Thursday, August 30, 2007

Don`t Spoil The Subprime

Years ago into the 1970s newmania senior was a pretty high profile Lloyds Broker. He was embroiled in a scandal that was at the beginning of a long list of scandals which did much to end Lloyds as it used to be. Nowadays it is really a name behind which companies write Insurance in the usual way aside from the Marine Market.
Anyway this scandal involved the writing of a certain Sasse Syndicate of a binder for the states called the Den Har binder. At that time, and still as far as I know , Premium written outside the US had to be declared surplus and those writing in the US had to accept a trenche of income that they might not want to accept . This was slum business for which there was no possibly underwriting rate. Nonetheless US Insurers had to take their share and all of this lead to the deadly cocktail of a huge flood of money with commissions to be made but no underlying underwriting criteria. It looked quite different by the time it got to London but the results were predictable .Events surrounding the catastrophic losses of this binding authority lead to the end of newmania seniors glittering career and the suicide of Tim Sasse.
I haven’t thought about it for a long time but with the Sub Prime lending scandal threatening to engulf the world in a new depression I cannot help but notice the similarities . One of the usual Lloyds broker tricks was to take a load of rubbish ( like US slum business) pass it though an Insurer and sell it as a treaty into the na├»ve treaty( Reinsurance) market it might be re packaged but the real trick was to get away from the risk and talk about the money
That is what has happened again except on a grand scale. Just as Insurance used to be passed around a treaty placement spiral so derivative s debt and loans are passed endlessly around with commissions all the way by the time it gets through a couple of hoops no-one remembers what it was. Brokers want commissions and lenders want the business.

Here is a question “ Would you lend money at any rate to someone with no job no security and no obvious way of paying you back.”
Answer “ No”

By passing this question through what is in effect a sort of laundry of derivative markets the question is lost. I know the story and it is a lot less complicated than it may be made to appear. I remember a very similar one


Old BE said...

The actual lending of the money to the "sub prime" customers was a classic pyramid scheme. The lenders gambled that house prices would keep rising and that they could keep them rising by pushing yet more money into the market by lending to more and more people.

If individuals went bust the banks could repossess at a large profit. They didn't remember (stupidly) that values may go down as well as up.

The banks that bought the repackaged debt are entirely to blame for their own lack of wariness, but it is ordinary mortgage payers who will pay for their lack of judgement.

Plus ca change.

Newmania said...

the "sub prime" customers was a classic pyramid scheme

Thats unccanny that is exactly what I thought . Like a pyramid scheme it carries its own demise.
When they had to take the property and foreclose ..the demand would stop and the collateral would disappear ina off of expectations

Mermaid of Moorgate said...

the fact that people would be willing to borrow that sort of money, at such extortionate rates, on a mortgage they could never repay beggars belief. Credit problem? CCJ history? Never mind, I'll borrow £150,000 for a mortgage. There has to be a serious lack of mental awareness among these people.

this means that the banks should themselves be held to account - lending to bad debtors, knowing that should the housing market turn sour they'd have to repossess - it's not illegal, but surely smacks of unethical practice?

Of course, you could go back to the old argument of "caveat emptor" - ie, there were sensible people who did NOT buy endowment mortgages from these lenders in the 1980s. Others did. Is it the bank's fault that people get suckered in by a scheme that relies on something as volatile as a stock market to help repay the mortgage?

I do think that individuals are to blame for wanting something they can't afford - I want a bigger flat but I can't afford it. So I save. I'd rather rent for years than feel peer pressure to buy a house just because everyone else seems to be buying a house. Especially if I did not have a regular income, or a CCJ - there's no way I would try to get a 100 per cent mortgage at an interest rate of 8.96 per cent - until all my debts are clear. It's basic common sense and while I am really sorry for those people who are not financially savvy at all, I have no pity for those people like that maths teacher who got a house on sub-prime. You'd never trust your kid's education to such a twit.

Mountjoy said...

“ Would you lend money at any rate to someone with no job no security and no obvious way of paying you back.”

Of course you would if you were one of those greedy investors who were sold yet another scam by snake-oil salesmen. And they got their fingers burnt, and the world economy has to pay.

Mermaid of Moorgate said...

At the end of the day, if you're not fiscally savvy, some dude will try to fob you off with a dodgy savings scheme or mortgage.

I have heard of bank managers getting suckered into a pyramid scheme - if these people are looking after our money, goodness help us.

1) Tackle financial education on a wider scale - not just at kids but everywhere. Give unbiased, independent guides out to potential borrowers/savers/people in debt before they make a decision on a mortgage

2) The FSA should better regulate the mortgage industry in the UK to prevent "Snake-Oil" salesmen.

It's not that I'm unsympathetic - I really am, but I also cannot believe the utter gormlessness of supposedly "well-educated" people who fail to use basic common sense when dealing with financial issues. Heck, I majored in ancient English languages but I still manage to do my accounts each month...

Oh dear, I really am a mini-Thatcher ain't I.

Old BE said...

Yes, but you are right.

With this sort of thing, there's a "collective" problem when things go wrong so I don't see any harm in collectively giving impartial advice to people. There should be adult education courses on personal finance. And also perhaps the lenders should be obliged to give out government-sponsored leaflets or something.

It's difficult, and the last thing I would want to see is more regulation, but if the result is silly and greedy people causing a major economic collapse then "we" have to so something don't we?

Newmania said...

Ancient English Miss M you mean Old english Beowulf , that sort of thing ?...Unlike you i found the financila world quite difficult to come to terms with and could have done with some help.

I find your instincts for caution won`t lead you too far astray

Newmania said...

Mermaid on your first post , you can always sell the poor a dream...what do you think the Lottery is . In my view a nauseating opice of exploitation

( and BTW I `m quite poor myself so no condescension is implied)

Mermaid of Moorgate said...

I'm "poor" too in the great scheme of things, but my dreams come free. My reality is dosed with common sense and TCP. Maybe a bit of lavendar too.

yes - anglo saxon, norse and celtic. Except I skipped the celtic bit. I've done latin and ancient greek and old french. Ladidah. about as useful as tits on a nun

Newmania said...

Eng Lit here ...same problem.( while ago though)

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