I’m not sure I agree that splitting the banks is necessary or would create a safer financial framework. Retail banks would issue mortgages, investment banks would package up mortgages in bundles as financial instruments – retail banks and investment banks might be separate but they would likely still do deals with each other. That might be a more competitive environment (stuff wouldn’t necessarily get done in-house), but not a safer one. If anything, the creation of smaller, separate institutions has the potential to spread risk even more diffusely.

As Larry Summers said in the article you linked to, ‘I think there is only the weakest of cases to suggest that somehow if the institutions had been smaller and doing similar things in parallel, you’d have seen smaller problems.’

I suspect he’s right. CDOs were set up to spread risk – which is logical in a finite sense (i.e. looking at the process one deal at a time). But when Lehman went bust, the problem was that no-one knew who was on the hook for what because the losses were built in to the balance sheet of any institution holding these instruments – and the tracking of them (and the assets backing them) by financial institutions left much to be desired.

For me, of much greater importance is the role of monetary policy and, if international agreement could be sought, a financial transaction tax. Mervyn King has, I believe, already talked up the idea of banks engaging in countercyclical capital raising – i.e. being forced to hoard a certain level of cash in a boom and lend some during a downturn.

Most of all, excess liquidity is the major problem in a boom and it seems to me central banks must play a more active role in future (when things calm down – i.e. no rate hikes in the near term with the recovery so weak and public spending being chopped). I suspect this latter point is more important than the whole question of financial sector reform.

For that reason, the question of changing the MPC’s mandate must be front and centre, giving them greater flexibility to target high employment in a stable growth environment and, most important, moving whatever inflation target we decide upon to RPI (capturing house prices) from the current CPI (which doesn’t).

For those still not understanding how much trouble we are in because of too much debt and too much government spending, please have a read of the link below. It deals with the US but the UK analogy is there, if not more perilous;

http://www.scribd.com/doc/52812947/Logan-s-Run-The-United-States-Fiscal-Situation

As for Lehmans;

It didn’t go bust because of CDOs. It went bust because it lost access to money markets (short term lending between banks) which it relied on before central banks stepped in to provide substitue liquidity.

Why did money markets freeze up? Because RETAIL banks with large mortgage books were taking losses, and no-one knew the extent of those losses. So no-one would lend to anyone else. When you are dependent on short term funding to cover your long term exposures, as Lehman’s was, you’ve got a serious problem.

Sunny,

you really need to learn this – please actually take in what I’m saying here, and don’t just dismiss it or try to argue against it. You keep getting this wrong, and whilst most people probably don’t know the difference, you’re just making yourself look like you don’t know what you’re talking about, so it is in your own interest to take this on board.

increasing the capital ratio is not about increasing the “amount of money banks hold”. Reserves, as in “fractional reserve banking” are not the same thing as capital ratios, it is wrong to speak of “capital reserves”. This is an important distinction. Fractional reserve banking is not to blame for banks not having “enough capital” to survive the crisis.

Banks own assets. Assets can be in the form of loans, securities or cash. The “reserve”, as in “fractional reserve banking”, is what proportion of assets that are held as cash (or cash equivalents) and is about liquidity – making sure the bank has ready money to give people when they ask for it.

Banks also have liabilities. The difference between assets and liabilities is equity, or capital. The capital ratio – which the banks are being asked to raise, the ratio of capital to assets – is also known as decreasing “leverage”. This is about solvency – if a bank has a high capital ratio, it means it can suffer large losses (declines in the value of its assets) and still afford to meet its liabilities and avoid bankruptcy and a bailout*.

Requiring banks to have higher capital ratios (reduced leverage) has nothing to do with asking them to hold more money. A bank can have a very high capital ratio yet hold no “money” (all it’s assets could be securities, whatever).

Banking systems with higher capital cushions are inherently safer, although notice that the size of the capital cushion is the difference between assets and liabilities, and the value of assets is highly uncertain and can change rapidly. So Lehmans may have looked like the value of its assets safely exceeded its liabilities, but its assets turned out to be worth a lot less then everybody thought. The greater the capital cushion, the more you can withstand large revaluations like that.

These distinctions matter. For example, if banks are being asked to increase capital cushions / decrease leverage they either need to raise new capital or shrink their balance sheets, for example by, allowing loans to be repaid without making any new ones. Injecting cash into banks in return for “toxic assets” (i.e. changing the composition of assets) of itself does nothing to decrease leverage**, so those who write things like “why aren’t the banks lending when we have given them all this cash” are making this mistake. Equity can also be thought of as initial equity funding plus accumulated profits, so banks can also be recapitalised via profits.

* although bailouts can also happen for liquidity reasons
** unless the cash injection is a sneaky way of propping up profits by overpaying for those assets

meanwhile, it’s not obvious what the long-term stability of the banking system has to do with the immediate problems of sluggish growth, especially here in the UK. It’s also not obvious what instruments governments have to creates growth that do not involve taking on more debt. It’s easy to say that governments ought to be doing more to promote growth, but the the European debt crisis is about some governments (Ireland, Portugal, Greece …) holding more debt that people believe they can repay. Trying to solve that problem by having these governments borrow more and spend more in the hope of engineering growth is a very risky game. Solving the European debt crisis, to my mind at least, is only about promoting growth if we’re talking other governments (i.e. Germany) spending money to promote growth in Ireland, Portugal etc. Otherwise the solution is creditors like Germany etc. taking losses and writing off debt, which would open up some space for those governments (Ireland etc.) to spend some money to prop up their economies. But none of that has much to do with what the Vickers Comission is on about.

