Sub-prime

The London Paper  –  8 Oct 2007

‘Chickens coming home to roost’ – that was Malcolm X’s controversial explanation for the assassination of JFK. It is also my analysis of the sub-prime lending crisis that has been rocking the City recently. Just as Malcolm X argued that poor old JFK’s demise was a direct result of the violence inherent in American society so the financial problems that we currently face are indicative of the risk-taking that has become endemic in banking circles. It is this recklessness that led directly to the profit warnings and job cuts announced last week by those banking behemoths Citigroup, Credit Suisse and UBS – and I’m afraid there may be implications for you too.

To think that Hank and Mary-Lou’s desire to better themselves and leave the trailer park to buy a prefab in Crapsville, USA may have implications for your mortgage rate or job security may be difficult to comprehend. Simply put, greedy bankers had found an ingenious method of turning America’s under-class into a potentially lucrative asset by offering them mortgages even though their lack of wonga meant default was a racing certainty.

Although rocket scientists cunningly mitigated this risk somewhat by bundling these dodgy loans in with less risky ones and then selling these packaged loans on to other banks any old joker could see that slowing economic growth would result in job losses and hence loan defaults. This, in turn, could ultimately lead to a serious banking crisis since there are potentially one trillion dollars of loans out there that have got about as much chance of being paid back as that £500 I lent my now ex-girlfriend who recently caught me in flagrante with her sister

Unfortunately for you, this banking crisis (most visibly reflected in the run on Northern Rock) could, if it gets any worse, result in higher mortgage rates and an increase in the interest rate on loans to individuals and companies. This ‘credit squeeze’ could, in turn, help result in a recession.

So once again bankers, desperate to make themselves a fast buck, have bent UK plc over the kitchen table and given her a damn good seeing to. However, as last’s week announcement that UBS is cutting 7% of its investment banking staff shows, we are not immune from our own folly.

I’d like to think that such is the admiration that we bankers are held in that the general public will, as one, release a gasp of concerned horror that we may possibly lose our jobs or receive lower bonuses this year. Unfortunately, I suspect ‘citizens’ shed more tears when something really serious happens … like the Blue Peter cat kicking the bucket. Indeed, I imagine the key thought you have is that ‘every cloud has a silver lining’.

I think Richard Nixon summed it up best when, dressed in a hot pink tuxedo and tap-dancing with a giant turquoise Aardvark, he enthusiastically sang: ‘There may be trouble ahead, but while there’s music and moonlight and love and romance let’s face the music and dance‘ … or perhaps that was just a dream?

Thoughts ?

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