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"The kernel of all our problems remains what it was, a chronic shortage of liquidity in the banking system."

Not so. The kernel of our problem has been excessive liquidity in the preceding years.

Truly massive credit creation and inflation of the money supply has taken place virtually unnoticed over the last 10 years and pumped first into the stock market and then into housing markets.

As the value of mortgage backed securities has fallen over the last year the hot money has flowed into other asset classes....notably commodities - leading in turn to food riots across the world.

The link between this inflation and the inflation of house prices has been excessively loose monetary policies.

It doesn't help to tell investors that they should relax because "on average" everything will be ok (if they only would relax). It's like telling an army unit not to worry about crossing a minefield because only a few individuals will be blown up. Each of them will rightly discount the chances of getting across until more bombs have gone off.

One explanation as to why write downs have been so implausibly high in the US, is that they are having to write off profits of loans which they had already booked.

Yes. They seem to have booked profits on these loan securities from the outset...so when they fail, or when they are traded, it causes those non profits to be realised. Ouch.

Can you check this is not happening here somewhere along the chain too?

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The Bank of England suddenly change their tune, in direct and strong disagreement with the markets and all other current thinking.

And the story is on the front page just above the mention of the local elections in progress today.

Coincidence?

It is not unknown for reports to be assembed to support a pre-conceived conclusion.

Most of this is just stating the obvious - we are here because evidently Bankers can't do their jobs properly - in this case professionally assessing Risk. Despite their incompetance they get paid huge amounts of money - as Mr King quite rightly points out. They don't like Mr King because he isn't 'close enough to the City' - or hasn't been corrupted like them.
The further this goes the more we should worry about the Financial system and how badly it is run. The head of the Mortgage Lenders Association was recently asking the govenment to buy Mortgage-Backed Securities, surely this is one of the most insensitive requests ever made.
Massive changes must be made in how we run our global finances and more importantly changing the culture of the Financial world. Remember the 'Greed is not bad' comment, sums up the financial culture.

How can possibly say that the worst is over whilst house prices are still falling? There is a direct link betweeen the value of the banks loans and CDOs and the value of house prices. Once house prices have stopped falling they can then value their losses more accurately.

This is obviously a PR attempt to try to restore confidence.

There is one major flaw in the 'worst is over' argument as I see it and that is that in the universe of synthetic financial products derived from prime and sub prime loans the very nature of the products prevents any proper evaluation of the risk in each particular product.

The nature of the consolidation that these products relied upon to get the AAA rating was that the 'good' is mixed in with the 'bad' and so the whole becomes (somehow) 'good'. This problem cannot be extinguished as much as we would all like it to be.

Once we see that the king has no clothes and not a transparent suit of exquisite quality there is no going back. It is a bit like virginity once lost it is lost forever.

The only solution is the passage of time - when the underlying loans have been repaid, or not, then we will 'know', but not until then. All the talk in the world will not solve this fundamental problem.

It is however in the nature of financial things that progressive writ-offs with reduce the overall uncertainty and at some point the markets will 'feel' that the problem is solved. However other problems in other markets will by then have become more important, such as the overvaluation in commercial property and the UK's housing stock.

The BoE must continuing to issue positive stability reports but it will be a mistake to believe that they will achieve anything except slow a precipitative fall. Markets need to bottom, and they will overshoot that is the nature of things free market and financial.

Its over, Its not over or should it be
get over it; at least that is what you appear to be saying that the BOE is saying. All of this is beside the point.

Regardless of whether or not the banks begin lending to one another again it will not mean that they are going to return to overlending or lending to bad risks. Robert, what happened to your talk about deleveraging and its painfull consequences lasting a prolonged time. The US appears to still be in the early stages of the real effect of the credit crunch.

I don't think the BOE are suggesting very much at all. Certainly i have listened to several respected Bond Fund Managers recently talk about the 'opportunities' to make money now on buying oversold fixed interest investments particularly some of the high yield corporate bonds. However, while not doubting that in volatile times opportunities always exist to make money out of the stampeding herd, the idea that Britains £1.4 trillion pounds worth of debt and Gordon's Brown terrible economic stewardship can be waved away if our banks who, incidently, are desperately trying to boost solvency right now by selling shares, start lending again to people drowning in debt demonstrates a flippant lack of understanding.

The one part in all of this that no-one has adequately explained to the public is where all the excessive liquidity that flooded into high risk markets came from.

Yes, the creation of an enormous volume of synthetic "AAA" instruments was (thanks to rating agency incompetence, opacity in the instruments' construction which prevented buyers from seeing the real risks beneath the voodoo, and a lack of skepticism on the part of investment professionals who ought to have known better) a mistake which underestimated the level of risk in the system and prompted a systemic undercapitalisation of lenders' balance sheets and an irresponsible increase in leverage in the system.