So, something must be done but you don’t what it is but you do know it means bigger government?

As a response to “biggest financial crisis this country has ever faced” I despair at the staggering ignorance of UK-based commentariat.

When you have a commentator with the wit to explain how European banks are meant to remain solvent whilst applying a more stringent version of Basel III I might start to take you seriously.

@ 2 ‘It [Lehman] didn’t go bust because of CDOs’

No it didn’t – you’re abolutely right (though it recorded hefty losses on CDOs, which didn’t endear it to those who might offer lending). But such instruments made accurate provisioning for losses across the sector more difficult when somewhere like Lehman did go bust, hitting sentiment and freezing the money markets even further. CDOs spread risk, just as they are meant to. But that means the risk is everywhere. I remember well the process of untangling Lehman’s CDOs – and the web of credit default swaps – and the wrangling over who ended up with what:

Good example: http://www.reuters.com/article/2009/08/14/fitch-cdo-lehman-idUSN1430383420090814

‘When you are dependent on short term funding to cover your long term exposures, as Lehman’s was, you’ve got a serious problem.’

No arguments there.

They are too scared to change anything. They think the financial sector is all they have and if they abandon London the country will fall flat. I hate the banks but I can see their point.

If they want to be visionary they have to work on an international banking framework. It would be hard to find a country or system which wasn’t corruptible to sink it. That’s what Luxembourg and the Bahamas is built on. I think there is definitley a will of people internationally to put banking in its proper place but it needs visionary politicians to capture the imagination and set the agenda world wide. the Labour party doesn’t like visionary politics any more than the rest of them innit.

2 Tyler

For those still not understanding how much trouble we are in because of too much debt and too much government spending

The problem is, we’re not in trouble because of government debt and/or government spending.

The opposite is the case: the UK economy is getting itself into unnecessary bother because the government is not doing enough to stimulate economy.

Also the zeal to de-regulate brought on the credit crunch crash.

It’s striking that there are people around quite as deluded as you are.

@ 5 John.

Agreed, CDOs did nothing to make things easier but their losses there would not have bankrupted them. Lack of funding did though. I too was involved in the lehmans unwind (on the IRS/derivatives side) and as you say it was messy and there was lots of wrangling. Much easier than the Iceland unwinds though.

@ 7 BenM.

What do you do for a living? I’m still surprised that there are people out there who think that government debt/spending *isn’t* a problem.

Read the link i posted above, and then tell me that government spending rising 4 times faster than GDP growth is sustainable. In the US, given current plans and projections, 100% of ALL revenues will be spent on entitlements. Who do you think is going to fund that?

In the UK between 2000 and 2010, GDP grew 13% roughly. Government spending increased 53%. The difference was funded with more debt. You don’t have to be a rocket scientist to realise that this can’t go on forever.

The UK economy is in bother because the government spends to much, and government spending is too large a part of the economy (thanks to Brown’s splurge) to be sustainable on revenues without resorting to massive debt financing, which causes huge long term issues. All the coalition “cuts” are doing is letting GDP grwoth catch up with government spending, and rebalancing the economy.

And no, lack of regulation didn’t cause the credit crunch. Too much poor quality mortgage/credit card debt caused it, when markets realised most people in the western world, governments included, were massively over leveraged. This was *encouraged* by legislation like the US CRA act (98) and by too low interest rates.

Luis – cheers for the essay but I was merely writing in shorthand. It wasn’t the main thrust of my article above…?

Interesting comments from Stiglitz in this interview – he’s right that disclosure/transparency is important. Again, I suspect this is more important than banks’ structure:

http://video.ft.com/v/900585284001/INET-Conference-Joseph-Stieglitz

“And no, lack of regulation didn’t cause the credit crunch. Too much poor quality mortgage/credit card debt caused it, when markets realised most people in the western world, governments included, were massively over leveraged. This was *encouraged* by legislation like the US CRA act (98) and by too low interest rates.”

Much re-writing of history here.

I’m not going to defend the levels of private debt. But the credit crunch was initially caused by combination of the banks using short-term cash to finance their operations and hiding poor quality debt in the derivative market. Neither of these is to do with debt per se (although the level of private debt was and is pretty insane).

Your argument is akin to foxes blaming the chickens for persuading the farmer to unlock the coop. The chickens didn’t ask for it, it was the foxes that did the persuading, and are now strutting around saying “wot me gov”.

Sunny,

of course it wasn’t the “main thrust” of your article, it’s a mistake you keep making whilst thrusting.

If you think that “hold more money” is merely shorthand for “increase capital ratio” you have completely failed to understand things.

imho somebody who writes articles about banking ought to display rather more interest in knowing what they are on about.

@11 Gastro George

CDOs were made up of mortgage debt. It was when the value of the underlying mortgages came into question that the CDOs took a pounding and the banks started to lose money. (Most) CDOs didn’t aim to hide the quality of debt underlying them, they just aimed to package up these mortgages making them easier to sell to investors, with each tranche assuming a different risk of default.

Essentially, if you have 1000 mortgages and the normal default rate is 10%, you can sell 5 tranches with 200 each, and assign the first defaults to the lowest tranche first, but the lowest tranche owner earns the most interest.

The problem comes when everyone starts defaulting at the same time, and the historic default rates go out of the window. Or worse still, no-one really knows how many people are or aren’t defaulting, and the CDO becomes near impossible to value.

