UBS: Another fine mess
was already one of the main victims of the calamitous losses being suffered by global banks on their exposure to US subprime lending.
But there had been a hope that it and other banks were over the worst.
Today's announcement that the giant Swiss bank has made a loss of around £6bn in the first three months of the year - due to losses of £9.5bn on what it describes as exposure to US real estate - may unnerve both its shareholders and the markets, although analysts had been expecting more bad news from UBS of this sort for some time.
There had been criticism of UBS's chairman, , for weeks - so it is no surprise that he is now quitting.
And the bank is taking steps to make sure it can weather the global financial storm by raising £7.5bn in new equity from its shareholders in a rights issue.
But investors have heard before from UBS that it had identified its problems and taken steps to remedy them.
Earlier this year it raised more than £5bn from the and around £1bn from a Middle East investor.
They may be feeling a bit sore that they invested at the wrong time and the wrong price - although UBS's decision to raise new capital gives them the right to renegotiate the terms of their investment.
As for other investors, they will be concerned about what other nasties may lurk at other banks.
Only today said it estimates its writedowns on loans and investments were almost £2bn in the first quarter of this year, mostly due to worsening conditions in the US mortgage market. That represents a significant rise in such losses for Germany's biggest bank.
I'm 
°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment
Let's have a reality check here. Bank loss will get a lot, lot worse. The UK house price bubble will burst, taking the economy into recession. There's plenty of sub-prime lurking in the UK e.g. self-cert i.e. Lie-To-Buy,), 125%LTV, interest only, 30 year terms and my personal favourite: BTL. Imagine how much the UK banks will lose once the repos really start and house prices are 50 to 60% lower than they are today. It will be a long drawn out process lasting 5 years or more.
How can the banks continue to issue public statements of confidence and solvency and expect to be believed by the markets? No doubt another scare-mongering charge will be wheeled-out against anyone reporting the truth about the huge scale of the 'off-balance sheet' catastrophe now unfolding.
WUBS worthless ubs
It would be helpful if Mr Peston would do some homework on the individual state of each of the British banks and not just allude to generalised scare stories about the problems which may still be out there.
The British banks reported in February /March this year and largely reported record results, and increased dividends - this implies either that they have dodged the worst of the sub-prime crisis (but still are suffering to different degress from the liquidity problems), or that the BoArds of the Banks have misled the shareholders and consumers on the true state of their businesses.
Implying further problems on the basis of UBS, a Swiss Bank, means tarring every bank with the same brush, thus further undermining confidence at a time when confidence is the key to returning the liquidity markets to normal.
Bank Boards have a duty to inform the market of any news which may adversley affect their share prices. Until this starts to happen and British Bank Directors stop buying, and start selling, their own shares, I regard the ³ÉÈË¿ìÊÖ's coverage of this largely American problem as largely alarmist.
To be honest, as a former employee and current shareholder of UBS I am not at all surprised. I could see the writing on the wall back in the early 2000s, and was at the time perplexed at the general way the investment bank was going and their attitude to staff and markets.
What I do find amusing is that after the UBS (old Union Bank of Switzerland) fiasco of the late 1990s, which forced the merger with SBC, that UBS still have a reputation of being a safe Swiss banks. In their drive to become more American every day, they are far from safe or even competent when compared to some of the big US banks.
They would have been better sticking to their Swiss roots and building a firm safe business instead of playing a high risk game whilst living off an outdated reputation.
UBS - U've Been Shafted - shareholders and employees alike.
Perceptive comment from Robert and not good news from UBS. Investors will inevitably worry that UK banks will follow suit - in my view they are not likely to be anything like as adversely affected as UBS.
Yet another one. I think it will take a long time to clean out the system. The banking sector needs a new year type detox but the central banks keep letting it gorge all over again. It is time for some serious bloodletting to cleanse the entire system.
Robert
I do not know which bit of news is less surprising over the last 24 hours; that the Duke of Edinburgh is not in fact running SPECTRE from a secret bunker under Buckingham Palace or UBS's latest debacle.
We all know the banks are drip feeding the terrible losses over as long a period as possible in order to save their skins. This is the single reason why they do not trust one another. I would suggest that the banks and central governments stop using 'PONZI' to construct their economic models and start reading Von Mises. "Credit expansion can bring a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump." If this is too demanding then perhaps they might remember the words of Mr Micawber to David Copperfield. "Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day does down upon the dreary scene, and you are forever floored as I am"
Dark day ahead.
This situation was bound to happen - half truths to stem the fear, when honesty should have been the policy!
What about the other debts that most people in this country have? Just reading the local papers shows the growing amount of people taking bankruptcy as their only option...
The government should have taken control of house prices by ensuring that people couldnt own 100's of houses, this has driven the prices out of control and prevented your average person from buying..
Due to this people have over financed in a desperate attempt to own their own place - its a sad and sorry state!
Look forward to the endof the lies, and the leveling and more realistic house prices that should come of this mess..