On the other hand, no-one can ignore the number of institutional investors who were putting their money into higher risk instruments in a bid to secure higher yields. The pension timebomb has not, to my knowledge, gone away...

As others have rightly pointed out it is excessive liquidity that has caused the problem.
The banks broke the model and have been doing so for over 10 years, we will survive but the whole thing is only just beginning to take effect. This is a crisis without precedent maybe 1920's crash is similar in that the financial instruments used then were employed in even more devious and clever ways this time around.
I don't think there is any money left in the banks coffers, they have sold us all down the river...

The banks have gone from popping corks to panicking. There's been 2 years of ever-increasing prophecies of a housing price crash but it has not happened even though any economist will point to a direct link between expectations and events . Despite all these harbingers of doom and an unheard of liquidity crisis house prices have just dropped 1% year on year . Crisis ? Hardly . The fact remains that employment is strong , interest rates falling ,and house
supply in many areas is inadequate to meet demand.

House prices may well recover and the liquidity crisis ease if the banks stop panicking and refusing to lend even to strong customers . One wonders if in reality the banks are not now talking up the crisis as a convenient excuse to hugely increase their margins when in reality their position ,as the Governor says, is more sound than they suggest .

The one part in all of this that no-one has adequately explained to the public is where all the excessive liquidity that flooded into high risk markets came from.

It works like this...
you bank £100 the bank keeps £20 and loans out £80 when the £80 is paid back there is then £180 of real money for the initial £100 so they are making money. The money paid back is not allowed to be used as a loan.....But......
it is this money which the banks packaged up and sold to the markets.... sold as CAPITAL that means they could reuse that money. Great huh ? but what happens if the CAPITAL they sold turns out to be not worth the paper it is printed on....
The banks solid capital the money it sits on disapears....
They have no capital to back loans, the markets they sold their crap loans to dry up and everything grinds to a halt.
This is a major serious event. Also China will not escape it is seriously tied into this model.
In a way it's a good thing Houses are not an asset to be traded.

LondonerGus (10)

I believe a large part of the increased liquidity will have been from hedge funds. (Was certainly the case in the leveraged finance market).

They would have obtained the capital element of their funding (small) from pension funds and other investment institutions and borrowed the rest from investment banks and (to a lesser extent) other banks, secured against the underlying investments in bonds etc..

To the extent the losses have not been revisited on the lending banks - having seized the underlying assets - the losses will have been invisible to all but the investors and banks in the hedge funds.

Your are right, though, some of the losses will certainly hit the pension funds, but their allocation to hedge funds are relatively small, so I would not expect it to become a live or significant issue. (Bad news capable of being buried). I may be wrong.

There are certainly hedge funds not affected who will be trying to mop up decent assets at good prices. I suspect the BoE is largely right on the valuation point. (And have said so before). It is also supported by HBoS's comments on their further writedowns. (Amongst others).

PS.
A bit rich for Mr. Peston to say "told you so" when he has been labelling everything that remotely resembles a bond "dodgy" or "toxic" for months. This sensationalist rubbish would hardly have encouraged the BoE to take a moare commercial view. Although whether the BoE should really re-invent itself as a hedge fund is a moot point.

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I have expressed an appreciation for Mervyn King on a number of occasions recently but now I am begining to like him. He talks sense.

His argument is that the exposure to sub-prime is now largely known to all and sundry and it is now time that the bankers came off strike. He has provided them with the liquidity with which to rebuild their balance sheets and so the next move belongs to the bankers.

This is as far as my optimism will take me.

We now have bank directors who are political rather than financial in their disposition and status. Therefore to change implies weakness and weakness means a loss of status. They seem trapped into immobility with their fear - like startled rabbits in the headlights.

This then begs the question: have they all actually admitted their sub-prime losses in full? My fear is that they have not. I hope my fears are unfounded.

If the bankers don't lift themselves from their current torpor then I suggest the regulators start knocking on doors and shaking a few trees.

Personally, I'm praying that it isn't over!

I'm hoping that this is the beginning of a return to reality, as opposed to the excess of recent years.

I worry that if this doesn't sort things out what will?

Where will we be in 12 months if the opportunity for correction is missed?

As if the Bank of England put this out to encourage punters to vote Labour today.

In 9 years in the city I can count the number of Labour voters I ever met there on one finger.

The city is all about unregulated capitalism, which sounds more like Tory Dave and his mates to me.

The only exception is when the city does its dough, then the banks bleat for more intervention!

The only solution as far as Britain goes is a managed steady fall of about 20 per cent in asset prices. This requires lower interest ratesso that banks can lend to us at 5 per cent ish, but expan their margins, so official rates will have to get down to about 3 per cent.

I suggest that Mervyn etc cease prattling and get on with cutting rates at 0.25 a month, but when it's really all over they must remember to hike them to prevent the next bubble.

