taken by the banks.  Their business should always have been one of prudence when lending; after all it is not their money.

It was interesting to hear the BBA and the FSA are now acting in a joined up fashion and are discussing issues at all levels.  The question then arises: ‘What happened before?’

For me though the crème de la crème of the meeting came as a follow on question put by Lisa Buckingham, Editor of Financial Mail who asked about the lack of any real remorse by the banks. Yes; it was agreed they had said they were ‘sorry’ that it had happened but words are cheap and the public should be able to identify a material penance for what was after all a result of  greed by the banking fraternity.  Angela Knight repeated as she had done many times during the evening that the banks were sorry for what had happened.  However the events were not a result of bad decisions by management.  At the time the products were delivered the risk levels were thought to be manageable.

 

Times change Ms Knight reminded and so does the money market.  Yes; there was over reliance on the rating systems and people were not looking at what was behind the product.  Judgements were not correct.  As ever; the retort once again resounded around the room that the banks were ‘sorry’ it had happened but now was the time to move forward.

Even Thomas Huertus of the FSA who had been remarkably quiet felt that there was a need to draw a line under the debacle and move forward. Neither had he nor Ms Knight seemed willing ready to include the words ‘poor management’ or ‘lack of controls’.

It was not surprising therefore the before long the dreaded issue of ‘fat cat bonuses’ came out for a swing around the room. And here emerged the real feelings of the banking world.  The real reason why you me and everyone else who is not on the senior payroll of one of the banks should be ready to tighten our belts, sit indoors and not dare to put on the central heating for the next two winters at least.  It was not their Fault!  Not at all!   The words resounded like a child of five or six years who spills a glass of milk and immediately shouts out ‘it wasn’t me Mum.’

To hear the Director of the BBA tell the audience that it was not the products it was the way they were sold by those on the shop floor, they were to blame. They were at fault by not presenting the risk in the correct way.  The rating agencies were also at fault.  They were the ones who said the risks were acceptable.  But NOT the banks!

It looks like those at the customer end will be the ones who will be getting the big ‘E’ and not the senior managers or directors who created the product in the first place.  Then those same managers set up targets for the mortgage sellers to achieve. Yes the sellers sold the products but they have no other choice.  If you are working for one of the main banks and are given instructions you don’t as an employee then ask for substantiation of the products credit worthiness.  You do as you are told! 

So my dear friends if you are expecting to see a few heads roll in the world of banking in the near future you are in for a big surprise.  If you are expecting the banks to start getting together and start supporting each other in the near future you are wasting your time.  What is likely to happen is that the banks and finance houses that we all depend on will keep there heads down below the parapet and do nothing for the foreseeable future.  It is likely that they are waiting for the media to push the crisis to pages 4 or 5.  Then we are liable to see bonuses rolling out; not too much though only to save face and not because they feel any responsibility for the events.

Of course there is much more to this sorry event than just the banks, the world economy was running to high.  Something was bound to happen.  As I mentioned in the spring of last year the European Central Bank was hording gold; this was a sure sign that it sensed a downturn in the economy.  I also pointed to the high price of gold and did again at the end of 2007.  Now gold has dropped in value, but this is the balancing of the commodities sector which includes oil.  Many in the markets and I agree with them believe that gold and silver for that matter, will rise again and we could even see it at over $1000.00 and ounce again and possibly higher. 

As Ms Knight said (sic) we are not out buying gold bars just yet.  Reading between the lines as we must with all agencies and politicians; they will be buying gold again when it reaches the level they believe will make them the most money and thus greater security.

For those who were planning to sell will remember about two years ago I mentioned the sub prime market in the US. I warned that the glut of properties in the US would spill over into the UK and onward to the rest of Europe.  In my view this will continue for another twelve months or so in the US.  Even with the forthcoming Presidential election and the up surge in confidence that will happen thereafter, it will be months before it filters through.  Realistically it will be 2 years before any noticeable change appears on the Spanish horizon.  

This is a down turn most definitely but so long as you are not desperate to sell then it is a question of sitting tight.  Yes there will be a resurgence in the global economy but as in the early 1990’s there will also be a need for rebalancing and that, unfortunately, takes time.

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