The saddest thing is that it will be the FTB that are hit hardest and theses are the ones who can't afford it!
Lets hope the truth comes out soon and that we can stem any further panic..
i am getting increasingly suspicious that the "scare-mongering" excuse will run out soon and we will see the full banking debacle for what it really is.
Oh dear. More cockroaches. I agree with Nigel. The UK property bubble is just getting to that point of consecutive monthly losses where the lag sets in and the for sale signs start to appear. Then word will spread as it does to fuel the bubbles. Do uk consumers seriously believe that all this credit tightening will not affect housing demand? Haha.
As Mr Mouse says, the banks have gone from being custodians and lenders to hedge fund wannabes. Problem is, it's a win-win game as Adam Applegarths disgusting 1m payoff displays.
If Nigel Watson owns a property, I can offer him cash @75% of its current value.
The idea that house prices will fall by 50-60 per cent is so ridiculous I'm surprised even Robert Peston allowed it through!
Interesting piece last night - gloom and doom from George Soros, followed by an extremely honest American chap who said more or less what we know is true : "When people realise the doom and gloom has been overblown, I (and presumably Soros)will already have made an awful lot of money out of the over-adjustment."
Be cautious about sprinting to the cliff edge. The property crash of the early nineties claimed most of its victims in its early months, and was back on its upward incline within a couple of years.
Interesting how the UK markets have viewed this news from UBS and DB this morning. Nearly every major UK bank seems to be on the up today.
Is there any indication why this is?
one thing that has struck me, as an outsider looking in on the banking "crisis", is how few banks appear actually to have announced losses to date. Unless I've missed something, the write-downs seem to have been off-set by other successful trading.
Is this just a matter of time? Is the UBS announcement the first in a long-running series?
Just one point I think you miss out on here.
It is the sheer greed of the individuals involved in this financial calamity.
1) How many of the mortgage brokers in the US who sold inappropriate packages to people who couldn't afford them have paid back the bonuses associted with these sales, or how many have funded new car purchases, holidays etc.... the real motivation people have for earning money whichever way they can
2) Slice and dice of debt. Clever greedy individuals trying to create products they can bluff have actual financial value and then sell those products (again making gain for their organisation and them personnaly)
3) Idiot highly paid investment bankers who traded in these super products.. gaining vast sums
Remember those pyrimad scandals in Russia at the fall of communism, remember the pyrimad investment here relating to women, the one you get 20 woment to invest so much in the scheme then you get a share of it.
This whole fiasco is purely based on main human emotion of greed.
Remember as a kid the story of the emporer's new clothes... it is this mentality that allows the greed to progress... as no one stands up and says... hang on this isn't real.
However eventaully reality stikes home.
Unfortunatley this time the emporers clothes are worth billions and billions of pounds..... enough to start destabilising the entire finacial system and shake confidence to the core.
And those responsible for the calamity have all marched off into the sunset with their big large bonus payments, while the rest of us pick up the tab.
Note to bosses of investment banks:
If your employees come up with schemes that look like bringing in fantastic returns
a) if you are greedy - support it, get your bonuses and run off
b) sack them, they are trying to sell you the emporers new clothes
Difficult to see how the UK banks can avoid raising fresh capital.
UBS has bitten the bullet and asked its shareholders to help out with its problems; the UK banks called an emergency meeting with the Governor of the Bank of England to ask him for help.
Which would your rather have? The second option would mean more tax payers' money thrown down the same drain as Northern Rock.
The UK banks need to raise money from shareholders urgently.
Until all banks come clean on their off balance sheet liabilities only a fool will take at face value what they say. Much as the pain of UBS and American investments banks is both dire if not horrendous, they must be acknowledged for coming out with the damage as they have.
The problem we have here in the UK is that we have a government who has put us all at risk with its own off sheet liabilities.
Nothing need crash out if honesty became the policy. The most damaging problem after coming clean is that so much moeny was diverted to speculative investment banking activities when the UK economy's industrial base was begging for funds.
As a former regulator and HSBC executive I would say that there's a lot more to come. I agree with the first poster regarding further losses, although suggesting property may falls 50-60% strikes me as utter nonesense (based on supply and demand for property).
More will follow although I don't expect it from the larger banks. Taking HSBC as an example they are geographically diverse, spread approx 33% across each of USA, Europe and Asia. At the moment USA slows down, but Asia counters that and the bank continues to do well. Banks that won't do so well are those overexposed to a single territory or product (such as mortgages).
Next fallout after sub-prime is likely to be credit default swaps (a product invented to pass the parcel and a much larger market than sub-prime). Noone really knows who holds the bag for these, although the smart overpaid cityboys that create such products don't look quite so smart now!
The Japanese Banks are the dogs that havn't barked in the night.
But I guess Mr Peston North End of expectations is not being briefed by anyone from that part of the world.