Dear Robert
According to the Finacial experts, American Banks STILL have not declared £129,----BILLION--- DOLLARS of sub prime losses, and it is expected tahta quarter of this will show on the British banks books, this being the case then the credit crunch has only just begun.

I totally agree with Holmana on Robert Preston's elocution and style of delivery which seems to be becoming more and more affected. Being in business I rely on the Ö÷²¥´óÐã for information, but Preston's delivery has me lunging for the off switch now. It's almost as though the modern presenters need to adopt a quirky style of delivery which get's them noticed. I just find it irritating and I really wish he would speak normally.

This is just more wishful thinking on behalf of the BoE. By the day, the true extent of the problems are being revealed. The fact remains we have been playing a very long game of pass the financial parcel - £3 trillion has been spent when only a fraction of that money was ever available.

It is somewhat incredulous then, though given the mess we are in, perhaps unsurprising that economists and politicians are arguing the same old arguments which got us here in the first place, i.e. let's keep spending, and hope for house price inflation to get back to speed.

The problem is simply that asset price inflation (i.e. house prices) has put the cost of living out of sync with true earnings. We have only been able to keep up the illusion of wealth with credit/borrowing, which has now stopped. Hence the extent of the problem is only now becoming clear.

Sadly, there are only two ways to deal with the situation, i.e. to seek to realign house prices with salaries, and neither of them are pleasant. One option is to double salaries, which isn't going to happen. Whilst the other is for house prices to fall by between 30-50%, which will.

Unfortunately, along route, we will see many people lose their properties, businesses going under, unemployment increasing, and at a least a decade, though probably more, for the position to correct itself. This is Japan all over again and look at what happened there.

Here are a couple of reasons why the credit crunch might have been overplayed or overstated.

Firstly it is conceivable that a number of banks did collude together in order to overstate the credit crunch propblem as a means or excuse to improve their depleted capital bases after a long period of lending over exuberance. If that is the case thenthose banks were ably supported (albeit inadvertently) by various city editors and such like, who were keen to show off they're inside knowledge of what is supposed to be going on inside the money markets.

Secondly the speed at which information can now be communicated and distorted, by all sorts of mischievious parties, means that the situation became grossly overstated and everyones worst fears became subsequently heightened. By the people working in the media who frequently sensatinoalise what is going on in order to try and attract a bigger and wider audience. This latter problem is compounded by the fact that there are too many news outlets competing and bombarding us with conflicting and often contradictory information.

For what it is worth I do suspect that a number of banks did in probably set out to improve their capital bases this way. Then the situation was then blown out of proportion by the various smart arses working in the media. As a result the credit crunch has probably been deeper and gone on longer than was intended or expected. Now the problem seems to be how to get the ball rolling again without loosing too much face or being accused of scaremongering. In this respect I also happen to agree with the Govenor of the BOE when he said the losses will not be as great as predicted but, I must confess that I am a "Merv" fan.

So come on you so called masters of the universe show us that you have the balls to earn the money you keep on trousering and get things back to normality as soon as possible. The brown adrenalin has been flowing for far too long and we are all beginning to smell.

Hmmmm. What about all the Alt-A lending in the US, which is barely better than sub-prime? The scale of that is terrifying.

Plus we have our home grown "sub-prime" where people have got mortgages based on false declarations of income. Not to mention the eye-waterng aount of unsecured debt, all of which will have a knock-on effect in the real economy, peole considered good mortgage risks lose their jobs, and feault, and so the spiral goes on ever downwards.

This is far from over, it has hardly started.

I read these blogs with great interest because it's the place I can find out real-time what the heck is happening at the top. Mostly the discussions are 'over my head' and that's cool, I'm no expert on banking, but I should like to say that, Robert, if your blog is really, as you say, about the things that matter, I'd like you to devote some space to the knock-on effect beyond the banks, BOE, City and Building Societies. My firm is a good barometer of what's coming, chaos. The slowdown in takings has been sudden and very marked.

I, for one, am glad that the worst of the 'Credit Crunch' is history, perhaps due to the remarkable Bernanke panic on interest rates, and would like to remind the BoE/MPC panel that price inflation in food, energy, utilities etc not to mention the odd variation in Vehicle Licence Tax needs their urgent attention.

With prices of basic foodstuffs jumping by double digit percentages (eggs I buy jumped 20% last month) and surely a fall in the weightings of consumer non-durables and entertainment, the CPI looks likely to rise above the 3% mark (or should) significantly so a similar rise in interest rates is required now the liquidity is OK for the banks.

So at the next MPC meeting remembering that the banks can't complain about lack of BoE funding perhaps, like my eggs, interest rates could jump 20% to 6%?

