Banking Collapse and the theft of peoples Pensions

One of the rules of thumb that I have always used when it comes to financial products is simply; if I can not understand how the growth is achieved or how the product works I personally will not touch it. As simply as an observer, I have never had the money to seriously invest, over the years every time there has been a scandal, a failure or a fraud it has been with devilishly complex vehicles that very few, if any understood. Often in fact it was the lack of understanding, of how the product worked or the risk, that brought an end to these schemes.

When the banking crisis hit, there was one major question in the back of my mind, about where all this money went. I can understand the loss in value of real assets like property, particularly commercial property as that fell in value by forty and fifty percent. Therefore the loans against these were greater than the asset value. Therefore the banks needed to make provision for some of those loans not being repaid.

That was all straight forward but add to this the “Fake” assets of security bonds. Even these as explained via the media had some sense to them. However as these were vehicles for getting loans off the books there was something suspicious about them in my mind. Put simply what was a loan and a liability by financial wizardry designed by Harry Potter, this became an Asset.

Now when I studied accounting and business at university, that was false accounting. Am I glad that I did not go into accounting as it is just far to racy and exciting if they can do that. But do it they did and on a grand scale. As the other fact that emerged when the media were full of stories about the Inter-Bank lending rates, was that transactions for the year prior to the collapse were six times the entire global economy. At the time this was being explained away by some cleaver mathematics, but while the explanations may have fooled most people, to me even with the clever maths, as the GDP (Gross Domestic Product) of all the countries in the world added together is a measure of the money and capital flowing across the planet. Therefore it should be impossible for transactions to exceed twice the global GDP. This can be explained as each transaction gets counted twice, once at the sending bank, and once at the receiving bank.

This posed a serious question about what the banks were doing. The Bank Bonds of slices of other peoples debt were devised purely to get Liabilities off of the Banks Books and fool the regulator. Once one bank does this then all follow. They have to follow as the Banks are in a club and they all follow the same rules. Not our rules, theirs!

This allowed the banks to lend out more and more money. But where was that money being generated? One of the major sources was the pension funds and insurance monies. This is where the hidden scandal of the banking collapse lays as over the next twenty years when people come to retire and claim their pension, they will discover that the pension pot is empty.

When AIG were bailed out by the US taxpayers, it was simply that to grow the business AIG had failed to keep in reserve enough cash to match its insured liabilities. What they had done was to buy the junk bank bonds. This had added money to the dividends but done nothing for the long term viability of the business. This is exactly the same situation the pension funds are now in. The cash that should be there to pay out the pensions has been replaced by Junk Bank Bonds.

Putting aside for a moment the junk bank bonds, there was serious failings by the regulators in not controlling the market. When house prices were spiralling out of control and beyond any logic, had the regulators stopped the banks lending 125% mortgages and making loans of up to eight and even ten times peoples earning it would have stopped the house prices going out of control and lessened the effects of the banking crash.

But to even have suggested long before the banking crash, that house prices were out of control was to create derision and abuse. I was told that I was just jealous and that I did not understand the housing market. But it was because I did understand that I was looking the gift horse that was laying the golden egg in the mouth, and could see the inevitable collapse of the property markets.

The crash was inevitable, not just in the housing market but in this structured credit, as simply the banks with these Junk Bonds they had devised was the equivalent of a massive pyramid scam. In the US you call it a ponzi scheme. By taking these liabilities of the books and turning them into assets was no different to what Enron did.

The ponzi scheme aspect is where this appeared to have created transactions that were six times the global GDP. The bonus culture is where some of that missing money went, but most of it just never existed in the first place as was only by cooking the books that the banks made it look as though they had the money in the first place.

While I don't think that the banks set out to defraud, that is exactly what they did. This happened simply because they thought they were more clever than us mere mortals. Governments failed to stop any of it as while it looked like it was working and they were getting their taxes, they did not even look to carefully at what the banks were doing. Even the Bankers themselves did not understand what they were doing as the products and trades were so complex that no one, and I mean NO ONE, ever understood what was happening. But like all Pyramid scams eventually the flow of money in to pay out ends.

This scam relied on asset bubbles and as long as new ones can be created, The Dot com Bubble, The Housing bubble, Securitised Finance, Commodities and food, Oil, it can continue almost unnoticed. The effect though has and will leave at least eighty percent of the people of the planet poorer and without a pension.

Even now, the people who are retiring soon, are looking at their pension pot and have seen it fall over the last year. The assumption is that this is about the fall in share values. But as pension funds are required by law to maintain a mix of assets, the biggest hole is the result of the Banks Junk Bonds that these funds were persuaded to buy as being as good as gilts (Government Bonds). Effectively this is stolen money as because these Securitised Assets were an elaborate Ponzi Scheme, then the banks, that's all the Banks, are guilty of fraud.

It has taken me well over a year to work this all out, and it is complex. But once all the convoluted pieces of this jigsaw are fitted together, the Securitised Assets scheme comes out as a fraud. It hid liabilities off the books, it created money out of nowhere just by creative accounting, and no one, the regulators, governments, central banks ever thought to question how the banks were getting returns of forty percent on assets when interest rates were so low?

When the Banking Crisis first started, I reluctantly thought that saving the economy by saving the banks was the correct thing to do. That was based upon what we were being told then. However as more of the fact have slowly leaked out, then quite simply it has been completely the wrong thing to do.

The big question that puzzled me was what triggered the banks to stop lending to each other? Various explanations have been hypothesised in the media, the real reason was that the banks knew full well that the Securitised Assets scheme was going to fail and that because of their false accounting they knew they were in the upper reaches of a very polluted stream without any means propulsion. (Translation Up Shit Creek without a Paddle).

