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These are the reasons I have been saying "cut interest rate". If interest rates are cut then affordability will come back and we will be out of this mess.

People who complain about cutting rates, see the cost of BOE policy that is ruining our country. Cut rates to 4% immediately.

Robert

I fundamentally agree with your analysis.

Assuming £50bn of mortgage assets, even a default rate of around 5% (which is twice as high as the current level of around 2.5%) would imply losses of £250m which should be manageable for a few years (compared to a net interest margin and fee income).

Ram

splendid......at least the bradford and bingley customers are sensible.lets all hope some we get some mathematicians running our our banks in the future.

Robert

I have just had a look at the 30th June statement of B and B and the total residential mortgages was 41 bn with self-cert at 9 bn and buy to let at 25 bn so self-cert and buy-to-let come to 34 bn NOT the 41 bn you state in your piece.

source: Page 27 Notes to Financial Information

So the Treasury should not be out by more than 34 bn - big enough but not as bad as 41 bn

Also B and B have savings to the tune of 20 bn (your figure) which if sold to someone should yield that much.

So the Treasury will only be down by 14bn won't they? (And also some of the Buy-to-let and self-certs will perform - possibly.)

#1 alphaGlen

"Cut rates to 4% immediately"

No I disagree - the BoE should put rates up to 6 per cent - as the low rates are the cause of the bubble.

(and rescue the retail bank failures and get back to sane banking and sound money.)

no...cutting interest rates does what? makes people borrow more..this is the problem in the first place.... the equation needs to be equalised..ie house prices reduced to real wages....not a mythical figure made up by doubling a squared number. for god sake lets have some sensible economics here.

Mr Preston, please learn basics of finance:

1) Deposits in a bank are LIABILITIES not assets.

2) Mortgages, even in default, have a value maybe not book value but still have a value.

3) UK isn't like the US. You cannot just post in the keys and say sorry I can't pay. You are still liable and the bank can sell the property and come after you for the shortfall.

We need to let these banks fail and put an end to this pyramid scheme.

We need to accept that many bad loans have been made and more and more will turn bad as house prices plummet. The banks must pay the penalty and not reap any reward.

Do you want to line the pockets of the banking elite? All the political parties seem to support these ludicrous bailouts.

If we allow this to happen then we will know that capitalism and freedom is dead and we live in a facist dictatorship masquerading as a democracy.

The banks have so much money they can easily buy the politicians they need on both sides to ensure that their bidding is done - so does it really matter whether it's Brown or Cameron on the stage when it's the banking elite that pull their strings?

Everyone is now pushing for more regulation - but it was government intervention that caused this crisis.

By keeping interest rates artificially low over the past decade the government has given the green light to banks to chase market share over loan profitability and the bonus and commission structure is a symptom not the cause.

We need to return to a true free market economy!

Robert,

I have read on the expert part of the "Have your say" comments that banks have created trades to put assets on their books.

Basically this would make their exposure look lower and enable them to loan more and hence trade more to the public.

If this is being done now then it will make their situation look better than is. However if it was done during the boom years, then banks may be in a far worse situation then could be seen by looking at the balance sheet - as loans made against these assets will be a mutiple.

Is there any truth in these false assets ?

Nationalising is the worst option. It means sacking more staff, running down the business and sending taxpayers a large bill for all the losses. It means fewer mortgages, lower house prices, and more uncovered lending.

If no one else is willing to buy the mortgage book why can't the state wait for B+B to go into receivership and then just pay a nominal amount for the mortgage book. I mean if it is currently valued at £41 billion then buying it extremely cheaply the government would bound to make a profit?

No way out for Gordon then

7:

Great post. Re. your third point, BTL borrowers very often have other assets, so they cannot simply walk away from BTL liabilities.

4:

Good point about mortgages - 41bn of self-cert and BTL sounded wrong; glad you clarified this at 34bn, and also pointed out resid values (surely at least half of the total, I'd guess?).

Robert, I've listened to a lot about the credit crunch, but there's one or two things that I just don't understand.