We should congratulate the Governor on his quiet rebuke of a Labour TSC member whinging on about homeowners or more precisely his re-electability.

Indeed. I agree with 24. We are at the End of the Beginning.

We are now seeing default rates of sub prime as high as 36% in the US and even the top class US mortgages default rates (not AltA) have recently doubled.

This will get a lot worse as recession/ depression bites.

Banks' economic function as "credit intermediaries" is essentially to provide a guarantee of borrowers' credit, backed by a proprietary default fund - "Regulatory Capital".

They have become used to "outsourcing" that guarantee to Investors: totally (via securitisation); temporarily (via credit default swaps) and partially (via monoline insurance).

Since Investors have gone on strike, probably permanently, the pool of capital available to back new credit has not only shrunk dramatically, but will shrink more with every default.

This "deficit-based" system is finished. We have reached "Peak Credit".



Give it six months to a year and the unfolding US and UK depression will lead to calls for alternatives to a failed system.

Clause 4. Advise from a Nationalised Bank.

As I understand it a sub-prime loan simply means a loan with a higher level of risk. Now, given falling house prices and the higher cost of living (in the US and increasingly in the UK ) many more mortgage and 'other' loans will fall into this category. So, it's fanciful to imagine anyone can currently predict the risk posed to the economy by sub-prime losses. What we are seeing here is an attempt by the BOE to manipulate market sentiment. Untill we have full transparancy from the banks we are all effectively in the dark.

Here's a statistic which should allow even the most ordinarily educated reader of Merv's words decide for themselves if we are at the end of the crisis or just at the end of the begining of it.

In the US, the alt-a rated morgage market (better than sub prime in the same way that a Double Whopper is 'better' than a Big Mac) is 50% bigger than that for sub-prime.

89% of those alt-a morgages are now in negative equity.

If half of those go bad, that could mean a new round of write offs equivilent to what we have seen so far... plus 50%

Most US comentators still think that house values still have some way to fall... actually they have no idea how much further they will fall...just that they will.

What happens if shareholders decline to take up the rights issues being currently offered by RBS and HBOS?

Maybe our posters here have some ideas?

For my part I don't understand why house values per-se matter in the medium term, unless you're trying to sell (or default on the mortgage). Using house values as a measure of worth (growth?) is a pretty worthless exercise. That is why we are where we are, is it not?

What does matter is how the economy is reflated (right word?) to bring in more money.
Hey - I'm not jealous, I'd be content with surviving! Right now I can't see further forward than tomorrow. My fault? no way.
Even the author of this blog intimates that we've got far too many super-rich in the UK, too many 'millionaires' (all soaking up the cash and squirrelling it away). Figure it out.. one guy with £100 million, well that's 200 people who don't have 1/2 million and so on. Money is finite, there isn't that much to share. We've got too much import, too much retail, nowhere near enough export (and if anyone's still exporting UK-made goods to the USA with the £-$ rate well-done them). There's NO spending-power left at street level for anything except the 'basic' necessities of food, clothing, tax and fuel for MOST people.

Now, if the super-rich actually started spending (putting back?) in the UK and IF the government came out and said 'we are going to reverse recent trends and have a 'blitz' to regenerate UK manufacturing' we'd all be better off pretty quickly.

I warned Brown would be a disaster when I stood in the last Parliamentary election, and so he is in my view. I paid for my own campaing and I fought for what I belived in. Not that now - if asked - I could name anyone better than Brown - look what John Major's mob did to the economy in the 90's. Ken Clarke still smirks about it on TV when the subject of Black Wednesday comes up. that shower are still behind the scenes in the Conservative party.

We can clamour for fresh-thinking and new ideas and new ways till the cows come home. Those guys down there in Westminster, heck, they just don't think that way. And if they did, they could never get together and implement anything. Name any useful achievement by any government that has made this country a better place to live in - in the last 30 years.

I despair of seeing any Realpolitik in this country in my lifetime.

Number 30, fingerbob69, about the alt-a rated mortgage market.

I was under the impression alt-a was 50 percent bigger than sub-prime by number, but double by value per mortgage. This would make it three times the size of the sub-prime market.

Still, we do not know the local exposure.

Evidently RBS has written down their sub-prime to 38 percent and alt-a to 50 percent. This seems reasonably conservative, not so? Sure, it is possible that reasonably conservative is not conservative enough. The main thing is to delay any further write downs as long as possible, so that the particular type of equity-release which banks are experiencing is gradual.

Banks will continue to be able to raise more equity capital in the market for at least three years because effectively the BoE has guaranteed that they will not let banks fail outright. One can always take over another. For example, in the US, Bank of America, the second biggest bank, is taking over Countrywide, previously the biggest home mortgage provider.

What happened to the credit default swaps you were looking for, if I may ask?