If we didn’t have CDOs, there would still have been a problem because of too low interest rates, too lax lending criteria and governments encouraging lending as a filip for growth (and through legislation – CRA created subprime).

People got too overextended in their debts, and when this extended leverage started to collapse it created a viscious circle. CDOs made it more entangled but even without the CDO it would still have happened – though most likely it would only have been retail banks which suffered (look at the Spanish Caja/home loan banks as an example – there are very few CDOs in Spanish markets, but their Cajas are almost universally underwater).

@8

And no, lack of regulation didn’t cause the credit crunch. Too much poor quality mortgage/credit card debt caused it, when markets realised most people in the western world, governments included, were massively over leveraged.

That’s some pretty hefty cognitive dissonance going on there. So you’re saying that lack of regulation didn’t cause the credit crunch, but how the hell do you get a surplus of poor quality mortgages and credit card debt *other* than by not having enough regulation to protect the consumer? There is plenty of evidence to suggest that the banks knew *exactly* what they were doing when they sold those mortgages and credit cards, specifically that they deliberately sold subprime mortgages to people who qualified for better packages because they knew the bank would, on paper at least, make more money out of it.

Also, the CRA in the ’90s was in effect a *loosening* of existing regulations, not tightening or adding more.

The theory that corporations in general – and financial insistutions in particular – will act rationally, plan ahead and protect the customer based on their own self-interest alone has been proven wrong time and time again, especially when the carrot of a glut of paper assets effectively conjured from thin air is dangled in front of their noses. And yet the call from the Right is always “more tax cuts for the wealthy, more public spending cuts and less regulation”. One could say that it fits the definition of insanity (repeatedly doing the same thing that didn’t work the last time ad infinitum), but seeing as the policy benefits the rich hugely and it’s only us proles that suffer, I’d be inclined to say that it’s a deliberate, sane, cynical and callous project.

“CDOs didn’t aim to hide the quality of debt underlying them …”

I can only reply in the mode of Nelson Muntz: “ha ha”.

“People got too overextended in their debts …”

The trouble is always “people”, isn’t it. Nothing to do with banks offering 120% mortgages or to sub-prime buyers.

Of course if we regulated CDOs and the mortgage market, then this might not be possible, but of course the banks were actively lobbying against that, and succeeding (as they are today).

@2

Tyler, thanks for the link to that piece. It provided me with the material for a blogpost on dodgy statistics:

http://thepotterblogger.blogspot.com/2011/04/bad-statistics.html

Of course if we regulated CDOs and the mortgage market…

I’m sorry, you think that the UK mortgage market is unregulated?

Also, re: the original post…

The cynic in me wonders if certain people took Balls and Miliband aside recently and said something along the lines of:

“Now look, it’s 50/50 whether this lot make it to the end of their five years the way things are going at the moment. If and when they do collapse, do you want our support or not?”

“I’m sorry, you think that the UK mortgage market is unregulated?”

Nitpicking on the detail, are we? You know exactly what I mean.

@ 14 Blue

CRA 98 *forced* banks to lend more to groups underrepresented in the mortgage market (particularly lower income blacks and hispanics).

@ 14+15

Mortgage market is *heavily* regulated. That people falsified their incomes and banks were lax in checking the details is nothing to do with the regulation. I’m sure their were unscrupulous mortgage brokers as well, but more regulation won’t help.

Blue – the consumer needs protecting? He’s got all sorts of regulation on his side already, and the long/short of the story is too many people took on the debt willingly. Do you think people shouldn’t be allwoed to make their own decisisions? It’s like telling me i’m only allowed to drink so much….

….unless you want to pass a law saying people can only borrow a certain amount of their salaries??

@15 Gastro

A couple of CDOs have been involved in fraudulent cases, but for the massive majority the prospectuses are very clear, and very often the investor themselves gets to pick what mortgages they want in each tranche from a general pool.

As I said, the problem with them is when the failure rate becomes very high, the CDO becomes impossible to price accurately and the historic rates it was created with becomes meaningless.

@20

CRA 98 *forced* banks to lend more to groups underrepresented in the mortgage market (particularly lower income blacks and hispanics).

Gotta love that latent racism. It did no such fucking thing.

http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

@ 21 Blue

*sigh*

From your article;

“What’s more, only commercial banks and thrifts must follow CRA rules. The investment banks don’t, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.”

As I said. Retail banks wrote the loans, which were underwritten by people like Century, and repackaged into CDOs by investment banks.

Those retail banks were FORCED to set aside a certain amount of lending to underrepresented groups by the CRA ammendment of 1998/99.

QED.

@22

The typically Clintonesque quid-pro-quo of the 1999 Act (written by three Republican Congressmen, don’t forget) was that they could have their deregulation – and the windfall it generated – provided they expanded the remit of who these new monster financial institutions would lend to. It made no prescription as to how they were to go about doing it – the finance industry came up with the subprime/CDO wheeze on it’s own.

Ironically the Republican Right were crowing in 2003 about how the deregulation had created a level of homeownership unparalleled in it’s social plurality at that point in time. George Bush even addressed the Republican Convention on it.

@8: “The UK economy is in bother because the government spends to much, and government spending is too large a part of the economy”

For comparison, here are World Bank figues for most countries showing ‘general government final consumption’ as a percentage of national GDP:
http://data.worldbank.org/indicator/NE.CON.GOVT.ZS

The percentage for Britain is about the same as that of France and lower than those of Denmark, Sweden, the Netherlands and Belgium but above the percentages for Germany – and the US or Switzerland.

