I’m still not sure why we’re all so obsessed with the lending to individuals. Is that because that’s all we understand (and are, to a significant extent, fed by the p*ss poor mainstream media)?

I really want to know how we think that only the increase in house prices caused this systemic failure. What about highly leveraged MBOs, poorly secured asset backed lending and the role of overvaluing businesses for the purpose of debt back acquisitions?

Stoner – surely you can help me..! What’s the percentage of lending that is attributable to individuals and what is attributable to businesses?

The tipping point will come when Marks and Spencer goes under IMO, then we will take to the streets.

I’ll be well up for some of that.

OMITN
this data is from August last year.
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=1569&a=14547

as you can see, consumer credit is about £100bn, Mortgages make up another £550bn and that compares with corporate lending of £770bn. So Retail/commercial lending by footprint is on a level.

This excludes inter bank lending and the wholesale market. I dont have figures yet for that. Let me go look.

What shape were Woolies/MFI in before the crunch? Were they living on borrowed time or money? In which case, when the credit dried up then they’d go under immediately. Seems suspicious that certain firms have gone under immediately credit becomes hard to find.

When your working capital cycle is predicated on long term debt then it only takes the briefest fart in the credit market for your business to grind to a halt.

molgrips they’ve struggled for years.

MFI and Howden joinery parted company, MFI was renamed Galiform (holding company) and its skidded along for literally years on its ass. You’d think the housing boom was kind to MFI- even the muppets couldnt turn a profit in this period of buoyancy.

Woolies was demerged by Kingfisher and again slid along surviving on its Christmas sales to survive. By closure it was £400m in debt.

There are others that went under, not to do with banks calling in overdrafts but p1sspoor businesses with poor/out dated business models that banks or anyone wouldnt go near now.
Im amazed House of Fraser is still afloat when Alders went under years ago.

The problem (I think) with Woolies is that when they were part of Kingfisher all of the freeholds to the stores were sold to property companies/landlords. A nice bit of balance sheet engineering ensuring big bonuses all round. Woolies were later sold off (probably in a leveraged buyout) so now not only had to service the rents they also had to service the massive cost of the buyout.

From memory it was £300m?

society needs to write the codes

I’d do more than just write a code. Target will fall… 😈

Blaming society for individual actions? The default position of a Guardianista, surely?! 😀

There was a systemic lack of self control in all areas of the economy. Just because you can borrow/move things off the balance sheet, doesn’t mean you should. To blame it on lack of regulation is as disingenuous as blaming personal borrowing. Bankers were paid to be professional and this includes competence. Bankers after all had the final say on who was able to borrow money and rarely did they say no!

individual bankers weren’t paid to say “No”, so they didn’t.

Stoner – cheers for those stats.

So, all the b*ll*cking on by people about individuals borrowing irresponsibly is actually a pretty poor argument for the reason we’re in this mess – it evidently goes a lot wider than that.

One of the weirdest things I hear is people saying that it will be a long time before things are “back to normal”. As if overvaluing assets to the massive extent that was done represents normal….

I read the stats differently. Half of all domestic lending is to individuals. That’s what I call a significant amount of credit exposed to the vagaries of the plebs 🙂

One of the weirdest things I hear is people saying that it will be a long time before things are “back to normal”. As if overvaluing assets to the massive extent that was done represents normal….

Very good point. It does seem though that the accepted way to get yourself out of a hole caused because people borrowed too much money is to borrow too much money.

I read the stats differently. Half of all domestic lending is to individuals. That’s what I call a significant amount of credit exposed to the vagaries of the plebs

Noted. What I was aiming at more is the general crowing made by a vocal minority who haven’t got unsecured personal debt – their assumption is that this mess has *only* been caused by personal debt, rather than the picture being different.

It does seem though that the accepted way to get yourself out of a hole caused because people borrowed too much money is to borrow too much money.

I hear it most often said, not by individuals (who would, no doubt, just wish they could sell their house and pay off their £50k credit card bill…), but from accountants, VCs, corporate financiers and other lawyers. Why? Presumably it is because they too enjoyed the spin off (i.e. bonus driven) benefits and job security that the debt driven boom times represented. And, for me, that’s a dangerous thing – there is a generation (or maybe two) of professionals whose sole motivation is driven by this system – there is not a sufficient counter argument (other than the threat of business being so poor individuals lose their jobs).

