TALES FROM INSIDE THE CREDIT CRUNCH (0r the mathematical formula for how the credit crunch happened.)

While everyone and his dog has talked endlessly about the derivatives market being the big reason behind the credit crunch and subsequent ONGOING recession what hasn’t been looked at (or certainly discussed in ANY book or program) is the lack of restraint by the banks before the crash in their unsecured lending.

You see we might like to look at the credit crisis as one created by the US sub-prime lending and out very own housing bubble in this country BUT as with all things like this there are more reasons than just those big ones that commentators speculate on, and in this blog we will look at all of them on an individual level.  So let us take a look at all the different villains that there were within this terrible debacle that, in spite of all the commentary to the contrary, the world never really escaped from in 2008, and the first of the fiends that we will take a look at is one of the worst of all things, one of those that has become almost a byword for mis-selling and that item is? ...PPI.

PPI or payment protection insurance may be, by most commentators standards, a reality small player in the entire credit crunch debacle, a sort of Mini-me to Doctor Evil’s subprime lending, but that doesn’t mean that we should devalue its impact on the world of finance and I remember seeing it first hand when I worked for a large debt solutions company.  When I first saw the scale of payment protection insurance I was flabbergasted.  For many people it seemed to be making their problems so much worse without any benefit at all.  For example, policies were sold to people who were self-employed BUT when it came to claiming on the policy they could only claim it if they had confirmation from the Inland Revenue that they had stopped, BUT the only way the revenue would confirm such a thing would be if they had those details in writing from them in that year’s tax return which could only be submitted at the end of the tax year, by which time a bucketload of interest and charges and court actions could well have been taken.

But even on a micro-level it seemed weird to me, as a layperson.  A loan for a car that was unsecured for say £10,000 may have had £3000 or £4,000 of interest over 60 months but with PPI could add an extra £5000 or so.  I remember seeing high street banks with loan agreements were a £10,000 loan saw total repayments (including PPI) of over £18,000 which always struck me as odd because with the PPI essentially the total amounts they were paying were not dissimilar to the interest that some companies regarded as loan sharks were charging.

But then we get to the real bug bear for PPI and that is the unwillingness of the banks to pay out.  You see that’s the problem with the banks being the people who were meant to pay out the PPI because, to put things simply, they didn’t want to, in fact it has been commented by the FSA that hardly any policies were ever paid out.  

I remember one occasion were a gentleman had been made redundant from work and was told by his bank that his policy covered unemployment and not redundancy.  To me, this is staggering and shows just how hard it was for people to be able to claim.  The banks had inflated the payments to a point were people were struggling to keep up when in work and then if out of work they pressured them to maintain payments when they had no money which usually meant people using credit cards to pay their debts leading them into a viscous cycle.

You see the problem was that somewhere along the way the banks decided high up that making a little bit of money from a lot of money wasn’t enough, even though that was the essence of banking.  The way it works is quite simple and I am convinced if the combination of PPI and aggressive advertising to entice people (especially young people . . . Remember those adverts on the music channels in the early part of this century for Barclaycard, capital one and egg amongst others and those are just the ones I can remember!)  then the banks would’ve been in a lot better shape than they are now.  Banks should be a sound business, it is an easy business to make money from if you’re mark up is correct and not so disproportionate that your products are unaffordable.

For example:

If say I as an investor put 10 million quid in the bank and £800 000 of that was leant out in 10,000 chunk over five years (holding back £200,000 in case of emergency) with a return of £4000 on each loan and if 90% of those are paid back that would leave you with a return 0f £52,000 profit per year.  Even 80% gives you a paltry £24,000 a year.  Now that sounds like peanuts until you consider that the UK’s supposed savings in UK banks is supposedly a few trillion pounds.  The RBS bailout initially was supposedly 37 billion pounds OR £37 000 000 000.  If this was everything they’ve lost (and I would think it was probably more) and 80% had been lent out in £10,000 chunks then the expected profits from that (if 90% of those loans had been repaid) would have been £296 000 000 over 5 years or £59,200 000 gross profits a year, which wouldn’t have been that bad bearing in mind that credit card and store card interest is more and Mortgage repayments pay back double the amount borrowed, UNTIL, we look at the other thing that went wrong with the system.

