The Credit Crunch

[Hammer]

Originally Posted by endless psych

I'm sure that book would have been a great comfort to citizens of the Weimar Republic.

True, but if your at the stage where you have Hyperinflation, then whatever money you have is fucked anyway and you want some nice valuable property or possessions.

[LesMTS]

Originally Posted by Potatojunkie

I want Credit Crunch to be a breakfast cereal.

Pressed corn for £2.00 a box is kind of a credit crunch.

[endless psych]

Originally Posted by Hammer

True, but if your at the stage where you have Hyperinflation, then whatever money you have is fucked anyway and you want some nice valuable property or possessions.

The point was kinda that aye investing is gambling but money lending shouldn't be. Until very recently banks wouldn't give you a loan unless they were sure you could pay it back. Most folks will have been unaware that bansk changed the way they gave out loans and were therefore giving out more and less concerned about the risks. IE. Its likely they were of the opinon they could afford the loan because the bank believed they could.

Or in short its a bit like blaming someone for catching a cold because they didn't eat their veg. or something.

Originally Posted by Hammer

Eh? Borrowers = normal people who borrow money, Lenders = banks who offer loans etc.

Got that the wrong way around then.

[Addy]

Originally Posted by Vonnie

I think it's got to come down to the lender here. When it comes to financing a home I don't think anybody goes into that planning to miss payments, but it's happened. In this case I don't blame Northern Rock for what has happened, they were just the first high profile UK name to admit they were having problems as a direct consequence of the American market.

We also are due to remortgage in July. I'm thrilled at the prospect.

I on the other hand do blame Northern Rock for having virtually zero concept of adequate risk management, in spite of the Basel Accords, the second of which was fully implemented last year. They made horrific assumptions about the liquidity of the mortgage market not changing (that's what you get for only calculating market risk by using Historical Simulation Value at Risk, even Monte Carlo simulations don't suffice there) and suffered for it.

I've very little sympathy for the bank itself, they should have hedged far better but chose to speculate instead. They acquired 75% of their funds directly from the mortgage market, and chose to do that instead of raising it from savers like (slightly more) sensible banks do. I have every sympathy for their customers and employees, none for it's board and its risk management department.

Originally Posted by LesMTS

Calling Addy to thread 134297
Calling Addy to thread 134297

Addy's as passionate about this shit as I am about tedious aspects of molecular biology, and as Keir is to tedious aspects of the psyche. It's all good though.
I'd like to learn a wee bit.

I could spend a huge length of time going on about this stuff, I don't really have the time tonight but when I get a chance I'll certainly contribute something to it.

[endless psych]

Originally Posted by Addy

I on the other hand do blame Northern Rock for having virtually zero concept of adequate risk management, in spite of the Basel Accords, the second of which was fully implemented last year. They made horrific assumptions about the liquidity of the mortgage market not changing (that's what you get for only calculating market risk by using Historical Simulation Value at Risk, even Monte Carlo simulations don't suffice there) and suffered for it.

I've very little sympathy for the bank itself, they should have hedged far better but chose to speculate instead. They acquired 75% of their funds directly from the mortgage market, and chose to do that instead of raising it from savers like (slightly more) sensible banks do. I have every sympathy for their customers and employees, none for it's board and its risk management department.

In English please?

[Addy]

Originally Posted by endless psych

In English please?

Basically when you invest, there's two ways you can do it - you can speculate, that is, try and maximise profit and to hell with the consequences, or you can hedge, which is trying to minimise your losses first and foremost.

Northern Rock did far too much of the former on the assumption that the mortgage markets from which they get 75% of their income wouldn't fall in value. Normal banks use money from savers on the high street as security in case their investments fail. Northern Rock decided not to do this and used mortgages as security for investments - they would have made huge profits doing this if the mortgage market didn't suddenly collapse, but when it did they lost everything.

They were dependant on other banks lending them money, but other banks were only prepared to lend them money so long as they had security for their loans. When their investments in subprime mortgages - uber high interest mortages to people who are basically just never gonna pay them back - went tits up, banks stopped lending them money. The funds dried up, and Northern Rock was basically fucked.

Its risk management processes assumed historical figures would accurately represent future figures to a far greater than healthy degree, you see.

Vonnie doesn't blame the Rock, saying it just admitted it had problems due to the American market, but what she fails to realise is that the Rock themselves exposed themselves to that market in order to reap the rewards of the market doing well. Of course, it works both ways and in this case they lost (as did Bear Stearns in America, which wasn't a totally dissimilar case)

[endless psych]

Originally Posted by Addy

Vonnie doesn't blame the Rock, saying it just admitted it had problems due to the American market, but what she fails to realise is that the Rock themselves exposed themselves to that market in order to reap the rewards of the market doing well. Of course, it works both ways and in this case they lost (as did Bear Stearns in America, which wasn't a totally dissimilar case)

See I knew it was their own fault.