For an Excel file with OECD data for 2007 (at the end of which the financial crisis started in Britain with that run on Northern Rock), try:
http://dx.doi.org/10.1787/738811605857

@20

“As I said, the problem with them is when the failure rate becomes very high, the CDO becomes impossible to price accurately and the historic rates it was created with becomes meaningless.”

Given that a high failure rate is always possible (especially if you say that it is impossible to regulate the market more) and when there is a high failure rate the CDO becomes impossible to price, then what evaluation do you put on the risk of CDOs? How are they sensible investments for anything other than fringe players (who are allowed to bust themselves)? Why should retail banks (with a government guarantee) be allowed to go anywhere near them? These are the kind of questions that the pro-regulation side are arguing.

If “people” will take on bad debts, then the least we can do is stop them poisoning the rest of us.

@25: “How are they [CDOs] sensible investments for anything other than fringe players (who are allowed to bust themselves)?”

Warren Buffett warned us in 2003 about financial derivatives lacking transparency – but what does he know?

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

Btw “Warren Buffett, the third-richest man in the world, has criticised the US tax system for allowing him to pay a lower rate than his secretary and his cleaner.” (2007)
http://www.timesonline.co.uk/tol/money/tax/article1996735.ece

@25

If “people” will take on bad debts, then the least we can do is stop them poisoning the rest of us.

I’m not disagreeing with the thrust of your point, but we need to be careful to not repeat the things that people like Tyler are saying about this being the fault of individual borrowers taking on more than they could afford. The banks deliberately steered people towards subprime mortgages even if they qualified for better products, because the usurious interest rates meant that they’d be more valuable when packaged into the CDO. If any other industry did this it would be prosecuted as fraud, but we’re so in thrall to the finance industry that they not only get to skate on criminal charges, but get to keep the money they made putting people into debt and making them homeless.

http://crooksandliars.com/susie-madrak/naacp-lawsuit-banks-steered-qualified
http://www.seiu.org/a/profilewells.php
http://www.teachablemoment.org/high/recession.html

@27

I agree entirely, which is why “people” was in quotes. But I guess it could have been ambiguous.

Osborne and the rest in government are scared of Balls. Yet lately he seems to be softening his attacks or certainly coming across less aggressively.

Is this a result of some poll or media guru at Labour?

What labour needs is a loud shouty “it’s YOUR fault people are suffering!”. People arent silly and accept cuts were necessary. But they also know the cuts are killing the economy making things much much worse than they need to be.

Yes yes, of course it was all those evil banks and not the fault of the man on the street at all was it? He was forced to take on a 120% mortgage and leverage himself to the hilt with his credit cards wasn’t he?

Please don’t be ridiculous.

People took out subprime mortgages when they could get better ones because at least to start with they were cheaper. They typically offer a low rate for a few years before they reset to a higher floating rate. People avoided this problem by rolling their mortgage into a new one with the same low starter rate, but that became impossible when house prices started to fall (try getting a new mortgage when you are in -ve equity) we suddenly had the subprime crisis.

As for CDOs; they are simply a way of packaging up mortgages so people can invest in them. And when I say people, we aren’t talking retail banks or the man on the street – we are talking hedge funds and the like. Retail banks were the sellers of the underlying securities. CDOs aren’t even particularly complicated in their construction, though clearly for those who know *nothing* about them I might as well be talking about particle physics.

The big issue with them is that their return relies on large amounts of individual mortgages, and predicting when those mortgages will become delinquent is not trivial. The main (and fair) complaint about CDOs is that they were thought to be safer than they really were because the *historical* data said so.

In practice though, owning a CDO tranche is no more risky (and possibly less so) than owning the mortgages which make it up – which is why so many of the retail banks, homeloan banks etc who had ZERO exposure to CDOs got pummelled in the banking crisis. The mortgages went sour, and how you dressed them up didn’t really matter.

@24 Bob B

Your world bank data is only for *consumption*. It DOESN’T include welfare. Once you include ALL UK government expenditure, its 53% of GDP (by some metrics it is marginally lower) and has increased dramatically since 2000.

As I mentioned above, GDP up 13% in the last 10 years, government spending up 53%.

Its even worse in the US though, where government spending on welfare alone is set to equal 100% of revenues by as early as 2025.

It’s clearly not sustainable.

@30

People took out subprime mortgages when they could get better ones because at least to start with they were cheaper.

Funny that.
It’s almost something you would expect financial institutions, whom one would presume would be stuffed full of people educated to the hilt in such matters, to guess that people would go for them because they were cheaper to begin with.

In other news, Bright House is not a constant annoyance to civil servants in the crisis loans department due to beggaring claimants by offering them things they actually can’t afford.

@31 Cylux

The point I was trying to make is that a great number of people, when offered a mortgage which is cheaper over its life but more expensive upfront, or a cheaper mortgage for a short time followed by the inevitable catchup will plump for the latter.

Why? I guess a combination of greed, short-sightedness and the idea that house-prices will always go up so re-mortgaging will always be possible.

You can’t blame the banks in entirety for offering products people wanted.

@32 “The people” here the UK are overwhelming in favour of bringing back hanging. Just because people want something doesn’t mean you should bugger up your establishment to give it to them.
Besides, you forgot ‘plain ignorance’ in your list of why peeps went for the cheap-up-front mortgages, generally the average Joe or Jane bloggs on the street is not an expert on mortgages and of the sum total consequences of various packages that they can choose from, and lest we forgot the financial industry at the time was busy perpetuating the myth that house prices were indeed always going to go up.