Which was ...

...CREDIT SCORES

A credit score evaluates a persons likelihood of default for debt purposes which means if you’re not in debt you have no score even though you may have a regular source of income, BUT, conversely, if you are loaded with debts cannot afford to repay them but maintain the minimum repayments then you will keep your high credit score.  With the changes in just how much credit you can get these days one would think that the models that are used to credit rate individuals would have changed but seemingly not.

Now when I did this work I remember seeing people with 10, 20 credit cards and untold loans and some of them still had flawless credit ratings, but the thing that I remember most of all at that time working there was niggling thought that didn’t go away until I left the job and it’s one that was frighteningly accurate.

“With all these bad debts out there how are the banks gonna make money?”

The answer as we now know is not well.  Now of course this isn’t the be all and end all for what caused the credit crunch, there are a thousand and one reasons why it happened, but there are two things that appear to be a constant through all the financial fiasco’s of the last few years the credit crunch, ENRON, long-term capital management, AIG, Lehman Brothers, RBS, MF Global and all the other huge businesses that have collapsed is the dangerous almost lethally toxic combination of two personality elements that the free market seem to look on as the best of thingz (Thingz is like things, but, trendier) . . . Greed and Ego.  These are the traits that convince seemingly sharp minds that nothing can go wrong and so take no precautions in case it doesn’t.  

It allowed the entire banking clan to believe selling on debts of people who can’t repay their mortgages and buying them back was sensible, or using 98% of your customers money to invest and not taking into account that 3% of your investments could go south was a great way of doing business, or how about hiding losses and projecting fake profits so that you can still award yourself a fucking huge bonus when you haven’t actually met your targets (a strategy that also took Arthur Andersen with it for shredding the evidence . . . An act the company may have survived had it kept the books like, well, like book-keepers should really) and, and, well, and countless other versions of the same story.

Ego perhaps is the more dangerous of the two forces here.  Greed is what convinces a gambler to keep gambling, ego allows these maniacs to convince others to let them gamble.  So how do we stop these things from happening increasingly, well, like many I would say that stopping rewarding failure is one step on the road to fiscal recovery.  Treating executives the same way individual traders are treated is the second.  When a rogue trader is found to have acted in a way that contravene’s the rules they are arrested first and questions asked later, when senior execs are suspected of acting outside the rules they are told “Yeah, you’ve lost enough” like the Arthur Andersen crew, or are merely fined (yeah, like that’s the same as sharing a cell with a guy called “BUTCH!”) an amount of money that is dwarfed by what they pay their team of high-priced lawyers.  

One of the suggestions being bandied around is for Director’s to be struck-off in a similar fashion to Doctors and I can certainly agree with that one, but there’s another option I would wager would also be a good way to go and that is to impose similar rules on directors as there are on bankruptcies in regard to shares.  When companies become nationalized there is always talk about how much will be paid for shares so shareholders can be recompensed for directors destroying their companies (banks do anyway, car manufacturers, train manufacturers, kitchen makers can all go under but put a banker in trouble and watch ministers bend over backwards to hand over money) but very often in these cases directors and executives hold huge amounts of shares and therefore in spite of their utter failure they will be entitled to, what is often a huge amount of compensation for that failure, I would bring in rules similar to those currently operating in regard to bankruptcy with shares being removed from senior directors as repayment for their failings, ALSO I would suggest that bringing in similar rules as to the disposing of company assets where trades to dispose of assets within a three year period can be reversed to prevent ENRON type trades that Jeff Skilling and (I think) his wife engaged in up to the companies demise, because these bailouts that we have seen are doing exactly that . . . they take the risk out of failure.

FOR EXAMPLE this year of course I wrote a book.  Now, because I live in the real world I did not decide to immediately give up my job, invest every penny in it in the hope that I would automatically be successful, such things take time and also, well, I have bills to pay!  I can’t afford to ignore the real world risks that unfortunately to some degree control our actions, I know if I did quit, get into trouble with the mortgage and lose everything the government would not come along with a magic wand and wish everything better.  My actions are shaped by what I can do and what I can achieve without putting my family at risk!  These clowns however due to their high salaries, share options and willingness for governments to throw good money after bad are not subject to any risks, for the execs at the top their is no downside.  