Firstly you say the 41 billion in residential mortgages is unsellable, but these loans are secured by property. So if the commercial market expects houses to fall by no more than 50%, even if the 41 billion was all 100% mortgages, surely a buyer would still think it worth paying 20 billion? Are you saying the commercial market expects the value of UK houses to fall to near zero?

Secondly, and more generally, if there is a shortage of credit, surely I should be getting more than 5% interest on my savings. If there's a shortage of money, why aren't banks paying 10 or 15% on deposits like they were in the early 90s? It seems strange that with all the talk about the credit crunch, nobody has even touched on that issue.

Are you aware that Northern Rock will not accept more than £2m per customer ?I was advised today that they have over the past two/three weeks inforced a limit to the amount that one may invest. Is this government policy ?
I assume too much money is flowing into their coffers as we panic as to the safety of other banks.

Why don't they reduce the rates they pay for deposits if they are awash with savings. They could well repay the government more quickly.

14:

Good point - logically, savings rates should be rising to attract depositors. So, why isn't this happening?

First, because govt still believes (despite all evidence to the contrary) that low rates are "a good thing", so base rates may fall and are unlikely to rise; mortgage customers' rates are customarily linked to base, not LIBOR. This makes it harder to afford to raise deposit rates.

Second, banks aren't lending much to each other - interbank rates are high, but not very meaningful if little is actually being lent at the rate.

We need to move towards sound finance, including limits on mortgage/income multiples and LTVs. This should include getting away from the low interest rates trap, a supposed "good thing" which in reality creates asset bubbles.

Eventually, scarcity of liquidity points towards higher rates, and better returns for savers.

Robert

Are you aware that Northern Rock will not accept more than £2m per customer ?I was advised today that they have over the past two/three weeks inforced a limit to the amount that one may invest. Is this government policy ?
I assume too much money is flowing into their coffers as we panic as to the safety of other banks.

Why don't they reduce the rates they pay for deposits if they are awash with savings. They could well repay the government more quickly.

LOL Yes it gets funnier by the day and FSA and the rest of us watched it all happening like dominoes falling in slow motion and did nothing except chant' fall fall fall'

As Isaac Newton said about the south sea bubble 'it is impossible to calculate the madness of man 'after having reputedly lost £20.000 on the venture himself

Proving that inteligence is no defence against collective or individual delusion


Any financial device ok'd to get past the chrismas bonus without ending up inside the turkey next to thin end of the wishbonus

Of course rational people will examine it ,proving, that the toothfairy was having a bad day at the derivatives and it willl never happen again,of course it wont


Self certified sounds soo like the outpatients of loonatic asylums encouraged to think that they are Paul Getty and given the red carpet treatment by mortgage brokers [how those brokers must have laughed as they participated in the fiction ]


No doubt banks were devising casino mortgages for those willing to use their rabits foot as colateral however The cirtified self service uneconomy is now over and whats left of the smorgaasborg is all over the floor

We can tell our grand children about this, but theyll find it harder to believe than the tooth fairy

Re Post 7

Can't disagree. Problem for householders is if problems maintaining payments cannot sell in v bad market. Change in circumstances not always reasonably predictable. Lower the market slumps the less the chance of redeeming mortgage. Bank will not allow sale if mortgage is not redeemed, even if only a fiver short. Better for bank to seize property and have forced auction sale even if shortfall against mortgage redemption is much larger. Bank not bothered as claims against householders mortgage insurance, that is objective. Insurance co then goes after householder if possible, maybe bankruptcy. Forced sales by bank depress market further. Duty of bank to acheive a reasonable market value for property very difficult to enforce, generally acknowledged illegal action taken by banks in dumping property on market in early 90's. Bank predates on householders at point of sale by selling unsound percentage of house value and then predates if subsequent difficulty, effectively unregulated. Impacts badly on vulnerable consumers and on market. All comes back to lack of regulation by government. Say it again, government. If anything else than a mortgage would be howls and charities set up to help consumers.

6. At 5:18pm on 27 Sep 2008, rvpisneverinjureds wrote:

"no...cutting interest rates does what? makes people borrow more", not to borrow more, its to pay what they have borrowed.

If interest rates are kept at this rate or increases more and more business and people will fail to pay; this will lead to more or all banks to fail.