Millbrookblue wrote: house prices have just dropped 1% year on year . Crisis ? Hardly.

That statement either reflects your age (probably never been through a boom-bust cycle before) or naiveté. The key phrase here is 'So Far' because all the figures reflect the past. Everything you talk about unemployment, east-European immigration, lack of houses, etc., which are thrown about in this 'by how much will house prices fall' debate will simply begin to unravel over the next six months. And I'm afraid this time it will not be 'different'. And here is the scary bit, this is just the start of this downturn. It has at least 18-24 months to play out. Then comes the recovery.

At the same time a downturn affects everybody if not directly through job security, indirectly through pensions, social unrest, etc. This includes me, even though 'so far' I feel alright, still have a job, more than halfway on my mortgage, a third through my working life, put aside a good pension contribution every month, etc. but not blinkered because I've seen this before.

If you factor the turn of events on the Halifax/Nationwide index and look at the graph i.e. the swing from the peak Aug/Sep to the present, the fall is absolutely staggering. Calculate the slope of the line (trend) and you'll arrive at a figure that is almost 1.8% per month.

Another very important point here is even if the liquidity crisis goes away the problem is still the deposit on the mortgage. I'll be very surprised in another three months if all the mortgage lenders don't raise the deposit to about 20%. Nationwide have already started asking for 25% so far and have stopped lending in excess of half a million. That should give you a fair idea of how much they expect house prices to fall over the next 18-24 months. Add into the mix the spiraling costs of living and I can't even begin to imagine where and when this will end now that it has started. It is a dead donkey and don't even try reviving it.

And finally if the sub-prime problem in the US hadn't started this something else like a banker splat by a bus in the city, would have triggered it.

There is a difference in being an optimist and a realist. It is about time to accept the reality and no amount of spin can change that. Just look at the other side of the Atlantic and the UK is about three quarters behind. Personally I think if we had taken a slight correction in Sep'05 for about a year it would have been less painful now.

Number 29, doctor-gloom. Perhaps your statement that the BOE is attempting to manipulate market sentiment is a bit strong. I do not think they are.

By analogy, while there are cards left in the pack one may be able to influence which ones are dealt. But we are facing a situation where all the cards have already been dealt. However, most of them are face down. They cannot be revealed until the relevant securities mature.

Also, their face value today, if one could take a peek, is higher than they will be on maturity, after further defaults.

Therefore market sentiment about this is not going to affect matters in the slightest. This is a straightforward effort to predict an outcome.

I happen to think the underlying prediction made by the BOE is completely and absolutely wrong. Not that prediction of future events affects their outcome. Will it rain on the 18th October in the second smallest town in Bulgaria?

Robert,

Please ignore the insults, you are doing a good job in difficult circumstances, you are more transparent than your critics who prefer the comfort of a blog site.

The banks worldwide have lost hundreds of millions of dollars/pounds.

Who has the money?

to #33

I'm informed some bugger has put them in a big pink envelope in the middle of the room... but I still can't find them.

Banks know class action suits are being prepared against them and compensation will not come cheap.
They have factored in this potential damage which is why they are desperate to keep funds in their coffers.
It is surprising Mervyn King has not spotted this an one wonders whether political pressure is being covertly laid on him to say what he knows not to be the full story!

Number 37, richiemurf, you said, the banks worldwide have lost hundreds of millions of pounds. Who has the money?

It is no more. It has ceased to be. Bereft of life, it has joined the choir invisible.

Like your car. You may have paid 15k GBP. Today it may be worth 5k GBP. What happened to the 10k? It has been used up, consumed, depreciated. It is history.

By the way, think billions, not millions. However, billions are only a thousand million, not a million million.

They may try to tell you that the lost money is stunned, or pining. They would, wouldn't they!

The banks regularly overstate their write-downs because it is hugely tax-efficient to do so. The scale is unusual this time, so the cash flow benefits are huge. The flip side however is that the Treasury will receive much less Corporation Tax revenue than it anticipated until this is all worked out of the system.

Does a glut of repossessed homes affect house prices generally, and do the lenders have the sense to try to avoid flooding the market? Borrowers with interest-only mortgages whose homes are sold at necessarily under-value create a new level of negative equity that must be adding to the agony. Surely the good old repayment mortgage will enjoy a renaissance when all this is over.

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On the question, of whether 'the worst is over' it seems naive to believe that normal operations can be restored when the cost of oil is 100% greater than what it was a couple of years ago.

Oil drives western economies, and with a greater proportion of wealth being consumed in covering basic utility bills the GDP is destined to contract.

The days of providing credit with the assumption of economic growth to repay debt is over (or just about). As oil supply, and raw-materials, becomes increasingly constrained (peak-oil) or more expensive to extract economic growth is destined to the history books.