What about Lehman brother's pulling out of the UK market, surley as the owners of two of the biggest sub-prime lenders, SPML and Preferred, this should be reported upon, or have the news casters become more responsbile upon reporting financial matters after the fallout from the Northern Rock fall out???
I agree with John . Let's get some perspective on this . Assuming liquidity can be fixed and there seems no reason why it can't with central bank intervention , there seems to be no sign of real grief in non financial parts of the economy . A bit more confidence that we can get over this would help a lot , particularly since the average man in the street does not really understand what is happening .
These banking issues aren't going away anytime soon. What's happening with the icelandic banks? No one wants panic but equally no one wishes things covered up until it's too late! Objective analysis please Robert. ps. and can we get in to the euro before it's worth more than a pound?
Appears as though some people have 'bottomed' the financial adjustment from property/credit almost before it has really begun.
I don't expect further huge losses from Uk banks ,but I do expect that faced with a much smaller market for their services that we will see mergers/takeovers.Some of these banks are simply too big to survive in their current formats given that many of the markets that have generated their profits in recent years are either under severe pressure ,or have simply dried up and blown away.
Lots of consolidation to come along with what that implies for earnings in this sector.
12 and 18
Yes, house prices are a function of the relative strength of supply and effective, but not potential, demand
Do you have 200k, cash?
If so you can buy my house for what it's supposedly worth.
I suspect that like 99.9% of potential house buyers you would need some sort of loan. So, you may not be able to demand it because you may not be able to find a bank willing to lend you the money need to pay the current market price
And there lies the problem. Lending multiples are being scaled back. Bye, bye effective housing demand. House prices went up during the bubble because banks were willing to lend more, and more and yet more. Now the opposite is happening
The supply of housing is price inelastic. Therefore, even small changes in demand have massive impacts on price
In summary house prices mostly reflect the availability of credit because credit is the main factor that affects effective demand.
No credit = no demand = big house price falls
Japan's a really small congested island. Housing is in really short supply, so how come house prices have been falling for 15 years on the spin? Yes, you've got it: reduced availability of credit. Banks in Japan no longer grant 100 year mortgages
Considering that UBS have just announced further writeoffs amounting in total to £18.5 billion, isn't it time that the Financial authorities in the US tracked down the perpertrators of what is possibly the greatest financial scam and swindle in history, and prosecuted them, not stopping until the last of them is locked up?
Regarding Nigel Watson's comments - don't forget everybody - its the 1st April today..!
Let us not forget this is April 1st...
Bury your heads in the sand and pretend it is all an elaborate joke.
No. 13, there are a couple of reasons why the UK market has taken this news in its stride, not just the fact that it was expected. (Which is the only one Mr. Peston has picked up on).
Firstly, the markets know and now see that UBS (and a few other foreign investment banks) were disproportionately exposed to sub-prime relative to our generally conservative lending banks. Those waiting for further disasters at UK banks will be disappointed - some more write-downs maybe, but nothing of this order.
Secondly, they are also now realising that this is all a massive book-keeping excercise to reflect the fact that there is little or no market in certain mortgage backed securities (which is also causing the constipation in the money-markets). The real cash losses over the next few years will be small by comparison to the provisions being made now. (Read the MBIA letters to shareholders if you want more info. Peston won't).
And guess who will profit when these provisions get reversed? Yes the City boys! Ahahahahaha.
And by the way, those hoping for the buy-to-let market to lead us into a property crash will also be disappointed. Check out Paragon's recent trading statements. The buy-to-let market is in rude health - tenant demand is strong, interest is well covered by rent and defaults are very low. (That is because there is a generally a shortage of residential property, unlike in the US, which is over supplied. BIG difference). A buy-to-let landlord would be mad to sell into a declining market. The buy-to-let market is more likely to shore the property market up than let it down. And guess who will profit when the market improves again. Ahahahah.
Most of this discussion is beyond me, sorry, and you all seem very well briefed. I just wanted to remark that ONE thing (among many) that Gordon Brown promised was stable macroeconomics.
Down where I am at street level, how the heck am I expected to run a stable business in this environment? I'm going potty with anxiety about this, the phone at my race engine firm has stopped ringing since this crisis broke.
Your advice welcome!
GC
Would agree with both posts 15 & 18 for diferent reasons.
Agree with 15 that for too long too many financially illiterate and / or gullible people in the States were very badly adviced and all of those organisations complicit in it get everything they deserve.
Also agree with 18 re housing price falls and credit default swaps. The UK banks are less exposed to sub prime and have a more healthy balance sheet so can ride out the crisis.
Yes there will be some financiers over exposed to sub prime; buy to let and over priced city flats and some of them will go to the wall but don't expect HSBC, Barclays, Lloyds, RBS or HBOS to join them.
On credit default swaps I would agree 100% with your views. The so called "smart city boys" have been exposed as fools and there really will be some fall out over this.
On property prices some prices will falls by maybe 25% to 30% in the silly priced urban flat market. Remember the early 1990's in Docklands anyone?