Based on news papers it looks like MFI is going to call in the administrators, with that another 3,000 plus jobs in UK will be lost, indirect jobs will be even more.

Cutting interest rates is a cheep alternative to rescuing banks, pay dole and deal with the all the problems with a recession (one of it will be increasing crime). Even government jobs will not be safe as reduced taxed revenue and all these addition expenses will be paid for partly by cutting government jobs.

The choice is simple.

i wonder how much exposure santander has to the spanish housing market..

#3 and #8

The doctrine of the free market economy along with the increasing adoption by banks of mathmaticians and investment by algorithm has contributed to the problems we now face.

Republicans in Washington are banging their heads on the table in disbelief that their rational economic system has failed to distribute wealth, or goods or services effectively.

Solutions to the problems may lay ultimately with us all - business, politicians, and the wider community reaching a new accord.

It certainly won't be reached by modifying old economic dogmas.

Schools may consider spending more time teaching philosophy at the expense of the ubiquitous business studies courses.

(For anyone interested on understanding why a rational system will ultimately fail I have included a link :



The Chinese curse is upon us - we will be living in interesting times !

@alphaGlen, 20

Changing interest rates won't do a thing, banks aren't lending full stop and the LIBOR rate is increasing.

You can have interest rates as low as you like, but if there isn't any liquidity then no ones going to lend.

Even when funds return to the market, we should be wary of maintaining cheap debt - there is too much debt in the system as it is, we can try and defer the day the chickens come home to roost, but thats just ensuring the eventual fall will be that much harder.

Sadly Labour seem intent on letting someone else bite the bullet, perhaps Brown should stop lecturing others on fiscal responsibility and start applying it to his own job.

Mr Peston; it is your duty to make the ³ÉÈË¿ìÊÖ expalin that this is is not billions being paid to crooked fat cats for their personal profit:

1. money is not real. Google "money as debt".
2. When there is a credit squeeze, those in a position to buy get real assets at a discount in exchange for cash. The wicked speculator gets the innocent punter's foreclosed home at auction at a huge discount. This time, that's being described as the downtrodden businessman bailing out the reckless punter.

The taxpayer is in a position to take the bankers mortgage assets at a discount. And take the revenue streams associated with those assets. And have the chance to fudge the economy later to enhance the resale value of those assets before selling.

Why aren't the taxpayers clamouring for this? Because no-one's explained it. So we risk the taxpayers jumping off a cliff to avoid receiving a massive gift from the banks, and driving us all into poverty.

Why can't people post?

Re Post 23

I can see there is going to be a differnt lanscape when this lot washes thru. If stripping money out of property via cheap mortgages has been propping up the economy then if you remove that effect and on top of that then only leave the debt you maximise the impact, thats got to hit the economy badly. I've see economic comment of minimal damage but being a bit simple I don't believe it. Brown has already said his answer is to borrow more and press on regardless. Problem is if all the private sector activity boosted by house prices disappears the private sector has to shrink. The public sector never seems to shrink so a longterm imbalance is going to ensue. It is difficult to see where growth is going to come from. The financial sector, trumpeted as the saviour of the economy has to shrink, the service sector has to shrink because there is less disposable income. National debt has to rise, taxes have to rise or public services have to shrink. The value of the pound has to fall. The hair raising thing is the likely outcome is a government that wants to see personal debt significantly grow again to boost the economy, which is where this started.

#10

I would reply is the ³ÉÈË¿ìÊÖ would allow...

Re 24

Thank you, have said repeatedly about it being a potentially profitable deal in US or UK ref 2000, 2004 Jap experience, have stated concern about media not giving perspective. Believe business based on inverse of norm is future at least for some small level trading, have positive signs correct in that for some time. Also only some counties affected by the Bush Brown malady. Very few challenge the hysteria which has been fanned, somebody wants petrol on the fire somewhere. I dont believe shortage of money, its just not flowing to many. Also suspicious banks using mayhem to restructure as international bad news dwarfs normal reaction to their activites. My guess pick up low before 2013. Not next election but one after key.

Why won't the ³ÉÈË¿ìÊÖ allow be to post more than a couple of lines, censorship or what?