At some point Joe & Jane were given very bad advice, or even worse, no advice at all, from those who do know what they’re talking about, and you’ll have to forgive me if I find them far more responsible than those who were conned into believing the money taps would never stop.
The banks and other financial institutions knew the mortgages where worth fuck all, and that’s why they played pass the parcel with them, hoping they wouldn’t be carrying the can when the music stopped. However, many in their hubris, sought to repackage and rebrand these parcels, cover up the smell of them and shift em for more, and soon even the originators couldn’t tell if they held a parcel or not. I fail to see how Joe & Jane can be blamed for that part of the credit crunch.

@33 Cylux

Ah, let me peer into my all knowledgeable crystal ball and tell you for definate where the future of house prices lie…

Please be realistic. Even industry proffessionals and experts only have an opinion on where house prices are going, they don’t know for sure. Historically house prices do always trend up, and there are many reasons for that….but it doesn’t mean they can’t go down short term as well. So, when I give what in my honest opinion is good advice, there is no gaurantee i’m going to be correct – because i can’t predict the future.

I’m sure ignorance also had a lot to do with it, but mortgage comparison caluclators are freely available on bank’s websites and many other places. Foxtons has a nice one which shows your exact repayments etc.

If you are buying a house the least you can do is check it.

The general public can easily find information on their mortgages these days from several sources, apart from the banks. Whist you might well have unsrupulous people working (on the retail side in) banks, the laws are pretty strict.

I think you might be confusing bad banking practices for massive competition, which has led to mortgage prices coming down and it becoming easier for people, including those who probably shouldn’t, to get mortgages.

@34

You’re moving around like a Space Invader on this one, it has to be said! First it was all the fault of poor black and hispanic people getting ideas above their station and taking out mortgages they couldn’t afford, and now it’s people being offered two products by their (bank-supplied) mortgage advisers and taking the subprime one because they were stupid. Amazing how Right-Libertarians are all about personal responsibility when it comes to the little guy, but we should let the banks and their executives off the hook for systematically fucking lying to their customers because, hey, they’re life’s winners and we shouldn’t begrudge them that – stop being so jealous and start a hedge fund yourself if you think you’re worthy of joining the club…

Jesus Christ – how much does it take to get into your head that in many cases these people were *never* told that they qualified for better products, that this process was systematic, with blessings from the board and executives on down, and were it not for the fact that the financiers and their friends in high places have everyone by the short and curlies that this would have been a case of indictable fraud, plain and simple?

@Tyler & Cyclux,

Surely both lenders and borrowers need to take the consequences of their actions? I don’t have much sympathy for borrowers who took on more debt then they can afford, nor for banks which lent to customers knowing they were high risk.

The problem is there was no mechanism in place to allow banks to fail – Governments felt it was neccessary to bail out the banks to prevent a total collapse of the financial system. What banking regulation needs to ensure is that banks can fail in a safe manner. Not an easy task I would have thought.

@34

If banks missold products to their customers then indeed they should be punished – this is illegal. However you must remember customers did not have to accept the deal offered by the banks – they can shop around, they can look at the affordability of repayments and understand the consequences of increases in interest rates and falling house prices.

@36

Blaming customers for not shopping around is a ludicrous position to take. Aside from the fact that there was barely a single bank that was not complicit in this scam, thus making shopping around something of a pointless task, the position that you and Tyler appear to take smacks of blaming the passengers of the Titanic for getting on a ship that happened to sink. Everyone was telling them it was safe, that they were getting a good deal and that a Shangri-La of prosperity was waiting around the corner as soon as they forked over their money and signed on the dotted line.

@37

Why is it ludicrous to expect people signing a contract not to read what they are signing? If they are offered a teaser rate knowing that this is for a limited time period they know exactly what they are getting into.

As I stated, if they were genuinely misled that is an offence.

I had no problem shopping around for my mortgage – there were literally hundreds of alternative deals.

@38

Read the links I posted upthread – they were definitely misled.

Remember as well that the system works differently in the US. Here in Blighty solicitors are all over the property market like a rash when it comes to contracts, over there it’s a bit looser – though even over here it can be pot luck as to how good the solicitor retained is, invariably the good ones are so expensive as to beyond the reach of your average punter.

@36 The difference is one of scale, each customer who took on too much debt can only be held accountable for their own personal debt. The bank that assisted say, 100 customers into that state, is 100 times more accountable. It’s 1 mistake versus 100. There really is only one place to point the finger, and it isn’t at the people who thought getting a home on the cheap was possible.

@ 38 Fungus

“Why is it ludicrous to expect people signing a contract not to read what they are signing? ”

There are (at least) three possible problems here:

1) It’s often impossible for people on the street to assess the risks when they take out an offer, especially if they’re essentially gambling on the continued viability of a large company. The necessary information may not be available to them, and even if it is they might not know what to do with it.

2) The official literature will explain the risks, but the staff member selling the product may not, because they’re targeted on sales. So they’ll exaggerate the benefits, fail to read the compliance statements properly, and will offer reassurance that’s beyond their power to give – such as saying “don’t worry, it’s perfectly safe”.

3) The official literature may bury vital information in the small print. While you should in theory read all the small print every time you sign a contract, in practice few do (how often online do you tick a box confirming you’d read some T&Cs when you haven’t?), and often they’re written in confusing lawyerspeak to put you off. While there’s some things you can’t get away with hiding in the small print, companies will always push the boundaries of legality.