Sir Fred Godwin

As I cannot take seriously the actions of our so called leaders, here is a satire on the Pension row of the failed banker Sir Fred Goodwin

Where are House Prices Going

While watching CSI, name your own City, I heard a phrase used that's so well describes the type of acquaintance that you only know from a certain situations. It is one of things that I always find extraordinary, that Americans tend to use English language better than most British people. However it is the use of this phase, that is so appropriate for the relationship I had with the person and now talking about.

When I leave us near the coast at the mouth of the River Tyne, I got to know various people that were involved in property investment. It was mainly through drinking in the same hostelries that it got to know these people. Therefore while I thought of them as drinking buddies, in no way were they real friends. Therefore it was rather surprising when a couple of weeks ago, one of them contacted me.

When I first met these people, I was fully aware that they were engaging in conversation mainly because they thought they could extract the urine, however over time they developed a measure of respect for me.

It was because of this respect that had prompted this person to contact me. Because of the credit crunch and uncertainty regarding house prices, he got in touch with me. However what he did to was surprising. As he asked me to look after the rather nice and expensive camera for him. The story he gave me was that he was moving house or moving some of the contents of a property and wanted to ensure that this equipment was safe. Further encourage me to use it, even repeatedly calling me and asking if I had then take any pictures with it. Eventually they did take the equipment out and some of the results I have posted here. It was only after I'd started using equipment did he reveal his real agenda.

Firstly he wanted to discover my opinion of where I thought that house prices would settle. What it told him shocked him. they told him that I thought that house prices would drop by 50 or 60 per cent. The main reason I say this is that historically, house prices have always settled at three to four times average income. As at the moment house prices are seven to eight times the average income, then if that historical rule is true then property is overvalued by 50 or 60 per cent.

He then asked what I would do if I was investing in property at the moment. All hypothetical as I do not invest in property. But I told him straight that I wouldn't. but he insisted that they gave him an answer. So I taught in told him, that the only where we invest will be in and social housing. By that I mean buying properties to enable a people to rent. Not high rents, but reasonable rents that are based on the people's ability to pay.

It was then that he revealed his agenda in fall, as he wanted me to go around the courts and find the people that would close to having their homes repossessed. He would then buy the properties, at a discount, and men and backed to the people. World this all sounded rather fuller if for philanthropic what he was most interested in was obtaining property is cheap. Further he wanted to avoid buying properties from people who he thought would be bad tenants. He has little or no respect for people that don't have money.

The loan of the camera equipment had been a bribe or an incentive as he thought that I would much want to keep equipment so much that I would jump at the chance to help him. He told me that I could keep the equipment as an advance on the earnings a would garner from him.

However as his whole plan was based upon exploiting vulnerable people, and I refused to do this for him.

While they know they will be people who are in a position to exploit the situation of the credit crunch, I am not willing to be a part of that. Further he was assuming that, I think probably correctly, that the government will be providing some form if rent relief or support to help people stay in their homes. And he saw no moral problems with taking some of that money to finance his property portfolio.

Anyway the long and the short of it is, I no longer have the can requirement to play with.
It is such a shame that people can only think about ways of exploiting our fellow man

The Credit Crunch

As my regular reader may remember, when I had to move home several months ago, I railed about the obscenely inflated prices that people were asking for as rent. Back then long before the “Credit Crunch” occurred, I was forewarning of that impending situation.

Here in the UK our whole economy has been driven by a perceived, paper, rise in the value of property. When in fact house and property prices were at their peek more than five years ago. This has meant that in the UK millions of people have borrowed money against the perceived value of their home to live the high life. Now the proverbial chickens are coming home to roost.

Now I don't blame the individuals for this, the fault lays with the banks who have been fuelling the perceived rise in house prices by giving 125% mortgages. The estate agents who earn more money by keeping the markets artificially high. But the biggest villain here is the government who has fuelled the housing market by constantly saying that there is a shortage of houses.

As all this talk of a shortage boosted house prices, and created the illusion that here in the UK we had more money in the British economy, this enabled the government and politicians to create the illusion of an ever expanding economy.

Firstly we need to nail the myth that there is a shortage of housing, there is NOT! Even in London and the South East where the pressures are greatest, twenty five percent of the homes are unoccupied. In other parts of the country its as much as forty percent. The difficulty is one of price, one of value. With the perception of property values rising, as well as a perceived shortage, landlords and letting agents would hold out for much higher rents. Sometimes they got them, but more often than not the landlords who jumped into the Buy to Let market only made any money when they sold the property. However the important aspect here is that because of the difficulty of finding affordable accommodation it energised the myth of a shortage of homes.

Even some banks could see the reality of the situation and nearly three years ago the Santana Group who owns Abbey National stopped lending on some types of property citing market manipulation. Meaning that properties were be sold at inflated prices.

Therefore this whole situation was foreseeable and predictable. Further the majority of the banks were involved in this nonsensical lending. If any bank or financial institution lends at more than one hundred percent of the value of an asset, it risks getting burnt. And while much of this has been blamed on the American Sub Prime market, here in the UK we need to take our share of the blame for what we have done.

In the UK personal debt stands at over one trillion pounds. That is one trillion pounds of future earnings or income that has been spent on a consumer driven spending spree. While some people will have borrowed money to invest on assets, the majority has been been wasted on; Clothes, Holidays, Electronic gadgets, Drinking, the list could go on. While this consumer binge may have kept the money circulating in the economy, like any over indulgence, the price now needs to be paid.

The majority of house prices will halve, and the sooner this happens the better as then we can start to house all the people who need accommodation and we can start to get the economy rebuilt.

While it will be difficult for many people, this situation could enable so many people to learn to be less wasteful and to value what they have, not to keep on dreaming of the latest fashionable must have.