"Taxpayers on hook for 40b"

Robert will you ever change!!!?

Its scaremongering pure and simple!

Furthermore its damaging our economy further by potentially strarting another run on a bank (and we all know how that ended last time)

I hope your proud of yourself and can sleep easy thinking of the number of employees, small shareholders and pensions that will suffer as a result.

To clarify BB currently has no liquidity or solvency issues (i know this via personal connections) and even if they did savers are protected so there is simply no reason to panic.

NOTE TO ALL

do not use an ampersand (symbol for and)in text, it pevents comments being written.

Re 29

Dunno mate, some people can post screeds, perhaps only junk like mine gets thru.

#10

Assuming that a large slice of BB is taken over by the Santander bank most of the UK Jobs are going to be toast anyway, at least in the short-term, as there will be far to much duplication. Remember that the buyer will be basically asset stripping, that they already have a UK based back-office from their take over of Abbey whilst they have a large High Street presence for the same reason (although some BB outlets will survive I suspect), if you are looking solely at keeping jobs then nationalisation of the complete Bank and it's operation (backed by the BoE) is the best option, although it will be the option that cost the tax payer (and possibly the politician) the most.

Note to Dunrod, no 17

1) £2m has always been NRs policy as Ive checked their website
2) So has nothing to do with the government. NR is a private firm with a single shareholder.
3) Lowering rates would penalise all customers and be therefore unfair.
4) New products cannot just arrive on the market instantly
5) National Savings is another institution that will willingly take his extra coffers if he really needs this calm port in a storm
6) Given NR only had £25bn savings before the run, does he really think his money would be unsafe in a larger bank? Talk of the £35,000 is crazy anyway. These last weeks and months have proved that no big banks will fall if they have a retail savings presence. Just put your money elsewhere and it will be safe.
7 and last) In truth - do you really think NR wants your money....? you are obviously panicing therefore will withdraw this money as soon as the panic is over or NR comes out of TPO and the guarantee lifts - not really a customer NR can build a future on...

I think alphaGlen has a firm grasp of the wrong end of the stick. Rock bottom central bank interest rates are the source of the problem, and while low rates might keep the whole Ponzi scheme going a while longer, they seem unlikely to me to be a part of the long term solution. 6 or 7% can hardly be described as high interest rates. If you can't comfortably make your payments at this level, then you could never really afford a house in the first place. For average homeowners absolute (versus partial) defaults are likely to increase because of unemployment rises, rather than because of interest rates per se.

Self Cert homeowners are considered particularly high risk as everyone suspects they lied through their teeth about their earnings to get the mortgage they wanted. Banks were largely complicit in this fraud, why else did self cert mortgages exist? If people actually earned enough to get the mortgage, why would people not present their payslip/P60/Bank statement and get a cheaper deal?

BTLs are potentially an even bigger house of cards. The basic business premiss rested on the supposition that house prices would rise infinitum and interest rates would stay close to their record lows. Consequently, multiple properties and massive leverage was the name of the game. Interest only mortgages (2 year fixed rate, typically) are also much, much cheaper than a repayment mortgage when interest rates are low, and thus allow even more leverage.

In this fairytale economic environment, if a BTL's yield (Total rent minus interest and maintenance costs) was zero or better, no worries, a bit of spare cash every month. If it was less than zero, well nevermind, there was the anticipation of a great big cheque from capital growth when the house was sold on at some future date.

Rises in real world borrowing rates and falling house prices represent nemesis for the BTL market. They aren't able to making anything on the yield, as the cost of borrowing has gone up and they can't really increase rents as tenants will leave, there are plenty of new involuntary landlords on the market, people who are unable to sell their residential property, but needed to move, and therefore let out their owner-occupier property to cover their mortgage. The chances for BTL of capital appreciation anytime soon also look bleak in the extreme. Its also difficult to get out of the market, even at a loss, as houses aren't selling.

If you aren't making anything on the yield, and you aren't going to make anything on capital appreciation, then you have a charity not a business. I met a guy this week with 38 rental properties. The reason I met him was because he had returned to his former job, he needed extra cash, he was unable to roll over his 2 year deals at anything like the same cost and he was a bit short meeting his multiple mortgages. The credit crunch has hit us, but I personally don't think the deluge of mortgage defaults has stated yet in this country.