However family houses in suburbia will be alright in the long run.
Nigel
In 1998 the RICS were warning that low interest rates would lead to an unsustainable house price bubble. OK they were wrong, but do you remember the "low" interest rates then? 6.85%.
Point is, if your property is worth £266k, I bet I can find a lender who will give me £200k to buy it from you - the equity being 25%. House prices will fall, sure, but if they fall more than 10-15% there'll be plenty of people making money - even with highly geared investments.
How deeply will sporting sponsorship be affected by all of this?
Does anyone remember 2004? The arrest and computer seizure of Mohammed Naeem Noor Khan. When authorities recovered Khan's laptop computer, they said they found detailed pictures and surveillance reports on several financial targets.
You don't need to drop a bomb on a building to destroy the global economy.
Thirteen days after the attacks on New York and the Pentagon, President Bush announced "a major thrust of our war on terrorism . . . a strike on the financial foundation of the global terror network."
"We will starve the terrorists of funding.........."
Looks like the opposite is happening.
The latest news from UBS saying that it had made a further loss of £6bn raises doubts about the banks ability to weather the global finacial storm even, if raises £7.5bn in new equity.
If a bank such as Bear Stearns can fall prey to the present market storm then it raises the spectre that the credit crunch will not end until one or two more similar institutions are shaken out in the same way. The the rewards for the victors, if that happens, will dwarf anything we have seen so far and I strongly believe that is the real reason why the credit crunch will continue for some time yet. There are some very ruthless people out there who are playing for very high stakes indeed. Let's hope that a UK bank doesn't fall prey to such skuldggery.
Number 4, you appear to have missed the point entirely.
Most UK banks have only a limited exposure to the US issue. That much is clear from their accounts. However, there is a bigger concern hanging over the heads of the UK banks, and that is the UK situation.
The UK problems haven't really kicked off yet. However, everyone with half a braincell has worked out that it is only a matter of time before the UK consumer cannot meet his mortgage payments, and reposessions start in earnest here as well. Prices are already falling in a progressive manner.
BUT, that hasn't happened on any serious scale yet. There is no reason to impair investments in UK mortgage investment vehicles, since there is no indication which ones will implode. No one can accurately assess the likelihood of loans not being paid back in the short to medium term, and therefore, no on is in a position where they should impair their UK mortgage-based investments. And that is why the UK banks are still able to say they're doing well.
With 4% of savers having funds invested greater than the Bank Guarantee Scheme protection level, this UBS scare serves to add fear to savers woes. Surely now is the time to create a "run" on a high street bank and put savings in the Bank of you and me (Northern Rock) where it is safe. The effect could be to get the BofE and Government to underwrite all High Street Banks to defend savings, thus giving the banks a chance to come clean about existing toxic debt (and go off uncontrolled to do the same wild investing again). Or failure to react could bring down the Government and Banking system as we know it. Robert Peston please tell me I have the concept wrong.
Number 4, you appear to have missed the point entirely.
Most UK banks have only a limited exposure to the US issue. That much is clear from their accounts. However, there is a bigger concern hanging over the heads of the UK banks, and that is the UK situation.
The UK problems haven't really kicked off yet. However, everyone with half a braincell has worked out that it is only a matter of time before the UK consumer cannot meet his mortgage payments, and reposessions start in earnest here as well. Prices are already falling in a progressive manner.
BUT, that hasn't happened on any serious scale yet. There is no reason to impair investments in UK mortgage investment vehicles, since there is no indication which ones will implode. No one can accurately assess the likelihood of loans not being paid back in the short to medium term, and therefore, no on is in a position where they should impair their UK mortgage-based investments. And that is why the UK banks are still able to say they're doing well.
A bit more confidence that we can get over this would help a lot , particularly since the average man in the street does not really understand what is happening .
Andrew Sobolewski
Ho. Ho. Ho.
A bit of confidence, a wink and a cheeky grin, and no-one's going to notice that the banking industry, through its own reckless greed, has lost hundreds of billions worldwide and is on its knees, throwing the economic prosperity of everyone into the toilet.
Keep grinning Sobolewski, the average man is looking in. Your smoke has blown away and your mirrors are all broken.
As always in the financial community, expectations are based on educated (often biased) guesses and not a lot else. It's fair to say that the banks MAY have taken the hit and MAY have bottomed, but people have been calling the bottom of the writedowns since august 07. It took the market at least 6 months of bad home sales data and subprime warning before it even reacted. The 'experts' were still pushing stocks to the moon.
(Bear Stearns at $150- great analysis from the 'Masters of the Universe' there).
The central banks are propping markets in a way not seen since the 70s when the u.s. had to raise rates to 15%. What would that do to property? The BoE is under pressure to cut rates also, but at 2.5% they are already above target and looking to pump even more money in to save wall st? Hmmm.
Now, by no means do I want recession or property falls, but you have to factor in the reality of current u.s. data and the 'unprecedented' actions of the Fed..