@39,

I have read the second link. One of the examples:

“So did Leonid Frolov, who bought his first home three years ago, a condo in Washington D.C., with a “piggyback mortgage.” This involved two loans. The first was at a fixed rate of interest. The second was an adjustable rate mortgage that he borrowed against to buy a car and pay credit card debt. “Frolov felt confident he could refinance…again before it adjusted.”

No evidence that he was definetly missold. His strategy was to refinance when the rate got higher – he therefore clearly knew that he had an introductory teaser rate.

There is also no evidence that the other example given in that article, the Pellgrino family were missold their mortgage.

I am not aware that there have been large numbers of misselling court cases in the US. Maybe the law is different over there, although normally there are more sever on white collar crime.

Having said that it would not surprise me if Financial Advisors and mortgage brokers did missell mortgages – i am always sceptical of salesmen.

@40 Totally disagree. Both parties have made an error and both should suffer the consequences. If as an individual you over stretch yourself financially you need to take full responsibility. Likewise the banks should take responisibility – the problem is off course the banks didn’t take full responsibility.

Also isn’t it a case of 100 individual mistakes v 100 mistakes rather than 1 mostake v 100?

@ 35 blue

Poorer people were offered mortgages they couldn’t really afford thanks to the CRA act. Not were covered by the act, but thanks to the law of unintended consquences, to compete in the mortgage market most had to offer similar mortgages…and not jsut to poor suprime/alt-a borrowers, but to all customers. People, poor or not, were happy to go for the mortgage which was cheaper upfront with the idea that when the rates reset higher they could get a new mortgage with a new low start rate against their house which was ever increasing in value.

If bank employees were lying to their customers, they should be prosecuted BUT there are already laws governing that, and they are pretty solid. Especially in the mortgage business. Even more laws isn’t going to solve the problem.

I already do work in the banking/fund industry. I’d even go as far as to say that you are the jealous one, my little green/blue friend.

@ 36 Fungus

I think both borrowers and lenders ARE suffering the consequences….banks have lost a lot of money and lenders are stuck in -ve equity or having their homes repossesed. NO-ones got off scot free.

As you say though, it’s the failure of banks and how to manage that which is the problem, and at least some of that is a political issue.

@44

So now we’re back to “Some people should accept their lot in life and not get ideas above their station”. You must be a really inspiring character, I tell you.

Of course, this is before we get on to the sea-change in society since the ’80s which fetishizes property ownership above almost all else, with a constant barrage of property shows on TV and the state of house prices on the news insinuating that people are somehow inferior if they aren’t on the property ladder.

Also, the difference is that bar a couple of the worst offenders (Lehman’s and Bear Sterns) the banks were cushioned by the bailouts, the executives got their bonuses and golden parachutes and they are all now in a position to start the whole mess over again, buying at rock-bottom, building a bubble and cashing out before it pops. If you are seriously suggesting that the banks have suffered as much as those poor sods who lost their homes then you’re either delusional or callous beyond belief.

@ Blue

Just want your opinion here;

If you think banks should be prosecuted for mis-selling, do you also think individuals who lied about their income or existing debts should also be prosecuted?

After all, lying to the bank to say you earn more than you actually do to get a bigger mortgage suggests a degree of premeditation?

((and as it turns out, people lying to the banks is very common, more so than cases of mis-selling)).

@44: “I think both borrowers and lenders ARE suffering the consequences….banks have lost a lot of money and lenders are stuck in -ve equity or having their homes repossesed. NO-ones got off scot free.”

C’mon.The opaque banking bonus culture continues just like before the crisis. What’s changed? The banks may have lost money but it isn’t the bankers and traders who are taking the punishment, it’s the bank shareholders and the pension funds holding bank shares.

“Barclays Plc shareholders should vote against the bank’s executive pay report because it’s vague and too complex, according to an investment adviser. Try this:

“’Disclosure of executive pay is opaque and design of executive pay is overly complex,’ Pensions & Investment Research Consultants Ltd. said in a statement today. ‘This prevents analysis of the design and quantum of executive pay.’

“Barclays Chief Executive Officer Robert Diamond was awarded as much as 10.1 million pounds ($16.4 million) in salary, bonuses and stock for 2010. The lender’s two highest paid executives within its securities unit were paid as much as 28.3 million pounds, London-based Barclays said last month. . . ”
http://www.bloomberg.com/news/2011-04-12/pirc-recommends-barclays-shareholders-oppose-remuneration-report.html

And this:

“Bank of England governor Mervyn King attacks bank bonuses and excessive pay”
http://www.telegraph.co.uk/finance/economics/8004488/Bank-of-England-governor-Mervyn-King-attacks-bank-bonuses-and-excessive-pay.html

@43 Nope, not in the slightest. As the saying goes “fool me once, shame on you, fool me twice, shame on me”. From the example, each separate debtor made the same mistake the once, while the bank continued to make that mistake another 99 times.

@ 45 Blue

You sound angry dude….

Not sure where I talked about people not getting ideas above their station though. I did intimate though that people shouldn’t buy things they can’t afford….

“suffered as much as those poor sods who lost their homes”

What I think you mean to say is;

“suffered as much as those poor sods who lost the homes they couldn’t otherwise afford without massive mortgages from the banks”

You could well be right about how we fetishize property, but you insinuate that its not people’s fault if the buy something they can’t afford. We also fetishize fast cars – doesn’t mean everyone can buy a Ferrari, or should be immune to having it repossesed if they buy one on credit and can’t keep up the payments. It is STILLL an individuals choice to go and buy something, and they have to wear the risk. Though clearly you think everyone too dumb to make informed decisions about their own finances.

