2007 The Year that Reckless Bank Lending Made History

2007 - The year that reckless bank lending made history and it is now almost certain that 2007 will be seen as the start of a financial down turn throughout the world. The blame for that is banker's greed and the use of invented reckless banking instruments to fuel that greed. Those reckless banking instruments were created without thought of their soundness or security value. It is possible that legal actions will follow later as the full impact and recklessness of these bundled instruments becomes clear. IBAS has witnessed nothing in the last 14 years which comes close to the scale or magnitude of what is now happening.

IBAS has repeatedly issued warnings that UK banks were lending recklessly to those who could not afford to borrow, not only on mortgages, but also on loans and credit cards. It now appears the same was happening in the US on a much larger scale. The size of the losses already evidenced in the US and the effect of those losses will be tremendous, but nobody has a full picture of the losses which will flow from sub-prime lending in the US. From the figures so far disclosed it will be of gigantic proportions.

Because SIV’s are ‘off balance sheet’, the full exposure to these instruments may not become known unless or until FASB 157, the very new US accounting rules, forces disclosure when accountants have to sign off the Wall Street Bank’s annual accounts in January 2008. Perhaps, it will be mid to late January 2008 before we have a better understanding of the total US bank losses in this sector.

However, it is already evident that World currencies and economics are affected as the exposure to US sub prime debt was multiplied and spread like a virus by ‘off-balance sheet’ instruments like ‘structured investment vehicles’ (SIVs) - see note below.

Major fears are that the bond markets, which funds literally everything including government debt, through company borrowing, credit cards and car loans, will effectively ‘dry up’ because of investor concerns from the existing scale and undisclosed losses within the banking sector.

It appears inevitable that The Bank of England will now be forced to lower interest rates to try to keep the downturn in the UK from becoming a severe crash, but the UK Government has no control whatsoever over what is now happening, it can only seek to lessen the impact on the UK economy.

Unfortunately, most financial institutions have not yet even started to reveal the full scale of their potential losses and that in itself is creating greater uncertainty.

The ‘fall out’ from the effects of the US sub prime market is inevitably already affecting UK banking and will have a detrimental financial impact on UK businesses and consumers leading to more possessions and increased personal and business bankruptcy. It is already evidenced by fewer mortgage applications, mortgage price increases, less available finance and more stringent financial checks on those applying for any type of finance.

Higher numbers of repossessions are already in progress and a ‘shake-out’ in the Buy To Let market has started with multiple properties being released for auction and sale at reduced market prices, driving further repossession in certain areas. From 'feedback' we are receiving The Buy To Let market in the UK is becoming increasingly difficult for those who entered this marketplace in the last 4 years.

‘Fall out’ from world banking problems inevitably impacts first on those least able to manage, whether it's personal bank account or business banking customers. It will affect mortgages, loans and overdrafts, credit cards and also how much cash is left in your pocket. We believe the effects will be considerable, widespread and long lasting and will affect every household in the UK.

Article by: Eddy Weatherill, Chief executive - Independent Banking Advisory Service - 14th November 2007

Note: Structured Investment Vehicles or SIV's are financial funds, which buy up mortgages, using short-term borrowed money from the commercial paper markets, which are then ‘bundled’ and re-sold to the bond markets. The bank’s two fees, one either side of the transaction were of obvious appeal to them. But, if the funds ‘go bad’ the banks will either have to continue to fund them or repurchase the underlying mortgages.

N.B. The Bank of England base rate was cut on 6.12.07 - This was the first rate cut since August 2005.

9^th August - Global credit concerns were first alerted by French bank BNP Paribas's decision to suspend three of its investment funds with exposure to the troubled US sub-prime market.

13^th September - Northern Rock requested emergency financial support from the Bank of England – the news of that event started a ‘run’ on the Northern Rock Bank.

30^th October - Merrill Lynch, one of the first to repackage sub-prime housing debt into tradable securities was forced to admit $7.9bn (£3.85bn) exposure to bad debt in the US housing market specifically the sub-prime mortgage sector. The write-off contributed to the firm posting a third-quarter net loss of $2.3bn, its worst financial performance since 2001.

5^th November - Citigroup revealed it was facing losses of between $8bn and $11bn from previously undisclosed losses due to decrease in the value of its $55bn portfolio of sub-prime loans.

9^th November - Wachovia Bank said its write-downs on bad mortgage debt would total $1.1bn (£525m) just for October alone. That is a huge amount for just one month of mortgage write-downs at one bank.

13^th November - Bank of America reveals it will write off $3bn (£1.4bn) of bad debts and has warned that its losses could grow.