People expecting a recovery ought to bear in mind a couple of things:
It may not be at all easy for banks to re-finance via rights issues. After all, the sovereign wealth funds have already been stung by UBS and they are the only ones with any money. I am not sure they would take up the offer of more shares.
Secondly, it seems that anyone who has a mortgage over 80% will find it impossible to get a new loan. If all those houses are repossessed and sold for what they will fetch then there will be a price crash, pushing yet more into negative equity territory.
In fact anyone with a mortgage might find it hard to afford a new loan, while rates spiral upwards and values plummet.
This will wipe out the banks' assets and make them insolvent. While there ought to be enough left in the pot to protect depositors, the shareholders will get slaughtered.
I fear the next stage after mass repossessions and banks collapse will be civil unrest. Let's hope I am proved wrong.
ps.
Looking forward to those 10,000 city job cuts!
Ok,
So depending on what poster or reporter you listen to where should someone keep their money (hopefully with some kind of return) because...
It's in danger in a bank, does the same apply to Building Societies?
The stock market is / is going to fall so it's not good there.
Houseprices are going to fall so properties are a bad investment (even if I could afford one).
What am I ment to do with the cash I've saved hoping to eventually be my house deposit?
Who would want to bring down the Western world financially? Someone hiding in a cave in the mountains perhaps.
People expecting a recovery ought to bear in mind a couple of things:
It may not be at all easy for banks to re-finance via rights issues. After all, the sovereign wealth funds have already been stung by UBS and they are the only ones with any money. I am not sure they would take up the offer of more shares.
Secondly, it seems that anyone who has a mortgage over 80% will find it impossible to get a new loan. If all those houses are repossessed and sold for what they will fetch then there will be a price crash, pushing yet more into negative equity territory.
In fact anyone with a mortgage might find it hard to afford a new loan, while rates spiral upwards and values plummet.
This will wipe out the banks' assets and make them insolvent. While there ought to be enough left in the pot to protect depositors, the shareholders will get slaughtered.
I fear the next stage after mass repossessions and banks collapse will be civil unrest. Let's hope I am proved wrong.
The spike in bank prices today mirrors the Fed and SEC's strategies. Faced with the worst financial situation in decades, if not ever, we've decided that it can be wished away. Remember that confidence is a necessary but not sufficient condition for economic progress. Google SFAS 157 and Floyd Norris to see the latest Canutism.
Is anyone just simply amazed at the losses the banks have taken? This means they must have been over stretched for years, they must have known how exposed they were. More to the point they must have known that the bubble would at some point burst. They always do (hello dotcoms).
I am simply staggered that so many educated people can be so utterly stupid and motivated by greed.
How much of this is due to the requirement to Mark To Market? The number of actual repossessions must be infintesimally small compared with the safe reliable mortgage payers who won't default. If a house is repossessed the bank still keeps the house and sells it or rents it out.
Surely the long term value of these products is greater than the zero that banks might currently pay for them. The banks, however, can't quote the long term gazillions that they will make from them in 15 years time as no-one will buy them today.
There must be some sensible way of valuing these CDOs to give a more appropriate long term return rather than the current method which does not reflect their true value.
#12
The house price crash of the early 90's actually began in the summer of 1989. Prices didn't begin to increase in income adjusted terms until 1996.
Sentiment didn't fully deteriorate until the early 1990's, many months after prices began to fall.
See this graph:
I am aghast that the UK bank shares have all performed so well today in the wake of the UBS announcement. the theory seems to be "phew - at last we have discovered where the rest of all that bad paper is - and it's at UBS! All the other banks must be fine" This is way too rosy. UBS must have been aggressive to the point of misleading when announcing their previous writedowns and there is more than enough unidentified risk out there to suggest that other major institutions were doing the same - plus the markets have deteriorated further since then. Brace yourselves - more coming.
Well said john and some others - perspective people please! There is no chance of house prices crashing because the underlying economy is still infinitely sounder than in 1989/1990 when prices last corrected. Your story Mr Peston does not support the headline - there are no implications for 'other banks' of UBS's mismanagement, and the reaction of British banks' share prices today proves it. As in any industry, some companies are well run and some aren't...
As I right UBS share price is up 7.5% on the back of a 1st quarter loss of 6 billion pounds an announcement they they intend to dilute their share capital and an admission that the year is going to be a very difficult trading envionment. am i missing sommething why are the economist and so called experts on financial news channels seeing this as a buying opportunity unless of course thay have some way of making losses to reduce tax liabilities or something. There is also a forced seller in the market dumping vast amounts of gold and I am wondering if UBS is having a spring clean in it's deeper more shady vaults. and certain banks that seem to be recommending clients buy UBS should remember that boiler room activity is generally frowned upon by regulators.
The latest news from UBS saying that it made a loss of £6bn makes sober reading and must raise doubts about the bank's ability to survive the global financial storm, even after it has raise £7.5bn in new equity.