Northern Rock and B+B were the UKs subprime lenders. B+B have 83% of their mortgage business in these two groups. It's no wonder that no bank wants to take them over, even if their mortgage book has some value, it's just not worth the risk of trying to put a price on it. Best case scenario, it would only suck away cash in the short term, but liquidity is crucial at the moment, the lack of it is why banks are going out of business. Why would you take the risk?

Just out of interest, does anyone know of any of the former building societies that are still in business? That "freelance butler" should be strung up like Mussolini

If you are going to report Mr Peston then please have the common sense in these difficult times to stick to the facts and stop making it up - Santander don't currently own Alliance and Leicester! They probably will by the end of next month but not yet! So then, let's be perfectly clear here, if you ever want to be a credible reporter stick to reporting the news rather than trying to make it happen with your scare mongering and doom mentality!

#7

Aren't you both right as the deposits are liabilites owed by the bank to the depositer but on the balance sheet, are shown as assets of the bank.

I guess Sir Richard Branson is not keen?

#35

re B+B BTL morgages,

A possible solution would be for the government to take over the entire B+B BTL mortgage book, and then take physical possession of any properties defaulted on via local council housing stock - this would not only allow people who have over stretched their finance to recover, although at the loss of their BTL property(s), and it would start to rebuild local authority housing stock for those who can't afford/get a mortgage. No doubt one of you experts will shoot it down in flames...

Might seem an obvious point to most but worth repeating i feel, the vast majority of the BTL mortgages are with people who have various assets and investments.

Therefore even if the market value of the property falls below the mortgage there is no concern as there are other assets owed to cover any potential shortfall.

Generaly speaking this is the case with BB.

just heard your scoop. when you say the government will "sell" the deposits, presumably what it means is that the government has substituted the cra ppy assets with cash. as 7 rightly points out, the deposits are liabilities. what the buyer is really "buying" is the relationship with the depositors (which obviously fits neatly with the branch network also being sold).

but as the deposits themselves have negative value to the buyer, the government should deliver them along with an equal amount of cash (freshly borrowed/printed by the government) so that the net value of the deposits + cash is zero. not a bad deal for the buyer in the current liquidity squeeze!

This thread has been over taken by events by the looks of things...

www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/bb_to_be_nationalised.html

Re whether deposits are assets or liabilites to a bank.

When you deposit funds in a savings/ current / investment account, you are in effect loaning that money to that instituation therefore they are in debt to you so your deposit is a liability to that company on their balance sheet as they owe you the money back.

That is why an overdrawn balance shows as £100 dr and a £100 in the bank shows as cr.

#7: I think a lot of people may see personal bankruptcy, or at least an IVA, as a reasonable way out. So posting the keys through the bank's door may happen despite the routes available for claw-back - the borrower may just say "come on, sue me, I'll just go bankrupt".

"Government bankrupts a million citizens" isn't something many would like to see in the papers...

I suppose the reason this doesn't worry me so much is that I doubt the government has paid 40 billion for Bradford and bingley. Should we be that concerned that the government is acquiring an asset for peanuts which may yield anything up to 40 billion?
I suspect the government will make a lot of money from this.

Who are Banco Santander? and why do you think they may have the (long term)capability to ride to the rescue?

Yes it's true that they are a big bank - with big exposure to the Spanish housing market (albeit they have confined their recklessness to funding construction companies, and have been a bit more cautious with regard to "Jose Publico").

Take a look at the Spanish economy - housing market wildly over priced, transaction levels going through the floor, unemployment rising, strikes rising, car sales fallng, Banesto (controlled by Santander) offering free cars in lieu of interest to new accounts, construction compaines going bankrupt, whole new towns built but completely unoccupied - and on it goes.

What do they have for entertainment? - why a trip to the fertile fields of South America. No doubt there are many examples of banks making their fortunes in Latin America it's just that I can't think of that many. Can't see Chavez, Morales et al being too keen on bailing out the "Mother Country."