There’s a difference between lending as a function gearing up investments (bad, that leads to bubbles) and lending as a function of liquidity (getting a loan to launch a company or pay for the building costs of a new commerical property). The latter is entire raison d’etre of banking, the former is simply a mechanism of making money out of a bubble.

How do you differentiate between the two though in terms of what’s “allowable”? Serious question since you’re the resident expert. Surely the people making money out of the former will find some logical reason to justify it (in the same way that short selling supposedly helps with correct pricing – a theory I get the logic of, but am still uncomfortable with).

The latter is entire raison d’etre of banking, the former is simply a mechanism of making money out of a bubble.

Quite. Sorry, should have clarified – all the people I deal with rely on the latter. Their livelihoods are driven by leveraged buy outs and debt driven transaction finance.

well you cant really.

At it’s highest level the whole reason for banking (and this goes back even before the moneymen in the temple gumf) is to create a “clearing” market for investors and borrowers – the power to bring together funds and a home for those funds is what improves everyones standard of living whether it’s a credit card or a development loan to build a school in Rwanda. Over the years it’s rather developed into an massive economic activity in it’s own right. To some extent that’s no bad thing: service industry is just as good a basis of an economy as manufacturing despite what the died-in-the-wool unionists might say.

What had developed in banking of late was intended to be the flagship of modern finance: refined vehicles that parcelled up risk, put an accurate price* [Edit: I dont mean that. I mean accurately describe it and let the market price it though competitve tender] on it and sold it to those wishing to invest. In theory it’s incredibly powerful because it means that any given borrower or lender (investor) could be very specific about what risk they wanted exposure to and what price they were willing to pay. Unfortunately along the way the link between risk and price got lost. Not least because of complexity (and hence the god awful uselessness of ratings agencies, still in my book one of the most culpable entities in the whole saga) and short term rewards for long term positions as I mentioned in an earlier thread on bonuses (among other reasons)

One way of limiting the volume of debt is to restrict the capacity of banking covenants. These are the rules that define the amount you can borrow in comparison to what you are borrowing it for. For most people that is Loan to Value of their house. The other is the Interest Cover Ratio – i.e. the ability to service a debt with the income you have, again more prosaically for the common man the old “3 or 4 or 5 times earnings” rule. There are others.

I think one method would be to require fixing longer term swap rates even for retail borrowers with margins (bits on top) reserved as buffers for when a default might happen in the future if someone lost a job. Buffers would roll up as equity and be released on redemption. Buffers would be used either as credits against principal or be permitted to be invested in other assets for additional diversity security.

Effectively it limits the amount of loan someone can have by shortening the repayment period required or making the interest only cost quite high.

The thing is no structures such as above are in the banking sector’s interest to create. Since they reduce volume and volume drives revenue. Changes like that need the hand of a more powerful god.

OMITN – Their livelihoods are driven by leveraged buy outs and debt driven transaction finance.

and that’s the problem. Their income is driven by volume of transactions, not prudence. It is banking for banking sake. I admit some buy-outs and debt transactions are important components of liquidity function, but I also think the world would still turn on it’s axis if some of their products didn’t exist.

Changes like that need the hand of a more powerful god.

And what will his salary be? 🙂

Stoner – intersting points you make, especially about a change in role of the margin. Somehow I fear you’re voice won’t be heard. Shame – it’s a good idea.

As a result of deal volume, employers like mine (law firms) are cutting staff. Why? To maintain profit. There aren’t even any shareholders in law firms*, just the equity partners – there is no incentive to consider a long term future beyond the acquisition of more profit. And profit needs turnover (deal volmue) and it doesn’t need cost (lawyers).

*OK, technically law firms can now incorporate, but even then that just means the partners become the shareholders….

As a result of deal volume, employers like mine (law firms) are cutting staff. Why? To maintain profit.

I’m just a thicko NHS bod, but the image of somebody compensating for blood loss comes to mind… you keep ticking along (steady BP = maintaining profit) and then… 😯

you keep ticking along (steady BP = maintaining profit) and then

Quite. Although I acknowledge this doesn’t allow for economic expansion. If we only ever had a finite number of people with equal aspirations, then this might be doable, but as we have seen, even the old command economies of the Soviet era couldn’t cope….