If a bank the size of Bears Stearn falls prey to the current market turbulance then it must raise the spectre that the credit crunch will not end until a couple more of these institutions, with huge write downs, have also fallen prey in the same way. If that happens the rewards to those benefiting from such an outcome will dwarf anything we have seen so far. That I suspect that is the real reason behind the continuation of the credit crunch.
As we have already seen there are some very ruthless players out there who are playing for very high stakes indeed.
Whats most worrying about all this is that some banks have been hammered before the traditional impact of a housing recession has even started.
Quite a few mortgages go bad in a full-blown recession and these are only classed as prime now to distinguish from the new sub-prime market.
Normally banks have some leeway to cope with recession but now some banks are almost on their knees as a starting position.
I stress "some" banks though. Markets are not distinguishing too well between banks.
The "supply and demand" argument for maintaining house prices is fallacious for a Adam Smith said...
"A very poor man may be said in some sense to have a demand for a coach and six; he might live to have it; but his demand is not an effectual demand..."
Just because he borrows money to buy one still doesn't make it a genuine demand.
I am, by my own admission, no financial expert but can someone explain why comments such as those from Nigel Watson, above, keep appearing. There seems to be an unswerving belief that as house prices move lower, repossessions increase. Surely, this is not a given - repossessions only take place when homeowners can't afford their mortgage. Regardless of the value of your house, if your circumstances haven't changed and you could afford your mortgage last month, you can afford it next month. With a stable job market and historically low (and moving lower) interest rates we are not in the same position as the early 90s. Sure, some people will find it tougher, but there can't be huge swathes of repossessions waiting round the corner - the fundamentals are different this time. Also, why do people forget the basic concept of supply and demand? There are just not enough houses to go around so it will only take a relatively small dip in house prices and a small increase in supply (from repossessions?) for those waiting for the first rung of the ladder to lower slightly and the demand will pick up again.
John, leaving aside any other comments of yours, I seriously dislike you saying "...who said more or less what we know is true..."
I do not know it is true. You don't speak for me and you can't speak for the population. We don't know how bad it is, obviously, or the question of liabilities would not keep popping.
If you have solid info please share it, otherwise what you say is only your opinion.
As a recent graduate of finance, it beggars belief that banks would stupidly take on such risky investments - surely it was to be expected that taking on "junk-bond" rated mortgage bonds would end in disaster?
Perhaps the losses would not be so extensive were the US Government to put in place a ceiling, preventing the sub-prime mortgage lenders increasing rates after the initial term.
Surely the billions that have been announced thus far are just the tip of the iceberg... who knows how this fiasco will turn out!
Capitalism at it's worst - perhaps this will be a lesson to the greed that fuels those on Wall Street.
Is the mortgage fiasco a symtom( the second for the US)of a wrongly managed economy.The first was the internet bubble.
Somehow i believe people/banks are putting money where they should not.
Look at people view on money today.Our parents never believed much in borrowing, rather for them it was, save save save.
I remember reading Adam Smith recipe for creating 'wealth of a nation' - save, put those savings into productive use.
Now a few century later we have a 'improved'recipe - borrow, spend.
"The government should have taken control of house prices by ensuring that people couldnt own 100's of houses, this has driven the prices out of control and prevented your average person from buying.."
two words : stamp duty
"As a former regulator and HSBC executive I would say that there's a lot more to come. I agree with the first poster regarding further losses, although suggesting property may falls 50-60% strikes me as utter nonesense (based on supply and
demand for property)."
Agreed, not as bad as 50 to 60% but supply and demand depends on mortgage availability! Banks are reigning in their offers, asking for bigger deposits and increasing their interest rates. This will seriously dent both demand and supply. But it will dent demand more. If people can't remortgage to reduce interest costs which they can no longer meet due to increases in costs accross the board this will force sales placing a bump on the supply curve. This is why Nationwide went from largely flat to to 4% losses per year till 2010, and they have a vested interest in making things sound better than they are.
Lets not forget an important part of the puzzle. The investors. Buy to let and buy to develop have driven house prices up in recent years. How many can continue to make profit from this when prices are tending in a negative direction? Even if they have nerves of steal and can ignore the house price drops. How many can afford to maintain their portfolio when interest rates are rising?
Fact is it does not matter whether a banks balance sheet is sound. Without access to cheap credit they are capped in what they can do to alleviate problems.
Even when the tax payer sticks 11bn in the pot via BoE the libor rate still rises! Cheap credit has gone for some time to come. It naturally follows that the housing boom has gone for some time to come.
i.e. The 8% over two years offered by Nationwide is as unlikely as 50-60%
All I read on this BB is yet more typical scare-mongering about the future of the UK property market.
The 'Sunday Telegraph' had an interesting article this week on who these 'mongerers' are. One of the paper's property writers dared to say that during 2008 UK prices would drop only slightly and that housing was still a good long-term investment. This was met with a diatribe of malicious emails and letters claiming the writer was 'off his rocker' and being 'totally irresponsible’. The Telegraph surmised:
1) You have already sold your house, are renting, and want to see property prices fall.
