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Oct10

Credit Crunch con-trick: Who’s really to blame?

Credit Crunch

A few days ago, I was listening to one of a seemingly endless series of radio discussion programmes about the credit crunch.

Most of these programmes have a fairly low-to-middle range annoyance factor, but this particular programme really got my blood boiling, because the interviewee had the gall to state:

“this has caught everyone by surprise; it’s just impossible to say with any degree of certainty that this could have been prevented”

What world has this idiot been living in, for the past 15 years?

Let’s briefly visit the not-too-distant past and look a little closer at some of the red flags in more detail…

Anyone remember a guy called Nick Leeson? The North-London barrow boy whose increasingly desperate attempts to conceal ever-growing trading losses in the futures market eventually resulted in the collapse of Barings Bank in 1995?

How exactly did he manage to do this? By acting as both a front-office trader and a back-office contract manager, he was able to effectively remove all checks and balances within the Singapore office of Barings. And thanks to his smooth sales talk and apparently impressive ability to knock up a good-looking balance sheet, his mistakes went entirely undetected by the army of accountants at the head office in London…until it was too late.

Although Leeson claimed to have never profited personally from his trading fiasco, he was certainly motivated – to some degree at least – by his bonus structure, as were his superiors in the London office, who had become obsessed with profits, completely ignoring the fact that high profit schemes by their very nature carry an exponentially high risk. Their failure to properly examine Leeson’s claims and figures (especially in a new office in an emerging market) were contributory negligence of gigantic proportions.

At the time, I was working in London, providing technical support to the Foreign Exchange / Money Market (FX/MM) division of Citibank. When the news broke, I expected that the shockwaves would rock blue-chip banking and financial institutions to their very core. We all expected to be deluged by an avalanche of new rules, procedures and auditing policies which would have to be built into the software and the office geared up for these expected changes.

But a year later, very little had actually occurred. The tidal wave of new regulation that we expected never arrived and apart from a few tweaks and twiddles around the margins of the system, bugger-all actually seemed to change.

Although Leeson was a prolific gambler with other people’s money, his motives could be seen – at least in part – as trying to redress his mistakes. In other words, he wasn’t deliberately skimming the till, purely for personal profit. If a desperate trader like Leeson could do so much damage just by trying to cover his arse while he attempted to gamble his way out of trouble, how much damage could someone who was genuinely stealing from a large corporate entity do?

Take a look at the WorldCom and Enron scandals that occurred in 2000 and 2001 respectively.

Both these scandals involved deliberate attempts to protect the assets of key figures at the head of both companies. In both cases, the books were deliberately cooked to drastically inflate the value of the companies – at least on paper.

And far more worryingly the books were allegedly cooked with the active aid and participation of key figures within the accountancy firms assigned to make sure that all was present and correct.

The Enron scandal involved the active participation of the firm: Arthur Anderson – at the time one of the world’s largest and most trusted accountancy firms. The firm was convicted on obstruction of justice charges when it emerged that they had deliberately shredded documents relevant to an investigation by the US Justice department.

A key figure in the Enron scandal was it’s CEO Kenneth Lay. Lay was one of the US’s highest-paid CEOs, earning, for example, a $42.4 million compensation package in 1999 and a close friend of soon-to-be-kicked-out White House incumbent George Bush (who affectionately referred to him as: “Kenny boy”).

Both Worldcom and Enron went Chapter 11 and when Lay and his Enron cronies realised the game was up, they collectively dumped some $300 million in stock, while encouraging employees to buy more stock, telling them the company would rebound. The resulting investigations into both scandals were cut short by the 9/11 attacks on the World Trade Center, which not only focused the world’s attention on other matters, but (if some conspiracy theories are correct) indirectly resulted in the destruction of vast quantities of key documents being stored on or near the target site by the SEC. In the aftermath of these terrible events, neither scandal was fully investigated. And so nothing changed…

Moving into more recent times again in the US. In 2007 we started hearing nasty news stories about the collapse of the housing market in the US, due largely to something called: Sub-prime mortgages.