Here's another one to chew on...

the value of distressed US corporate bonds rose from $.4billion in value in March to "$206 billon in April...WOW WEEEEEEEE!

I think worse may well be to come, but it is difficult to tell! The worries over alt-A mortgages could be valid. I don't wish to strike up a misanthropic or critical note here but things hinge on the sort of people that have applied for the various mortgages. In the absence of unemployment (and that's an important proviso to what I'm about to say), I can't imagine that a couple with kids would leave their family home just because they were in negative equity. If their jobs continued they'd probably continue to pay off the mortgage and wait for the price to increase-at some indeterminate point in the future hopefully! Of course if they both became unemployed they'd have no option but to leave the home probably! In comparison what can we reasonably expect from people who have lied on their mortgage applications? If you are willing to lie from the outset, then we are probably not dealing with that reliable a bunch of people! That they would walk away from their debt repayment responsibilities during hard times, or negative equity, is quite to be expected.

As regards "who has the money?" in this whole housing debacle-it must be in the hands of building construction firms (for new build flats) or sellers (for second hand properties). If I borrow 100K from the bank to buy a 150K new build flat then I have to hand that money over on the day of completion or they don't give me the keys. If the flat subsequently depreciates to 50K in value, the bank loses money (if I stop paying the mortgage back) or I effectively lose money (if I continue to pay it back)-but the original 150K is safely pocketed by the flat construction firm (or the sellers of the house in the other scenario). No money has actually dissapeared in such a situation. In that regard I suspect that new build flats are no longer being constructed at the previous rate because the building firms think that they can no longer sell them, but whilst they were selling they literally couldn't lose by future events because the money appeared "up-front" in the chain of events from their perspective.

@ 17 "His argument is that the exposure to sub-prime is now largely known to all and sundry and it is now time that the bankers came off strike. He has provided them with the liquidity with which to rebuild their balance sheets and so the next move belongs to the bankers."
------------------------------------

I take it you don't believe this and frankly, I'd be surprised if anyone would.
The rock-bottom reason the banks won't lend to each other is precisely because nobody knows how much the liabilty is. Bank A won't lend to Bank B because it doesn't know what Bank B's exposure is. It does however know it's own and is thuis presuming Bank B must be rough;ly equivalent and thereore Bank B is not a sound bet. Bank B thinks likewise about Bank A, C and D to Z and they all think the same way to.

The only way this mess will be sorted is for all the banks to declare all of the exposure and I mean all of it. Otherwise it's just meaningless.

Also, it's only sub-prime etc. The real problem is yet to surface - SIVs. They're not the elephant in the room, they're the full herd. They dwarf many 10's of times over the exposure to sub-prime.

@ 38 The reason is because the elephant no-one will talk about is standing on them

I doubt the worst is over. If you believe this is a problem imported from the US, and they have difficulty identifying how far down the line they are with their sub-prime, how come we are so confident that the worst is past? The value of the packages are unknown and are certainly not going up in value or stabilising, so fail to see how it's all over now. Coupled with that we have our own housing bubble that is now deflating at speed, commercial property has fallen in value, higher taxes, higher food and fuel of all sorts. The worst is yet to come. We can not live off credit for ever and banks are now beginning to realise how much they have lent to people who will not be able to repay the money.

OK I'll buy the lot, then.

Now, where can I find a bank to lend me the $200bn ? Shouldn't be that hard. Merv?

It's also because the banks can lend the money they do have to the general public at higher rates thus boosting their profits without taking extra lending risks. Banks are businesses - not mutual funds as building societies once were. They are no longer interested in the wellbeing of general public but in their share holders. The people running the banks are only really concerned about their pay and bonuses, so what do they care about whether some poor family can't afford the mortgage repayment anymore. The government could have put the £50 billion into a the national savings system and lent it out to borrowers at cheaper rates and let the share holders of Northern Rock take the loss.

But it's not all one sided. Quite why people expect to be able to buy a house with no money what so ever as a deposit is beyond me. There should be laws in place that say that you can't buy unless you have taken the trouble to save up at least 5% of the purchase price of the house/flat.

Mind you, if that tyrant M Thatcher had not given away the profits from the greatest asset the UK had (North Sea Oil) and sold off the vast amounts of council housing which with registered rents enabled less advantaged and young people have some where to live, then things may have been different.

Any comments ??

Im fed up with everyone knocking our wonderful leaders.
If Mervyn says the worst is over, then he must be right.
Gordon and Alistair are also wonderful.
I mean lets just think about all their great acheivements....ummmm?

Advert in todays papers. RBS have CUT rates on new fixed and tracker mortgages. For months the Ö÷²¥´óÐã lead by chief horseman of the apocalypse Robert Peston have gleefully reported any increase lenders have applied. Why is he not so ready to acknowledge this more positive development. Time to be honest Mr Peston, just what is your agenda and what do you and your colleagues hope to achieve from this blatant mis-reporting of the economy?