I was simplistically thinking that if people hadn’t been allowed to overborrow and thus fall into negative equity, some of the current problem wouldn’t have happened. That seems to be the case anyway. I saw self certified mortgages fabricated in the extreme pass through IFAs to banks ith no documentation sought by anyone. The FSA rules on such things were laughable. Was corporate lending similarly open to such abuse?
If it’s true that a proportion of the problem was created by excessive bonuses on a short term basis – where has that money gone as presumably the majority usually finds it’s way back into the system?

I’m obviously one of the numpties banging on about personal debt mind :!

Changes like that need the hand of a more powerful god.

And what will his salary be?

You know I dont get out of bed for less than 200 souls and a dozen virgins normally, But for this role, I’d settle for Wales. Without the Welsh. 😈

Yes. It’s all the bankers’ fault. And it’s nothing to do with:

1. Gordon Brown deciding to tax dividends in 1997/8 causing the collapse of final salary pension schemes (apart from those serving the public sector) and requiring all investment products to seek much higher returns to allow for the shortfall
2. Gordon Brown deciding to raise the tax on savings interest
3. Which in turn has caused the many people to invest in something else – property, which was compounded by
4. Labour making no effort to manage migration or support families, resulting in failed marriages and lots more single / separated people looking for housing even though supply couldn’t keep up with demand
5. Which increased demand for property and thus prices and the associated lending
6. Which suited the government quite nicely as they could raise stamp duty and do lots of clever money wasting schemes with housing associations
7. Until the government’s “investments” in public sector services required more cash, so they hiked up lots of smaller taxes because no-one bothers reading anymore so they would get away with it
7. So businesses in particular complained about the growing tax take
8. And the government told them to shut up
9. So the businesses started to move offshore e.g. WPP, Regus, Shire etc
10. etc etc

The single common thread here is a political party that has traded on the blissful ignorance of the general public until it’s far too late with the result we’re all in a spot of bother. “Things can only get better” we were told in 1997. My a*se.

I like the logic.

Was corporate lending similarly open to such abuse?

It wouldn’t be abuse, as such, but plenty of businesses were perhaps valued at a lot more than they perhaps ought to have been. Also, leveraged buyouts are designed to increase equity value, thus driving the process upwards.

I’m of the view that private equity investment is up there in the responsibility stakes with lax lending practices on asset backed lending where the asset used was land (i.e. house and other commercial property prices to you and me…).

You know I dont get out of bed for less than 200 souls and a dozen virgins normally

*Revises positions in souls and virgins.

I agree, but PE is only one bit of equity. Corporate investors are just as bad sometimes.

You know I dont get out of bed for less than 200 souls and a dozen virgins normally

*Revises positions in souls and virgins.
Damn – I was short selling them!

Nice to see some sensible replies here amongst the “mob view”.
What some miss is the Government’s (in my view) blatant attempt to deflect blame to the “naughty bankers”. Its not just the British Government doing this at the moment but all Governments. First of all Brown seemed to be trying to avoid blame for his party by rousing up the “anti foreign workers” mob. He later seemed to realise the risk in that, so turned on the bankers, a much easier and obvious target.

The basic reason we are in troubled is the unparalleled credit expansion bursting as correctly stated. This enormous expansion was happily presided over by our Government and regulators. I remember Mr Blair and some of his colleagues with their exceedingly large mortgages taking full advantage of the “reckless lending”.

They chose not to regulate or reign in the massive wholsale market expansion. Much of this was via highly leveraged credit products held by a large number of hedge funds who are indirectly funded by banks. Banks created “toxic product” and lent money to hedge funds to buy it. We have had years of asset securitisation which has certainly not been kept secret.

Now we have to suffer a period of asset deflation. “Balance sheet recession” this will hopefully end when we get coordinated international spending programs to “force” money to circulate again. (may take some years 🙁 The credit crunch in the banking system is just the begining. Solving that is a necessary first step but it wont restart the economy. The first thing people/companies will do when they get cash is pay back debt. Thats why tax cuts wont work, and the only way out is the hard way, and thats spending. Unfortunately in the UK we are very adverse to public works and cynical so it will be hard to get our programme going.

As hinted at before the problems started in wholesale markets(Iceland is the extreme case here). The domestic market collapse was a secondary effect from the collapse in wholesale) as domestics use it for funding.. sorry to go on so much!!

Unfortunately in the UK we are very adverse to public works and cynical so it will be hard to get our programme going.

Well that and we had a higher PSBR than any other major industrialised country, so less room to manoeuvre when the **** hit the fan. I’m sure that’s nothing to do with some delusional fool reckoning he’d abolished boom and bust.