But what exactly are sub-prime mortgages?

In essence, they are a form of lending that comes as close to loan-sharking as it’s possible to get within the current US legal framework. Banks made large loans to hapless customers (who had little or no deposit and an income that could not possibly meet the repayment schedule), to buy houses that the banks knew they could not afford. They charged ruinous interest rates and demanded that customers purchase overpriced and badly-worded insurance plans from the bank to cover their own arses six ways from Sunday. Then all they had to do was to wait like a pack of hyenas for the customer to default on the loan…and when that inevitably happened, they simply moved in for the kill, foreclosing on the property and seizing whatever other assets to recover their “investment”. Insurance covered any shortfall in their balance sheets, which meant that the mortgagee sale of the house was pretty much all profit.

As every loan shark knows, you can make a lot of money by targeting the poor; there’s lots of them, they are are often a bit financially gullible and they are therefore easy to get money out of. Worst of all, especially under the Bush regime, the poor have no-one to protect them…easy meat in the eyes of the bankers. The entire concept of sub-prime lending not only flies in the face of common sense, but is – in a moral sense at least – a hideously sick practice, which only a sick and twisted mind could have come up with.

But this time the bankers came unstuck. Their profit margin was tied up in the sale of the house after picking the bones clean and it was based on the market value of the property. But by now, so many thieving, scheming bastards were in on the game, that more and more mortgagee sales were becoming the norm. The supply/demand see-saw tipped over and suddenly repossessed properties were only worth a fraction of their perceived value. The bankers, blinded by their profit projections and bonus expectations had started to believe their own fantasy figures – until they suddenly took another look and realised that (just like their victims) they too were up shit creek in a barbed-wire canoe.

And so they collectively blackmailed governments around the world to bail them out…and the rest as they say is history.

There have been plenty of warning signs over the last 10-15 years, which have been ignored by both governments and regulatory bodies to a degree that is way beyond accident or circumstance. It’s hard not to come to the conclusion that they have been part of a deliberate and systematic attempt to avoid learning from these mistakes and putting adequate economic and legal safeguards in place to prevent the situation we all now find ourselves in.

And as voters and consumers, we too must shoulder a proportion of the blame. We who have been brainwashed by the corporate spin-doctors and ad campaigns into believing all these dollar-green gold-plated fantasies. We who insist on designer labels, the latest mobile phones, flash cars and big houses, all of which is financed by an ever-growing mountain of credit card accounts and personal loans. And we who have refused to live within our means must now face the reality of what we have helped to create…

So for chrissake let’s wake up and get real. Let’s start by doing a proper, honest appraisal of our individual circumstances.

Let’s work out a budget, cutting back on all the frivolous shit we spend all day working to obtain. Forget the X-boxes and WII consoles, cancel your satellite TV and glossy celebrity magazine subscriptions. Trade the gas-guzzling 4×4 in for a more economic model and use any cash rebate to pay off a chunk of your next credit card bill. Start buying more of the no-frills brands in your shopping, install long-life bulbs in your home and turn down your gas (cold? put a bloody jumper on). Collect those discount coupons and store those loyalty points. Start living within your means – it’s folly to earn a quid and spend 2 quid.

Most importantly, remember who the rich bastards at the top are and which of your elected officials help them out with tax breaks and deregulation. Demand action against those responsible, but also demand the re-institution of proper regulation, overseen by independent auditors so the bastards can’t get away with it so easily in the future. Oh – and when the next election rolls around, get off your arse and vote!

Let’s start taking back the world we have been conned into giving away…

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One Comment for: Credit Crunch con-trick: Who’s really to blame?

  1. Visitor Comment # 1
    Day Trading Courses : (Visitor)

    There is so much mis-information around these days that it makes it refreshing to see something written that actually makes sense. Thanks for a well-thought-out post.
    Kind regards,
    Barry

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