HOW and WHY did the banks get in such a shit state

[exasperatedmummy]

I just don't understand it. Every time i turn on the TV/radio, its there. Times are hard for us personally but i don't blame the credit crunch.

How can all of these banks being going bust? Did someone not realise, um, guys, we've got no money?

All those clever people, you'd think someone would have foreseen this. Never mind, let's just give the same people more of the taxpayers' money and trust them to handle them carefully this time round.

Do you think that handing over control of interest rates to the bank of england had a hand in this? Or was it their willingness to throw money at people regardless of ability to pay back - we are in that trap to be honest. Surely the banks must have realised, yeah they can get all heavy demanding money back etc, but you can't get blood from a stone.

A real ad in the States said - "Just got outta prison, no job, phone 12345 and get your credit here"

Irresponsible lending is what this is all about.

Because they are not run by particularly clever or moral people.

They are run, first and foremost, by people who are so driven by profit that they came to believe their own nonsense about the merits of mass borrowing, and many other people told them so often how powerful and masterful they were that they believed them too.

Go back to myths and fairy stories and exactly the same tale is re-told there many many times.

there was a pretty good explanation in The Guardian yesterday.

Basically, most banks are reasonably ok, but part of the problem is that banks don't hold enough cash reserves to meet all their obligations (i.e. fill up cash machines, pay out over counter transactions, meet all transfers out of their accounts etc) all the time.

So banks lend money to each other constantly to cope with the ups and downs of the demands on their funds, if that makes sense. Bank A will borrow £1m from Bank B because that week loads of people have taken cash out of its cashpoints, for example.

The trouble is, with the credit crunch and irresponsible lending etc, a few banks have overextended themselves and ended up not being in a position to pay other banks back.

As well as making the banks go under (Icesave, Lehmans etc), this means banks are now hardly lending to each other at all because they don't know if they'll get their money back, they don't know who might go under next. And the rate of interest that they lend to each other at has gone through the roof.

So a couple of banks going under means that the whole system of money flowing round the system has ground to a halt, and all banks are now at risk of not being able to meet their obligations as they can't borrow in the normal way.

Did that make any sense?

Yes, it does make sense - its like a giant game of monopoly really isn't it

Pretty much. As long as people are willing to lend, the whole system works brilliantly and there is much more money available in the system than there is actual cash.

Problem is all the banks that are overextended (and even the ones that aren't) now can't meet their obligations with the cash they have, and can't borrow any more, so CRASH! The whole farce comes to a halt.

Comes of playing with money that isn't real.....the minute someone stops believing in the unreal money, it's all over.

It started with sub prime lending.

Banks lending out more money than they actually have in reserve. This used to be ok as at the end of the day (or whenever) all the banks used to get together and lend to each other to rebalance the books. However as more and more banks started making riskier and riskier investments (such as sub prime) the other, more solvent, banks began to panic about lending them their money because they were (rightly) concerned that they wouldn't get it back. Hence the tailspin.

I understood that some banks lent on sub-prime mortgages and so exposed themselves when the US housing market fell.

But I don't get the next bit about bundling all the mortage debts together and selling them on as investment instruments in return for other assets which themselves then somehow become "infected" or toxic. I can say it, but I don't understand it! Can anyone explain?

Is that what the whole derivatives thing is? I never quite got that, either!

"But I don't get the next bit about bundling all the mortage debts together and selling them on as investment instruments in return for other assets which themselves then somehow become "infected" or toxic. I can say it, but I don't understand it! Can anyone explain?"

Basically you take a bunch of iffy mortagages ('iffy' in this context means 1.1% interest for the first 2 years, 35.7% thereafter) to Cletus W. Fucknut (and friends) in Buttpoke, Arkansas, wrap them up together (so that, on average, most of them will be paid off) in a CDO (Collateralized debt obligation) and if you don't look to closely (like, say, you were selling them on commission) they all look like AAA-rated investment vehicles.

A bank or other investor buys them, and when it turns out Cletus (and friends) can't afford 35.7% APR on their trailer/flat/new-build rabbit hutch they default, and the buyer of CDO takes the hit. When large numbers of the mortgages go belly up the value of the CDO drops, and the buyer can be left having paid out for what amounts to a small heap of IOUs and a number of rapidly depreciating repossessed homes.