Tyler, equally financial institutions should face the consequences of lending to people who can’t pay it back. Currently they don’t, they get bailed out.

@ 47 Bob

Bank traders are the people who are getting the bonuses….they are not the people selling mortgages. Investment vs retail banking.

I think the talk of high pay is off topic a bit, but the mortgage brokers selling products to average Joe certainly aren’t getting big bucks.

@ Planeshift

I agree, though it was retail banking that needed the bailout, not investment banking. Politically retail banking got propped up because people were so worried what a general run on banks could do to financial systems.

Remember also that the government offers depositors gaurantees up to a certain amount. The political decision probably was that it was cheaper to prop banks up than bail out depositors and suffer major financial stress with a non-functional banking system. The true direct cost of the bailouts is only a few billion now (Treasury accounts 5-10bn down from 50bn initially), though the indirect losses thanks to the recession are greater.

@48 Individuals usually only buy one home, banks sell thousands of mortgages. The banks stopped making the mistake once the error came to light. Not a valid comparison.

The bottom line is individuals do not make many decions as important as taking out a mortgage to buy a house – if they do not check long term affordability then they must take responsibility for this.

@52 Which they have done and are doing, crashing the world economy is not one of the concequemces of taking out a mortgage which you cannot afford.

Besides, who stole the banks ability to say no? Who held the purse strings? Who was it that knew that sub-prime mortgage packages were worth jack all, and so repackaged them in artful fashion to pass muster?
I’m sorry but trying to pass off banks and the rest as victims of a greedy public just won’t wash, the sub-prime lenders knew full well what they were dealing in was going to explode messily, they even managed to get their packages rubber stamped as being good in some cases, and they did it anyway with the main precaution being toward not holding the can when it did blow up. Just because Joe bloggs asked a bank for money he couldn’t pay back does not make him responsible for that bank then going tits-up.

@49

Not angry, just appalled at how willing some people are to carry water for these crooks…

Not sure where I talked about people not getting ideas above their station though. I did intimate though that people shouldn’t buy things they can’t afford….

One goes hand in hand with the other. It also conveniently sidesteps the fact that a significant number of people who were steered into a subprime mortgage could easily have afforded a better, less risky product but were deliberately not informed of that fact.

@52

The banks stopped making the mistake once the error came to light.

Rubbish. You had people like Warren Buffet saying that this was going to tank horribly as far back as 2003, but the financial institutions told their customers there was nothing to worry about and kept selling the products. You had the majority of Lehman’s and Bear’s shareholders kept completely in the dark until less than a week before it all came crashing down.

As I said, Right-Libertarianism – it’s all about personal responsibility if you’re the little guy, and getting off scot-free if you’re a billionaire executive or a corporation.

@53, I never said Joe Blogs was responsible for banks going bust! Both banks and borrowers are equally liable and as I have said in future banks should be able to fail rather than have to be bailed out.

However to say it is the banmks fault that Joe Blogs loses his house is also incorrect – Joe Bloggs is responsible for the decisions he makes.

Also ultimatly it was the taking out of mortgages and commercial loans which were not affordable which has caused the crashing of the world economy. If the loans were still being repaid there would have been no crash, no matter how the mortgages were repackaged.

Also I suspect many sub prime lenders didn’t actually realise what they were dealing with was going to explode.

@54

“Rubbish. You had people like Warren Buffet saying that this was going to tank horribly as far back as 2003″

Sorry, but Mr Buffet’s comment was on derivatives as a whole, not sub prime mortgages which are not derivatives. Mortgage failures only started happening in 2008.

“As I said, Right-Libertarianism – it’s all about personal responsibility if you’re the little guy, and getting off scot-free if you’re a billionaire executive or a corporation”

As i have been ssaying the banks should be allowed to fail. Free marketers and Libertarians all agree opn this! It was the Governments who decided that the banks needed to be bailed out due to the consequences to the financial system. Governments may have been right on this, I don’t know. It would have been interesting to see what would have happened if the banks were not bailed out – maybe a bit of short term pain and chaos would be preferable to what we have now.

@ 54 Blue

OK, lets assume that mortgage brokers, possibly even banks DID steer people into subprime mortgages when they could have afforded “better” ones (though the definition of better is a pretty vague one, given for the first few years they are more expensive). You are effectively accusing the banks etc of mis-selling, and they should be prosecuted for it. Fair enough.

However, and I ask you again (which you convieniently failed to answer);

Do you think people who lied to banks about their earnings or existing debts to get a bigger or better mortgage than they otherwise could have afforded should also be prosecuted?

A simple yes/no would suffice.

@56

I’m sure he factored the CDOs derived from subprime mortgages into what he meant by “derivatives”. Also, the bailout wasn’t just about keeping the financial amrkets going. How would it be fair for an arbitrary group of people to lose their money and life savings because the retail bank they used were involved in these shenanigans? They may have lost everything, but they’d still have the ability to vote against the government that failed to protect them.

@57

I thought that’s what bankruptcy was for. In any case I’d like to see you prove that a significant number of individuals deliberately lied to the banks with malice aforethought, as opposed to making a mistake based on advice they were given. My dad is a mortgage broker, and some of the tales I’ve heard about what the retail banks have been doing to coerce people into taking out an unsuitable mortgage (and yes, that does include reassuring them and telling them to apply anyway even when the customer hasn’t been sure, as well as putting pressure on to get the deal done as quickly as possible when the customer indicates a desire to get an accountant to double-check the figures) have put me off even thinking about taking the plunge. I know anecdote isn’t the singular of data, but I’ve heard an awful lot of similar-sounding anecdotes.