Now I also know why.

[Potatojunkie]

I really, really want to watch Trading Places right now.

[Addy]

Originally Posted by endless psych

See I knew it was their own fault.

I don't completely absolve the recipients of these mortgages of responsibility, and certainly if you deny mortages to too many people you get accused of elitism (mortgages only being available to those who don't need them isn't a situation we want to get into) but certainly some banks, like Northern Rock. have brought it on themselves by being too complacent.

Accepted, nobody could really have predicted a crisis this bad, but that's not to say it needed to have had this big of an impact, and I think it's hard to argue based on Northern Rock's investment policy that they didn't really have this coming.

Incidentally, if anyone is interested in the risk management side of things, the FSA produced a report last month about the effectiveness of various practices used during the crisis. The fact that they need to be so critical is shocking, and hopefully the crisis will prove a wakeup call. Here's the report: http://www.fsa.gov.uk/pubs/other/SSG...management.pdf

[metallideth]

Originally Posted by Addy

Accepted, nobody could really have predicted a crisis this bad...

How so? Also, I don't think we've seen the 'worst' of it yet.

[Addy]

Originally Posted by metallideth

How so? Also, I don't think we've seen the 'worst' of it yet.

It could have been predicted, but the sheer scale of it? Far too many variables to be able to predict them all, though some traders have certainly made millions by guessing on at least the market direction.

Whether the peak of the crisis has passed I can't say, but we haven't seen the end of it yet, no way. The ripples haven't stopped yet.

[endless psych]

Originally Posted by Addy

I don't completely absolve the recipients of these mortgages of responsibility

I lean towards total absolution because the banks moved the goalposts. I don't remember getting a notice through the door saying they'd changed the way they managed to lend money.

Originally Posted by Addy

Whether the peak of the crisis has passed I can't say, but we haven't seen the end of it yet, no way. The ripples haven't stopped yet.

Doubtful, I doubty we have even seen the extent of the crisis yet. Depends if the American economy has picked up yet I suppose.

[Addy]

Originally Posted by endless psych

I lean towards total absolution because the banks moved the goalposts. I don't remember getting a notice through the door saying they'd changed the way they managed to lend money.

That's because it had nothing directly to do with you. Banks don't make their money on the interest they get from mortgages, they make it by investing it in the markets and profiting on that. Ignore the tabloid hype about charges and the like being where all the profits come from, the reason charges exist is because if you don't repay overdrafts then you're denying them money to invest in the markets. That always has been the case and always will be.

The fact remains that if you know you're probably not going to be able to repay a loan you shouldn't be taking it. Not an easy decision to make, but just because the bank isn't demonstrating common sense by offering you the loan doesn't automatically mean you should pander to it by accepting it.

I'm not claiming for a second that the banks aren't mostly responsibe, just not 100%.

Originally Posted by endless psych

Doubtful, I doubty we have even seen the extent of the crisis yet. Depends if the American economy has picked up yet I suppose.

It's the impact on the Asian market I'm thinking about, just as Europe didn't properly feel it until the middle of last year (the mortgage dry up was at the end of 2006) Asia won't feel it fully until the middle of this. Then of course because so many Western firms are idiotically investing in Chinese firms, their problems rebound on us again. And thus the spiral continues...

[endless psych]

Originally Posted by Addy

That's because it had nothing directly to do with you. Banks don't make their money on the interest they get from mortgages, they make it by investing it in the markets and profiting on that. Ignore the tabloid hype about charges and the like being where all the profits come from, the reason charges exist is because if you don't repay overdrafts then you're denying them money to invest in the markets. That always has been the case and always will be.

It is if I wish to take out a loan. I doubt they would tell me then. Or rather it is if I as a theoretical borrower are to be held accountable for the credit crunch.

The fact remains that if you know you're probably not going to be able to repay a loan you shouldn't be taking it. Not an easy decision to make, but just because the bank isn't demonstrating common sense by offering you the loan doesn't automatically mean you should pander to it by accepting it.

Lets consider the situations in which most people who can't afford a loan are going to take one...

Do any of them involve people taking the loan "just because they can?". Excluding overdrafts and their kin I'm willing to bet the amount of folk who take a loan they know in reterospect they can't afford is very, very low.

[MarkMono]

Originally Posted by Addy

It could have been predicted, but the sheer scale of it? Far too many variables to be able to predict them all, though some traders have certainly made millions by guessing on at least the market direction.

So the only people capable of predicting it are those who make money from letting it happen. I've always been interested in economics but the stock market never fails to depress.