This analysis also means that Northern Rock represents a substantial profitable asset for tax payers, and not the huge liability that Robert Peston implied just a few weeks ago.

Which Robert Peston are we to believe?

Is there any body else at the Ö÷²¥´óÐã except for R P ?

to #50

First let me say I'm no fan of Thatcher however....

North Sea oil revenue during the early eighties went to one place and one place only... the 3 to5 million unemployed... supported a rate that in today's money is 2/3 times what today's UK unemployed receive.

The reason they were unemployed was that the unproductive, backward looking, uninovative, strike riven and uncompetitive waste of space that was 'Birtish Industry' was being put to the sword of a global recession... a recession principally led by spiralling oil prices ($110/barrel at their 1980/81 peak) rampant inflation regularly peaking over 10% and appantly superior methods of production and management coming out of Germany and Japan.

As for those council houses... only a fool would argue against allowing ordinary folk who otherwise would never be able to partake of asset growth wealth being given that chance. Where Thatcher screwed up was that the billions that was created by what was then called 'right to buy' flowed directly into central government coffers. None of that money went into a programe of social housing build to replace those council homes sold. The mis-direction of those monies was one of this countries greatest criminal acts.


A correction to my post #44

Distressed US corporate bonds in March were at a value of $4.4billion not $.4billion as stated.

The value of distressed US corporate bonds in April IS however $206 billion.

I said before and I'll say it again... WOW WEEEEEEE ....and not in a good way!

The BOE does deserve some BOOing.

How dares it give lessons in market analysis and timing ?

This sounds like yet another attempt of calming down the market.

A PR release is definitely less expensive than a pointless multibillion pound quick fix.

Truth

Greed is the cause of all Humans hell on Earth. Many laws on man, but never on our god called money. You see things should be shared to make things work, but with now laws on money, in this world, greed is all peoples aim. Our system would work if wealth was made of three classes, but in this world we have four (greed) It should be mans biggest sin, but the very wealthy with their power on money, control and make up the most important laws. Form when man first walk to us today, like a child growing to adult, we are all here only learning. With many poor forced to stealing, are many times locked up from there freedom. The real thief's of our world with no laws on how much wealth one should have, the rewards are have your freedom. Jealousy grew in time, to create all our hate, build you prisons you mighty ones. Employ police to guard your Earth treasures, to keep the bad poor away from the good rich, then relax and watch your corruption grow. The evil that grows on Earth was made from the man that greeds. Building this fake heaven that we all see. Our ever growing destruction was all from the powers of greed.

I note Sir Ronald Cohen, arguably the most deserving of an appearance in your blog on greedy people, says the credit crunch is only one third of the way through.
Cohen, whose former company Apax is associated with thousands of lost pensions all needing taxpayer support, has a different solution to the problem. Guess what? More venture capitalism!
What is terrifying is that people or at least those at the Entrepreneurs' Summit seemed prepared to listen to him. Clearly he doesn't think the bank of England vaults are empty yet.

dudeDevonboy (no 50). I believe there used to be tighter controls on the availability of credit. These controls were swept away by the Thatcher clan. I understand why it might seem reasonable to return to 'tighter' state controls here, but, as some of the other commentators have pointed out, the 'market' (what ever that is) is restricting credit (the ending of 100 percent mortgages etc.) A good thing too, given the need to bring some sanity back to the housing market.

#41 Martin, correct me if I'm wrong, but doesn't the capital gains tax mainly come into play when gains or losses are realised? I thought that any tax would be calculated when you dispose of the assets, as a gain or loss against cost, hence the book value in the mean time wouldn't affect tax and therefore cash flows?

I found what I was looking for. Explains a little as to why writedowns seem implausibly high.

This was published in Business Week April 13 2008.



"Insurance offered banks another advantage: It allowed them to execute what's known as a negative-basis trade, a strategy that essentially lets banks book profits on CDOs up front, even though they haven't collected the money yet and might never do so.

Here's how it worked: Say a bank bought a security that paid an interest rate that was 0.5 percentage points above a benchmark rate. Then it went out and purchased insurance on the bond that cost 0.2 percentage points above a benchmark rate. After doing so, the bank could book the difference between the interest payments and the insurance premiums, the 0.3-point spread, across the life of the bond—usually 5 to 10 years. Banks recorded those illusory profits in the quarter they took out the insurance. "

When do we get to hear which banks are beginning to use the BoE Special Liquidity Scheme? Will this be made public, week by week as it happens? (Hard to see why not, if it is taxpayers ultimately lending out the funds being swapped).

Have a look and add your name if you support it.