Morally speaking, this stuff is the bread-and-butter of the financial industry, and as such the industry and all players within it are reasonably assumed to know what they’re doing. You can’t level accusations of fraud on the part of the customer with consquences commeasurate with that on the part of the banks because the customer cannot reasonably be expected to know the financial- and legal-ese to anything like the same degree.

@ Blue

I pretty much expected you to say what you did, as I think you find it difficult to square that banks might not be all evil and “the people” all shiny and innocent with your ideology.

I also think in that case you live in some fantasy land. About 30% of mortages in the UK in the 10 years to 2008 were issued without any proof of income. I’m sure a significant % of that group lied about income, which is a criminal offence.

How many people have you seen prosecuted for it?

You might not like banks, and I’m sure some mortgage brokers and banks weren’t quite kosher, but to say it’s all the evil bankers fault is frankly ludicrous. Enough people lied to borrow more money than they could afford, and then found themselves in trouble through no fault of the banks – who also ended up losing money on the transaction.

@60

Ideology doesn’t come into it (I’m a pragmatic social democrat – the woolliest of the woolly!). The banks can afford to take that hit, that’s why they’re banks. The people can’t. I’m not saying all banks are evil and all people pure, but logic suggests that the former had more reason to be aware that what they were doing was wrong than the latter.

If you can find instances of a significant number of cases of people deliberately lying to the banks to get their hands on more money (it doesn’t even have to be enough people to bring the bank down, just make a significant dent on the balance sheet), then I might be inclined to give the “poor defrauded banks” supposition some more thought. As it is it just seems like a way to foist the consequences of the mistakes made by the rich and powerful onto plebs like us.

Sovereign debt default: When the government runs out of the currency it issues and can’t afford to pay back its debts to itself.

Understand the absurdity of this proposition and you understand the absurdity of the cuts rhetoric.

@61

So the solution is to simply pay off the deficit by printing money? Fantastic – why doesn’t the Government print billions and give everyone £100k and we’ll all be rich.

Also I suspect many sub prime lenders didn’t actually realise what they were dealing with was going to explode.

Oh I don’t know about that, the generally accepted sequence of events tells a much better story of buck passing and knowing duplicity.

Do try the links @26 to Warren Buffett’s warnings in 2003 about the mega-risks associated with the growing trade in derivatives.

We are apt to forget about the early warnings we had – and some have vested interests for their own reasons in sustaining our amnesia.

Personally, I’ve moved beyond bank bashing.

The ground has been covered endlesly, and as mentioned in this thread WE are just as guilty as the banks.

We need to move on if we’re to sort the issues we all caused out.

@ukcuts @ 65,

Why should I give up on hating bankers? It seems to me that they didn’t legislate for themselves, far less the rest of us. Their recipe was more or less designed to construct a burnt pudding.

You are too nice. These people should be imprisoned for a long, long time.

I can assure you that I hadn’t a clue about sub prime mortgages in Texas, prior to it all coming out. Whilst bankers did. So stop blaming the general public. Blame the bankers. Who either knew or were incredibly stupid.

My point, for what it is worth, is that each and every bank that didn’t do due process should have been allowed to fail. It would have been far cheaper for the government to have guaranteed private loans and mortgages rather than have bought out the banking sector.

I’d far rather see the City fall apart than spreading the pain through taxation. Most of us don’t benefit from the wealth that The City creates. It is just a shill game.

So, no, @ukcuts, I think you are wrong.

@ 60 Blue

Just google @mortgage application lying” and you’ll find literally thousands of links. There are even sites advising you on how to lie better. It was clearly very widespread.

@ 61 Lewis

Please understand the absurdity of your post. The government can’t “default” in the traditional sense of running out of money, but it can default in practice as people no-longer trust or place any value in the currency. I currently have a trillion dollar note on my desk…it’s Zimbabwean. Lot’s of zeroes doesn’t make you rich.

@ 63 Cylux

Yes i’ve seen that, and it’s very simplified, leaves a lot of the root underlying causes out and clearly has an axe to grind. If you want to look at everything in black and white feel free, but the truth is very grey.

@ 65 UKCuts

Agree – banks did do things wrong, but they aren’t the only ones. Governments also made massive mistakes, as did the individual man on the street. Scapegoating might make people feel better about themselves but I think there is a danger decisions are made in the heat of the moment which aren’t the best for the UK economy.

@ Douglas Clark

Why don’t you tell your banker you hate them when you next try and get a loan?

Subprime was alive and well in the UK, we just didn’t call it subprime. What do you think Northern Rock was busy selling?

Realistically I doubt it would have been cheaper to let al the banks fail. As it is the bailouts have cost a net 5-10bn, the headline numbers of 850bn include the short term liquidity injections to keep money markets functioning and has all been repaid. Whilst 10bn isn’t a small sum, it doesn’t explain the budget deficit and would almost certainly been outstripped by a total failure of our banking system and the chaos that would ensue. It was a political decision, but probably (and I detest Brown) the right one.

Lastly, you might like to see the city fall apart, but think about what that would do to UK GDP, and more importantly for you, your beloved welfare state? Finance (and it’s employees) paid huge amounts of taxes over the last decades. Your memory seems pretty short when it comes to that little fact.

@68

Just google @mortgage application lying” and you’ll find literally thousands of links.

Of which the first three are news stories about banks and mortgage brokers encouraging customers to lie. Nice try.

J.