If Banco Santander ever need to choose between cutting of funding to the British or to the Spanish I wonder which option they will choose? (Here's a clue: you can deduce the correct answer quicker than LloydsTSB conducted due diligence on HBOS)

#37, they shouldn't be. Fundamentally deposits are loans to the bank, so when I make 0.0000000001% on my current account that's the "coupon" that my bank is paying to borrow off me. They are liabilities, what I suspect is there maybe some deposits locked in at some silly low interest for a period of time but that is still a liability as the bank has to pay it back after the lock-up, those loans would just be trading above par.

It's a common mistake, the main economics editor at NYT also doesn't know the difference.

#22, more philosophy so we can more financially, economically and mathematically illiterate people? This is a pure and simple liquidity crisis. No one can be seen to hold these bonds because they are "not safe" and no one wants to be the last guy who lent to a bank just before it went bankrupt. Again the correct response, property prices come down, bonds get marked down, banks become insolvent and get bought or go bankrupt and we all go into recession as we should probably done post-dot com boom, except now it will be many magnitudes harder.

#44, I suspect when people see the consequences of going bankrupt that you'll be surprised at what money they can dig up and "million bankrupts" would be a fitting epitaph on Mr Brown's end to boom and bust. Remember a significant portion of these people probably are just that.... bankrupt.

The point is that unlike the US, you simply cannot walk away from a secured debt. Mr Preston is reading US news and cutting and pasting it into UK news without realising the fundamental legal differences.

PS I am not meaning to sound cold but trying to prop up the housing market is simply going to cause this to blow again later, which is probably what Mr Brown hopes because if it blows up post the next election he's in for another five no matter what.

#43, because the statement is talking ABOUT you. If YOU have a deposit then YOU have an asset, if YOU are overdrawn YOU have a liability. It is the mirror image of the bank's situation.

Finally, these mortgages are only worth zero if there has been some sort of fraud and the charge is non-existent.

REGARDLESS OF A BAIL OUT - IT IS AND ALWAYS WILL BE UNLAWFUL

REGARDLESS OF A BAIL OUT OR THE ARGUMENTS OVER WHETHER OR NOT THERE WAS REGULATION AND NO MATTER WHAT LEGISLATION IS PASSED BOTH IN THE UK AND USA - IN PRINCIPLE AND IN LAW WHAT THE BANKERS DID WAS UNLAWFUL AND WILL ALWAYS BE UNLAWFUL. TO PUT IT MILDELY IT IS A FORM OF CRIMINAL NEGLIGENCE INTER-ALIA.

LEGAL PROCEEDINGS CAN BE TAKEN AGAINST EXISTING REGULATION, LEGISLATION, ORDERS AND AGAINST THE DECISIONS MADE. THIS WILL BE THE NEXT PHASE.

MEMBERS OF THE USA CONGRESS AND MEMBERS OF UK PARLIAMENT:

TAKE NOTICE: LEGISLATION TO BAIL OUT AT THE EXPENSE ENFORCED UPON HOMEOWNERS AND THE TAXPAYER IS A FORM OF MALFEASANCE INTER ALIA MOST FOUL.

So losing 50bn from taxpayers money was called today: "decisive responsibility"?!?

That may go well with Bankers Association, but the truth is look what happen with Japan property bubble and banks 20 years ago, and you will see were the Britain will be in 2020 - thank you Brown.

Investors and the international markets are not stupid and will punish that kind of stupidity, mark my words.

At least America shows some common sense with "Bail-out" style nationalisations.

If it was possible to have state governed economy, we still would have "Council for Mutual Economic Assistance "

With apologies for lowering the tone, but glad that you managed to take time out for a most enjoyable 90 minutes last night! Martin Levy.

We shouldn’t assume that all self-cert borrowers are going to find it difficult to pay their mortgages. B&B wasn’t completely irresponsible lender and they did vet their borrowers prior to release of funds. Their mortgage book may interest some buyers as not every borrower is prone to default. It is totally unreasonable to say that are a great risk and buy to let borrowers will be leaving their keys. Majority of buy to let owners are responsible customers and many run buy to let as a business, which mean that success of their buy to let is their bread and butter. Many businesses are in trouble now, but it doesn’t mean that many owners will be abandoning it.