Northern Rock & Giant Space Rocks......

HAMISH_MCTAVISH

Low probability but high impact events do happen.

The chance of them happening during any one lifetime, or career, or mortgage term for that matter is highly improbable....

But they will happen eventually.

The global financial crisis that led to the downfall of Northern Rock was one such event. The previous event of such magnitude was almost a century earlier.

Hindsight is wonderful and all, but I don't see many people suggesting we should all live in nuclear bunkers to protect against the inevitable strike of a city-killing Asteroid at some time in the future.

It absolutely will happen one day.

That day could be tomorrow.

Or in a thousand years.

But it's no more or less predictable than the collapse of the global financial system taking down a bank thanks to an unforeseen global liquidity crisis that had nothing to do with the profitability of the bank itself.

The reason we don't protect ourselves against such events, even though we absolutely could if we wanted to, is the same reason we don't protect ourselves against the rare but extreme financial crises that come along every century or so.....

Because to do so would mean sacrificing the benefits, progress and quality of life we can achieve for the decades, centuries or millennia between them happening.

Probably worth remembering the next time something "unexpected" happens and a load of people on the internet try to be armchair generals with the full benefit of hindsight.....

HAMISH_MCTAVISH

One of these would do to London what the Atomic bomb did to Hiroshima.

This meteorite was just 50m in diameter and even today would be essentially undetectable in enough time to accurately model impact locations and evacuate.

But would vaporise all life within a radius of 10 miles or so if it hit today.



Many millions would die instantly if this hit London, and hundreds of thousands more would die in the national panic and disrupted economy and services that ensued after.

We could protect against this by devoting most of the Earth's resources to space defence systems and hardened bunkers for the population to live in. But of course we don't....

We know it will happen one day.

And when it does, many people will be asking why we didn't take "sensible precautions", when we all knew it would happen eventually.....

Generali

Funnily enough I did predict the GFC in about 2005-6 when I first read about CDOs on the Greed and Fear news feed on my then employers intranet site.

Unfortunately I made $0 from that prediction so it doesn't count. I also failed to predict the policy response which has made a massive difference to the outcome but which has also, IMHO, made the chances of a similar thing happening again quite likely.

HAMISH_MCTAVISH

Generali wrote: »

Funnily enough I did predict the GFC in about 2005-6 when I first read about CDOs on the Greed and Fear news feed on my then employers intranet site.

Unfortunately I made $0 from that prediction so it doesn't count. I also failed to predict the policy response which has made a massive difference to the outcome but which has also, IMHO, made the chances of a similar thing happening again quite likely.

I suppose I compare the current bout of 'monday morning quarterbacking' (as the Americans would say) over Northern Rock, to criticising someone for buying a house in Nagasaki in 1939.

In hindsight, obviously, you'd do something different.

But at the time, with the information available and the facts as they were, you wouldn't.

Which is why they didn't.

I still maintain the initial policy response, or lack thereof, to the crisis was the real cause of NR failing. Not the business model itself.

This was a liquidity crisis that became a solvency crisis needlessly.

And the way to avoid that in future is not to prevent or restrict otherwise profitable lending, but rather to explicitly guarantee no bank will fail due to external failures in the funding markets, provided the underlying model remains profitable.

Screw moral hazard.

The mostly avoidable pain the nation went through as a result of govt and BOE failing to act decisively enough in the early days should never have happened.

That was the real failure.

Generali

HAMISH_MCTAVISH wrote: »

I suppose I compare the current bout of 'monday morning quarterbacking' (as the Americans would say) over Northern Rock, to criticising someone for buying a house in Nagasaki in 1939.

In hindsight, obviously, you'd do something different.

But at the time, with the information available and the facts as they were, you wouldn't.

Which is why they didn't.

I still maintain the initial policy response, or lack thereof, to the crisis was the real cause of NR failing. Not the business model itself.

This was a liquidity crisis that became a solvency crisis needlessly.

And the way to avoid that in future is not to prevent or restrict otherwise profitable lending, but rather to explicitly guarantee no bank will fail due to external failures in the funding markets, provided the underlying model remains profitable.

Screw moral hazard.

The mostly avoidable pain the nation went through as a result of govt and BOE failing to act decisively enough in the early days should never have happened.

That was the real failure.

NRK did sail too close to the wind: the FSA warned them that their reserves were too low but neither NRK nor the FSA did anything about it. IIRC, they had 2p in reserve for each £1 in liabilities.

By contrast the expectation is that banks will hold 10p+ in risk-weighted reserves under Basle III, a level most British banks have already reached.

HAMISH_MCTAVISH

Generali wrote: »

NRK did sail too close to the wind: the FSA warned them that their reserves were too low but neither NRK nor the FSA did anything about it. IIRC, they had 2p in reserve for each £1 in liabilities.

Sure.

But at the time, they weren't the only ones.

2-3p in reserves per £ of liabilities was common.

And ultimately it wasn't the quality of their loan book or assets that toppled them.

But rather a once-in-a-lifetime external event.

By contrast the expectation is that banks will hold 10p+ in risk-weighted reserves under Basle III, a level most British banks have already reached.

Preparing for the last war instead of the next.

We're good at that...

Generali

HAMISH_MCTAVISH wrote: »

Sure.

But at the time, they weren't the only ones.

2-3p in reserves per £ of liabilities was common.

And ultimately it wasn't the quality of their loan book or assets that toppled them.

But rather a once-in-a-lifetime external event.



Preparing for the last war instead of the next.

We're good at that...

NRK were exceptionally low.

The real question for me, which I've never seen answered satisfactorily, is why Lloyds had to be nationalised.

vivatifosi

Interesting thread Hamish. Your initial post reminded me of Whoops! By John Lanchester, a book about the GFC. It's a while since I read it, so can't remember the actual metrics. However it says something along the lines we of, because there was never in history a previous housing crash across ALL US markets, the risk was considered ridiculously low, the same standard deviation as dinosaurs returning. Interesting read.

Generali

vivatifosi wrote: »

Interesting thread Hamish. Your initial post reminded me of Whoops! By John Lanchester, a book about the GFC. It's a while since I read it, so can't remember the actual metrics. However it says something along the lines we of, because there was never in history a previous housing crash across ALL US markets, the risk was considered ridiculously low, the same standard deviation as dinosaurs returning. Interesting read.

If nothing else this has to win the 'Thread Title of the Year' award.

Yes, the fundamental assumption was that house prices couldn't go down but then the rise in US house prices was unprecedented. Whilst UK house prices tend to rise with wages, US ones have traditionally risen with inflation on the whole, high-end places like Manhattan excluded.

The only similar rise I can think of is the Great Florida Land Boom, the policy response to which arguably caused the later stock market boom that ended in 1929 with pretty familiar results.

It's arguable that it was the policy response to the end of the dot com boom that paved the way for the US house price rises that fueled the current mess. It is my fear that the current policy response will cause an even bigger bust. I hope it doesn't but it might.

theEnd

Generali wrote: »

The real question for me, which I've never seen answered satisfactorily, is why Lloyds had to be nationalised.

Lloyds were in very healthy shape, but 'made' to take on HBOS, who were more like NRK. They say they were lied to by the govt.

michaels

Oh great - as well as hoarding silver and bitcoins, Hamish is now suggesting I need to build a bunker in the back garden