2) You have gone short on the property market and want to see prices fall.
3) You love to wallow in doom and gloom; you love to be pessimistic; you would adore seeing a financial crash; and spend much of your time on the growing number of 'property crash' websites to satisfy this lugubrious desire.
4) You missed out on the property price rises, have felt envious towards those who didn't, and now it's pay back time.
5) You're an ageing hippy or a lefty who dislikes Capitalism and want to see prices fall.
As BBs like this one are primarily for self interest only, which one are you? :o)
Along with supply effective demand determines house prices. Potential demand is irrelevant. There's lots of people who would like to own (demand)a Ferrari. But these people will not influence the price os a Ferrari car because they do not have the money, or the credit to buy one.
No credit = no demand = massive price falls.
Banks have already stopped dishing out sub-prime 125% LTV and 6 times salary lending multiples and..........that's why prices are already falling!
I repeat: house prices largely reflect the availability and the price of credit. A 60% fall in UK house prices could well be an underestimate rather than an overestimate. It really all depends upon just how hard banks are forced to pull in their lending.
What don't you understand John?
Do you really think that people pay for houses using savings drawn from their deposit account?
Along with supply effective demand determines house prices. Potential demand is irrelevant. There's lots of people who would like to own (demand)a Ferrari. But these people will not influence the price os a Ferrari car because they do not have the money, or the credit to buy one.
No credit = no demand = massive price falls.
Banks have already stopped dishing out sub-prime 125% LTV and 6 times salary lending multiples and..........that's why prices are already falling!
I repeat: house prices largely reflect the availability and the price of credit. A 60% fall in UK house prices could well be an underestimate rather than an overestimate. It really all depends upon just how hard banks are forced to pull in their lending.
What don't you understand John?
Do you really think that people pay for houses using savings drawn from their deposit account?
John, leaving aside any other comments of yours, I seriously dislike you saying "...who said more or less what we know is true..."
I do not know it is true. You don't speak for me and you can't speak for the population. We don't know how bad it is, obviously, or the question of liabilities would not keep popping.
If you have solid info please share it, otherwise what you say is only your opinion.
Nigel, leave John alone and read post 60. Anyone you know?
But if you are a property owner, can I please buy your house at 60% of its December 2007 value and save you the other 20% fall?
Do you really think competitive mortgage lending has gone forever?
With average household incomes at £30k+, if average prices fell by 60% you would be knocked over in the rush. (If the men in white coats haven't got there first).
Tightening credit + slowdown = slight housing correction = massive egg on doomsters faces (again)
#46
Re the losses that have now been/are being realised, they have not been triggered because the balls were up in the air, but because the balls fell. Whilst banks had access to cheap money to lend to keep prices inflated, all secured loans were highly valuable, as the security was good. Once banks can no longer afford to fuel the price rises, the security goes bad, and the balls fall. It is that which has caused the current problems, not that which has gone before (i.e. the lending).
#55
You fundamentally miss the long term nature of mortgages, and the interaction with income and other costs. Just because you can afford your mortgage today, does not mean that will always be so. Suppose wages do not increase in line with inflation (as is currently threatened). Suppose taxes rise (as is currently threatened). Suppose the cost of borrowing increases (as is currently threatened). All three of those could move such that your previously affordable mortgage on your house is now unaffordable, despite not moving house or increasing your mortgage.
The answer used to be to remortgage with a cheaper provider. However, decreased competition in the mortgage market has led to higher rates and stricter conditions, more akin to the conditions set 10 years ago. So many people cannot now remortgage. And so the house gets reposessed. You follow?
And this doesn't even begin to factor in the impact of reduced borrowing capability and disposable income on the retail economy, which is probably the largest industry in the UK after financial services.
All in all, not pretty reading.
Oh, and by the way, my vested interest is in not being a house-owner. Despite having a professional job in a global accountancy firm, I can't afford anything worth buying, and truly believe that prices are significantly over-inflated, and have been since about 2002.
Average British house prices peaked at around 8x average income. The loan-to-income ratio associated with a performing loan is 3:1. Until a few months ago, mortgages with LTIs as high as 6:1 were easily obtainable.
Supply and demand has nothing to say about whether a loan performs or not. Affordability is everything. Mortgage lenders can and will lose during a housing shortage once borrowers fail to make repayments.
The perverse reality of the British housing market boom is prices were driven by lenders expanding LTI ratios, not by supply and demand.
As lenders tighten their belts, the impacts on mortgage paper are obvious.
The Cedit crunch appears to be inevitable Global crises. The Banking Industry, in the U.S.A. and Worldwide. Many of the other financial Institutions have been victimised,as well.
The Economic Crises in the U.S.A appear to be actively created, through the impact of a longstanding, deeply rooted, Destructive Political Movements, on behalf of many of the Top Democrats, andby very few of the Republicans, among the U.S. Government.
