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

TheFactory

HAMISH_MCTAVISH wrote: »

Indeed.

The 2007 banking crisis required a confluence of events so vanishingly rare that as Viva pointed out earlier, the statistical probability of it all happening at once was on a par with the return of the dinosaurs.

Hi Hamish

What, in your opinion were the rare events that caused the banking crisis?

Genuine question, im interested in your take on it

HAMISH_MCTAVISH

TheFactory wrote: »

Hi Hamish

What, in your opinion were the rare events that caused the banking crisis?

Genuine question, im interested in your take on it

The reasons for the credit crunch and resultant banking crisis are well documented and clearly understood.

First, the Credit Crunch:

The credit crunch was a direct result of one thing and one thing only.

American banks bundled some truly horrific sub-prime loans together and with the complicity of ratings agencies, mis-sold them on the global markets as AAA investments. These were bought by pension funds, banks, investment funds, etc all over the world.

To illustrate the scale of the problem, a new word was invented. The NINJA loan.... No Job, No Income, No Assets. Ignorant people were being mis-sold these loans on an epic scale. People without a job, without any income, and without any assets were being give $500,000 mortgages on a 1% introductory teaser rate, with no understanding the rate would revert to 5% within a year or two and the loan would inevitably default.

And then of course, the inevitable happened. American sub-prime mortgages started defaulting in very large numbers, up to 30% of loans written by some lenders, and the losses caused the biggest US sub-prime lender, New Century Financial, to file for bankruptcy in April 2007.

Contagion then started to spread throughout the American financial system as the scale of these mis-sold American sub-prime backed AAA investments was realised. And just 3 months later, in July 2007, Bear Stearns Investment Bank, one of Wall Street's biggest, announced that investors in two of it's hedge funds would get little, if anything, back on their investments.

At this point, the contagion goes global.....

By August 2007 BNP Paribas announce that investors will get nothing back from two of it's funds because it can't value them, owing to "complete evaporation of liquidity from the system".

Banks all over the world stop lending to each other, and the wholesale money markets dry up, because nobody knows who owns these American mortgage backed obligations, how big the problem is, and who will be left holding the bag.

At this point the ECB pumps 200 Billion Euros into the system to fight the liquidity crisis, and the Federal Reserve, Bank Of Canada, and Bank of Japan also intervene.

By September 2007, the LIBOR interbank lending rate, the rate at which banks lend money to each other to fund consumer lending such as mortgages, rose to 6.8%. UK banks started hoarding capital, and UK wholesale funding dried up.

Those banks whose business model relies most heavily on access to wholesale funds, such as Northern Rock, start experiencing a cash flow crisis and turn to the Bank of England as lender of last resort.

Word of this gets out in the media, and we have the first run on a UK bank in 150 years. The UK government steps in to guarantee deposits at Northern Rock, and the run ends.

But it's not just Northern Rock that's in trouble.

ALL of the UK banks are having trouble accessing funds.

It makes no difference whether you're Northern Rock, RBS, HSBC, LLoyds TSB, or BOS, the global wholesale money markets have frozen up, and whether you're a good lender or a bad lender is immaterial.

The financial system was in melt-down.

And absolutely none of this so far has anything to do with UK mortgage lending standards, UK sub-prime, UK mortgage default rates, or UK house prices.

Which brings us neatly around to point 2......

The wholesale lending markets, UK banks, UK lending standards:

Northern Rock relied heavily on the wholesale money markets, rather than savers' deposits, to fund its mortgage lending.

And contrary to the belief of some posters on here, Northern Rock did not fail because of it's mortgage lending standards, or because of supposedly "sub-prime" loans it wrote, or because it's defaults made it unprofitable.

It failed purely and simply because it's business model relied on the ability to borrow short and lend long, then securitise the mortgages and resell to repay the original borrowing.

When the wholesale markets dried up due to the global credit crunch (and not just to NR, to ALL banks in the UK) this business model was unsustainable, and Nationalisation was the end result.

Now it also so happens that Northern Rock was one of the most aggressive lenders in the UK as far as higher LTV lending was concerned, and indeed had a greater concentration of non-traditional loans on it's books, such as 125% mortgages, Self Cert, etc.

But this had absolutely nothing to do with the reason it failed.

It wasn't defaults on it's loans that caused it to fail.

It was it's business model of borrowing short and lending long. A model that became unsustainable with the end of RMBS and the freezing up of global money markets.

Indeed Northern Rock's old mortgage book of all those supposedly sub-prime loans, the so-called "bad bank", is still profitable to this day. It made over £1,000,000,000 (One Billion pounds) profit in just the last 2 years.

Because the quality of mortgages written, whilst perhaps lower than traditional UK standards, remained an order of magnitude better than the real sub-prime slime written in the USA, that was the sole cause of the credit crunch.

Graham_Devon

Well....lordy...

vivatifosi

Loughton_Monkey wrote: »

What we need is three large space rocks.

One to fall on Brussels, one on Luxembourg, and the other on Strasbourg. We would then be sure this is a 'sign' from 'someone out there.

Nooo... don't do that. I used to work sometimes in Strasbourg (not for EU) and it is a lovely place with great people. You can also get very reasonable hotel rooms when Parliament not sitting. Can I suggest a targeted space laser instead?

HAMISH_MCTAVISH

vivatifosi wrote: »

Can I suggest a targeted space laser instead?

Only if I can control it from my Evil Underground Lair.....

Loughton_Monkey

vivatifosi wrote: »

.......Can I suggest a targeted space laser instead?

Aerial photographs of "Hello Mum" etched in huge letters over docklands would be quite impressive....

Of course pumping up the power, we would be able to etch accurately along Hadrian's Wall, enabling us literally to push it away and make Scotland its own island country.

I have asked Santa Claus for one of these for Christmas.

vivatifosi

Loughton_Monkey wrote: »

I have asked Santa Claus for one of these for Christmas.

Excellent. You can hide it under your swimming pool in Loughton, Thunderbirds style.

Loughton_Monkey

vivatifosi wrote: »

Excellent. You can hide it under your swimming pool in Loughton, Thunderbirds style.

That's where I had planned to put my survival bunker (from the space rocks) that Hamish told us all to build. But now you mention it, I'm still at drawing board stage so I guess it could serve the dual purpose of command centre and survival bunker.

The plans are coming together, but I'm stuck on:

(a) a source of fresh lemons for the gin & tonics.
(b) the optimum thickness of lead shielding should there be a nuclear attack instead.
(c) how to retrieve my post from deep down there [note to myself, do I really need all those Viking catalogues?]

HAMISH_MCTAVISH

Loughton_Monkey wrote: »

That's where I had planned to put my survival bunker (from the space rocks) that Hamish told us all to build. But now you mention it, I'm still at drawing board stage so I guess it could serve the dual purpose of command centre and survival bunker.

Perhaps our visiting tin foil hatters from HPC today could come and stay with you.....

MFW_ASAP

HAMISH_MCTAVISH wrote: »

Wow, those people in those buildings had a lucky escape! They're literally just on the edge of the impact crater!!!