In the USA at least, homeowners can walk away from a mortgage, unlike here where the bank will hound you for the outstanding for the rest of your natural life. Which exacerbates things. A lot of buyers are apparently walking away from their homes, and putting their mortgage payments into a pension instead.

That's my understanding of it anyway... feel free to correct me...

thank you Kevlarhaed. Cletus is now strangely vivid to me......

Umm
have to add that alongside the irresponsible lending there is per se irresponsible borrowing

As pagwatch says. Fundamentally, because we have an economy which runs on credit. The concept of living within one's means, and saving to be able to afford things, is alien to many people (and to the banks).

Yes I'm agreeing with pagwatch's irresponsible borrowing comment. People have a whole lifestyle built on debt. 'Buy now pay later' - well we've bought and now we're paying.

Once the immediate aftermath is over, I rather suspect that the lingering question will be 'why were these banks so poorly regulated?'

Banks are heavily regulated by the FSA in the UK. The FSA set all kinds of measures to ensure that banks are kept 'safe'.

As far as I am aware, none of the banks broke the FSA rules - therefore one has to ask - what went wrong with the regulation of this key industry?

{hi Soapboax, you're one of my favourite posters and I haven't seen you here in a while}

But the irresponsible borrowing was done by punters who had been bombarded with offers for years, encouraging them to take money for whatever they wanted. Even I had almost got to the stage where I thought, this is what people do, why shouldn't I get new windows.

They were the punters, people, having their heads turned by pretty pretty leaflets and fake cheques and pictures of wonderful holidays.

The bankers were the experts. That's the joke. They were the professional (ha!), ridiculously well-paid experts who were so highly thought of. The experts who could earn upwards of £4million per annum.

They were professionally and morally bankrupt. And they were none too clever.

"what went wrong with the regulation of this key industry?"

I'd suggest it's to do with the City's loudly trumpeted competence in the field of finance, and withering contempt for any Stalinist throwbacks who suggested they should possibly take fewer risks. I seem to remember that risk was the basis of making money, and that if the little people insisted on the money men taking fewer risks, they'd all go off to Adu Dhabi, or Mumbai, or New York, or wherever non-doms go when someone suggests they think about paying income tax.

Given GB's been in love with this image of the City, there's been no real impetus to regulate it so it's no real wonder that everything's gone down the pan now. To be fair, in the good times, silly risk did pay off. The fault was that people thought it'd keep paying off forever.

I do wonder how DominiConner's doing now. He was a poster on here, but I haven't seen him around for a yr+. He ran a headhunting agency that specialised in quantative analysts; I suspect demand for them has dropped off pretty sharply of late.

I didn't know americans could just walk away from a mortgage.

pointy
I agree to a point pointy

There will always be people who are swayed or advertising would cease to be relevent.
But there is a difference between people who are tempted to push through a purchase they would usually save for and the kind of profligate spending that many people have seen.

I have seen both types of borrowing - and i know when DH and i had not a bean it was hard to always be doing that 'maybe next month' thing.
But I just think too many people gave it no regard at all and that makes some of this their own responsibility.
Not blaming the poor or the easily tempted. i am just saying we had reached a point where some were totally reckless and the 'normalising' of that kind of behaviour doesn't mean we all get to just put all the blame on the lenders.

Yes, I do put all the blame on the lenders. I really do. And I have thought about this (well, you know, I've given it a full few minutes of my time.)

The lenders spent their working hours (their very well-paid working hours) creating the climate of spend, spend, spend. One heck of a lot of money and time and effort went into creating this climate. Many people are not particularly financially astute (I include myself here) and they are far too trusting/gullible (just look at some of the threads mnetters take at face value).

And then to say, oh those suckers, they borrowed way too much. The odds were stacked very heavily in the lenders favour.

And they fleeced us true and proper. Because they had no accountability, no professionalism towards their customers and very little morality.

And Mr Punter has paid very dearly for his own foolhardiness. Not only are many punters feeling the pinch, they are giving £50bn to the banks. This in itself absolves them of any blame they might have had (although I think none).

I'll say it again - because I like it - Mr Big Buck Banker is laughing all the way from the bank.