During the 1980's, and the 1990's, it was noticed that the ³ÉÈË¿ìÊÖless Population, in the U.S.A, had been used, as a political tool. Lots of Federal funds were spent, to overcome the ³ÉÈË¿ìÊÖlessness problems. Many expensive and bureaucratic, Federal Programs had been created; however, the Number of the homeless population continued to grow, out of hand.
During the 1990's Former Vice President Algore had declared that the very expensive High Rise Buildings for low Income Housing Projects, to be unfit, and unsafe, because of the increased crime rate.
Instead of providing more security, and improving the safety measures of these valuable buildings, He and his teams, of the top Bureaucrats had ordered to demolish these expensive, valuable buildings, and to accomodate those low income citizens, in private homes.As a result, Many of the Lending Institutions had been forced, to provide Subprime Loans, for those displaced low income citizens.
People with poor credits could not be denied loans, for Private ³ÉÈË¿ìÊÖ Ownership.
It was reported, that former President Clinton had pardoned many of the hard, and rich criminals, at the end of his Presidential Term. As a result the crimes, the arsenical activities had increased. Lots of energy were spent, to restore the Internal Order. It had been easier, for the Terrorists of all kinds, to take advantage of the situation. 9/11 tragidy had occurred, as a result of the exacerbated internal, unsafe environment.
President Bush and his team began to focus more on the ³ÉÈË¿ìÊÖland Security, and the Security on a Global level.
The supporters of the destructive movements, among the Top Nation's Democrats appear to have difficulty functioning, in a crises free environment. Their main job appear to create more of the Economic, moral, health, and social crises. Everybody is busy, and overwhilmed, looking for solutions, at all the time.
The Tax Payers Money continued to be wasted, on many of the trivial bureaucratic investigations,to the already victimized Financial Institutions. No one can be perfect, in kauotic environment.
The Moral and the Economic Revolution that was initiated, by the U.S.Republican Congress, on 1994, aught to be re-energized, in order to prevent Global Recession, and to restore the economic foundations, of every nation, arround the Globe.
The banks are using this as method to defer taxes into 2009/10 on huge gains in 2007. If you hold a mortgage for a condo on the beach in Florida , how can that be worthless? The bank has the #1 slot on the warranty deed. There is value there, just now only 70-80%. Don't be fooled by the big banks using the "bubble" to thier advantage yet again...
Hang on, on one hand you're saying
"Today's announcement will alarm both UBS shareholders and the markets "
whilst simultaneously saying
"...may unnerve both its shareholders and the markets" (as quoted in the website news article)
And the result from the real world was:
Stock markets rallied.
---
News 24 interviewed a guy from some New York journal something along the lines of "it was like a frat party where one guy is barfing up- you know there's nothing left to come" hence the positive market reactions.
Perhaps it just illustrates that it is hard to start predicting a market's reaction at 7am.
My replies to Nigel were lost yesterday somehow - but Chris more or less summed it up.
For ~n @ 6.33pm, my remarks were backed up by Robert Peston when he described Scwarzman's position as "a statement of the obvious".
Wise investors will make a packet from people rushing to the abyss to have a look, then falling in. It happened after the abolition of double mortgage relief in August 1989. The worst affected were the first-timers, who pushed prices through the roof by trying to get in under the wire. The day after the abolition came into effect, the market froze and a couple of years later many of my young friends were handing back their keys.
A couple of years after that, those who could afford the repayments and hung on were in clover.
66
No expanding LTI ratios was the main factor that drove up the demand for house prices.
64
Why don't you try phoning up First Direct for the mortgage you'll need. UK house prices are already crashing because lending is already being pulled in.
Nigel - First Direct have suspended their activity while they clear the enormous backlog of applications. You are in denial!
Nigel - First Direct have suspended their activity while they clear the enormous backlog of applications, presumably mostly from re-mortgages. You are in denial!
#60
Mr Garret I fear the Telegraph is either seeing only what it wants to see, or like yourself, is seriously out of touch. It missed the largest and most important demograph out: Those people under 30 who have been unable to get on the "property ladder" yet.
They have been unable to buy a house to live in because of the unbridled selfishness of the buy-to-let fad and the sudden surge in second home owning City folk. The outlook for them is good however; as renting a property is now considerably cheaper than buying they are sitting on wads of cash. This they will no doubt use to buy up all those forced sales of BTL properties (now that the rent doesn't meet the mortgage and the value is no longer rising) and second homes. Even better, the banks will be forced to flog any repossessions off dirt cheap due to their desperate need for cash.
Nick -If you believe there are tens of thousands of under 30's sittiing on wads of cash and renting, then aren't you arguing that there's nothing much wrong?
Personally, i think that the "yield compression" of recent years won't bother the BTL's, as most of them are in it for the long term, and would still regard a low yielding asset as a better investment for retirement than, say, a traditional pension