BANKER and ADULTERER, FRED GOODWIN (You know the biggest kick in the teeth is that if he is still paying to keep that privacy injunction in place, he actually isn’t paying for it WE, the taxpayer, ARE, as payers of his fucking pension!) ruined RBS.  FRED “KNIGHTED FOR SERVICES TO BANKING” GOODWIN created the Titanic of businesses.  At the point just before it’s demise, in terms of assets, RBS was the world’s biggest company, he was Captain Smith piloting the ship as it went smack bang into the credit crisis and ran out of money.  Now some people might suggest that not doing due diligence on some of the companies they took over was not wise, or that investing heavily in sub-prime CDO’s was a big risk for Fred ...but it wasn’t.  His £16 million pension shows beyond doubt that he took absolutely zero risks.  You and I in such a position get nothing if we make stupid decisions and our risk-taking leads us to a dark place ...Fred Goodwin gets the bonus prize because the Government thought that clearly he was too awful to stay in his job.  

Reward without risk creates a climate where those who will do anything to make money will, well, do anything to make money really for as long as they can, and because there are no downsides to taking those risks that is what they’ll do, and, if and when it does go wrong they will all show zero remorse, 100% cowardice and blame everyone else.  The formula of which looks like this

CDO(2) + failing core + ( EGO x GREED           

business      over CONFIDENCE) = CREDIT CRUNCH

And it’s here where I finish with where I really disagree with those who say that said crisis was unpredictable and such events are out of our scope of vision.  If I can think the unthinkable as I did during that year, and I’m someone who is an averagely intelligent layperson then such events are not unpredictable but very predictable, the thing that the rest of us cannot do that the philosophical folks would like us to do is to profit from said foresight, which many of us can’t.  There were several reporters who were investigating ENRON who thought something was wrong with their business model but did not bet against the company to make money because here is where thinkers like NASSIM NICHOLAS TALEB get it wrong.  

The crisis for those with good sense was inherently obvious.  Just because said people didn't make money from it doesn't make them wrong.  Where people are adverse to risk is in numbers and text.  Show someone a cleverly worded paragraph that shows an earthquake is coming and they may well stare at you confused, whereas if the ground starts to shake then watch them react.    In terms of risks in the property markets, it was obvious that a bubble was developing and it would burst BECAUSE that’s what bubbles do.  You don’t need complex historical models to figure that out, everyone could see it.  When the mortgage adviser on GMTV was told by a woman who could not get on the property ladder there was no point her getting an interest only mortgage because she could NEVER AFFORD the capital he had no answer and merely sat there looking stunned.  It was like no-one had ever had the gumption to put it into words to this guy why that was a stupid idea.  That was the year the bubble burst.

I think that our instincts for recognising dangers are relatively good for the most part, just like most of us don’t have the psychopath gene that makes us such a danger to others coupled with a bad environment.  These instincts have been honed over centuries and of course how we usually react is wait for the danger to start to reveal itself and then put things into action.  Bankers and financiers do not do this.  They act continually in their own instincts until a crash and then make out that the events were unforseeable BUT there is a way  for us to beat the banking industry and bring some sense and order to it finally.  

Clearly the male-dominated market-based thinking is the problem, this is undoubtably caused by ideas that are flawed due to overproduction of testosterone.  Therefore when idiots get ideas that will create over-valued bonuses that make financiers think they can take bigger risks without anything bad happening they can be sent to ...THE WANK TANKS!  

WANK TANKS could be installed in every financial institution across the world to reduce testosterone by creating a more plateaued environment and prevent the spread of ridiculous ideas and suggestions that puts both high street investors and taxpayers money at risk by reducing the risk of said  testosterone based ideas flowing out into the general workplace and restoring logical thinking to the western economies in order to get to the other side of the ongoing crisis because while we are still battling the financial sector we cannot hope to beat their excesses.

I’ve been Mr Chatable and a happy new year to all my readers.


My first book FREE AT LAST: A NOVEL by MIKE LAMBERT & ZOE LAMBERT is still available on Amazon Kindle for £2.29.

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