You’ve got to feel sorry for the banks and credit card companies. They sustained us through the good times, barely taking enough profit to carpet their meagre offices and keep their executives and shareholders above the corporate poverty-line. Always willing to help those less fortunate than themselves, they tried to provide mortgages for poor Americans who couldn’t afford to pay them back. And that very act of largesse has turned around and (as Noel Coward might have said) ‘bitten them in the ass’. Shame on you, ungrateful subprime mortgagees.
Of course, the reality is very different. Banks and credit card companies have always been making millions, much of it coming from the poorest and those least able to afford their services. If you have a million in the bank and pay off your credit card every month, you’ll never have to fork out a penny. If you can’t afford to pay your mortgage, you’ll be walloped with charges until they come out of your ear-holes.
The reason European banks and investment companies invested in the US Subprime Market (don’tcha just love the jargon?) in the first place was because they suspected that the people who took out these ‘risky’ mortgages were probably too poor to be able to pay up on time. But that didn’t matter: the institutions had the security of being able to repossess the properties and keep whatever payments had already been made. (Another word for properties is ‘homes’ but that’s not something you’ll find in too many financial reports.)
What these lovely fellows hadn’t taken into account was that the value of the properties would plummet after 9-11, the Iraq War and subsequent exploits of George W Bush. And so they lost lots and lots of money.
A lot of homes were repossessed (nearly two and a half million at the last count), the banks lost zillions and, fearing a ‘run’ on their assets, used creative accounting to cover up just how much of their money had actually departed down the Suwannee. Because every bank knew they’d fudged their own figures, they refused to believe how much other institutions said they’d lost. Mistrust set in and the banking system began to wobble.
What had previously been a series of simple every-day transactions in which High Street banks advanced one another billions in short-term credit, ground to a halt. Northern Rock all but went to the wall and a couple of others almost followed. Recently the Bradford and Bingley Building Society, a British mortgaging institution, issued a profits warning. It’s not getting better, it’s getting worse. No one short of the Duke of Wellington can currently get a loan in the UK and card companies are lowering credit limits and calling in cards like there’s no tomorrow – which is exactly what they’re fearing.
My own bank, the ethically-motivated Co-operative Bank have just reduced the credit limit on my Gold card by £1,500, getting an advisor to call me to ‘explain and discuss my new credit limit’. This is all being done for my own benefit, apparently, though how the attendant rise in interest rates fits into this scheme of things passes me by. ‘Are you OK with this?’ he asked at one point. ‘No,’ I said. ‘Oh well, let’s move on…’
The American Subprime crash didn’t cause the current Credit Crunch, it was merely a catalyst. Many other factors came into play, including the slowdown in the UK housing market, and the fact that banks had few genuine assets to sustain the big losses. In the ‘good old days’, banks and building societies took in money from investors and lent it, at a higher interest rate, to those buying property. But times have changed and they got greedy, lending money they didn’t actually have, occasionally in a silly fashion, such as Together, Northern Rock’s infamous 125% mortgage.
Repossessions are becoming big news in Europe, too. Over 27,000 in the UK in 2007, a nine-year high. According to an article on the BBC website posted in February: ‘Among the biggest mainstream lenders, Britannia, Bradford & Bingley and Northern Rock were found to be using the courts the most, relative to their market share.’
The worrying thing is that no matter how badly the banks do, they will always pass on their losses to their customers. The recent legal action against them for unjust charges – which the banks are supposed to have lost, though you wouldn’t think so – has put them on the back-foot, looking for new and more interesting ways to take money off us.
The total cost of the Credit Crunch? As ever, it looks like the rich will survive and the poor will lose their homes and possibly their jobs as well. A pity Britain is ruled by a government too afraid of losing affluent middle class votes to help those who really need it.
The only vaguely optimistic note is that Gordon Brown and his post-Blair Thatcherite government has two years to improve their miserable record before they get kicked out and David Cameron’s Thatcherite Conservative government takes over. We can but hope…