Mmmmmm its interesting that at a time the BoE has now decided that it will accept asset backed securities and swap them for purer higher arted Gilts the BoE declares that all is less worse than initially anticipated

This does remind of the what the sell-side does when it is promoting an issue it is leading/advising on ie is the BoE talking iots book?

The BoE may be right although what has caused it to change its mind and make a U turn when previously it was against such a swap?

The BoE is playing a dangerous game as it tries to hang on to its credibility. In addition it probabaly is beginning to realise that the world is not oulated by Homo Economicus but Homo Sapiens and that most of these individuals are loss averse

There is more pain to come and as we are in May the recent rise in the markets provides an excellent cue to sell and go away

Once the banks have raised the capital they need at present we can expect the conditions to deteriorate again as more evidence of the recent greed splurge are revealed.

Even Buffet is being investigated

Gordon Brown appears to be a complete Moron.

Even worse, he assumes that everyone else is as dumb as he is.

There is no way that mortgage defaults are causing banks in the UK any problems.

This means that banks have been caught gambling on risky financial instruments abroad and made major losses.

Banks also asked that Legal safeguards were removed so that they could make even more money (or in this case threaten their own financial stability). The minimum liquidity rules should be brought back immediately. The banks cannot be trusted.

Banks refused to pass on lower mortgage interest rates to the British public, but had the bare a$$ed cheek to bumb us for a £50 Billion top them up. The government should make them pay.

The shareholders of these merchant bankers should be questioning the financial credentials of their executives and most certainly some of them need to be shown the door.

Most definitely there should be no six figure bonuses until the banks have repaid the taxpayer in full.

When I hear or read your reports I have always been concerned by the billions and trillions of £s you quote, until I realised you were using American numerical notation. An American billion is merely one thousand million whereas a British billion is one million million. Apparently it is this latter figure you use when you speak of trillions. Is there a reason for using American values? I find them very concerning.

Hmm, so far house prices are down only 0.93%

Just a little correction so far.

Pension Funds have seen some of their assets values (on which Annuities and our Pensions are based) fall by over half.

So who is going to invest their money in a Pension Scheme ? (When the media does its best to knock the very companies our Pensions are invested in)

Best to Invest your money in Bricks and mortar, collect the Rent and in twenty years decide whether or not to keep the House (and Rent) or buy an Annuity (or just Gilt Edged stock).

Not a hard choice.

Bearing in mind the amount of damage done to our Pension Funds by scare stories and spreadbetting cartels, I think there should be a criminal investigation, to find out if any deliberate collusion existed between journalists and spreadbetting cartels.

If you agree write to your MP !

It's your Pensions they are plundering !

Lets step back from this one a bit. What exactly does the bank stand to gain from this statement?

Answer nothing, financially. It is still widely expected that the bank will have to plough money into the system to keep it afloat because of trust and liquidity issues.

However, short term, there is an even greater risk for the bank: EU State Aid rules. This was touched on in the Northern Rock debate, and I believe that the Commission is considering challenging the action taken. How much more would they challenge the action about to be taken, especially since most of the major banks in Europe are UK based. The defence to this is that in effecting the arrangement, the Bank was not giving any aid, and was only doing something that the market should be doing of its own accord, i.e. that the security is good.

And that is why we suddenly have a statement out of the blue from the Bank saying that the worst is over, and its all blue skies from now on.

Cynical? Moi? Too right.

The whole financial system is based on a promise - a promise to pay.
It seems to me (as an uninformed observer :-) that various financial instruments and securities effectively (a) spread risk associated with debt (b) hide the audit trail that links the borrower, the lender and the debt.
In a virtuous cycle I imagine that there are stable dynamics between these things, and that a little 'leakage' of unpaid debt is OK (i.e. the rewards are bigger than the risks).
In a vicious cycle you don't know where the good money is i.e. 'where the buck starts and stops'. A bank lending money might be have to write off huge sums because of defaulted debts. Another bank might not be willing to lend to that bank. . I can't borrow to spend. The financial world atrophies.

You would think that in this computing age all financial instruments and securities, including money, could have an audit trail to show its provenance. Not all money is the same?

I think there is worse to come as the assessment of risk moves from the almost unassessed to cautious side of normal. The problem has been the over confidence caused by exponential property price rises (15%+ p.a.) and very easy credit, leading to a very high 'feel good factor', it turn leading to loss of view of the true value of money and overspending.

Banks were OK lending 100% and even 125% because they knew even if borrowers defaulted, the equity in the house would be at least 15% higher year on year. Now they see prices falling back hence they need deposits and move quickly to recover their assets if defaults occur. Don't forget this is a normalisation of the market, 200% rise followed by a 10% fall is not exactly a disaster.

Inflation has again been outstandingly low for many years, and prices have been falling for some time on the high street, at some time they must rise. I think we need to get back to a more balanced economic perspective and that sadly means lower more sustainable house prices and higher high street prices.