The UK and “the largest financial shock since the Great Depression”

Sterling has hit an 11-year low against a range of currencies and slumped to 80p against the euro for the first time as consumer confidence wanes against a weakening housing market and a downgrade to UK growth forecasts.

On the same day the International Monetary Fund cut its UK growth forecast for next year to 1.6 per cent, blaming the current credit crunch. Only last month, UK Chancellor Alistair Darling forecast growth for 2008 of 1.75-2.25 per cent and 2.25-2.75 per cent for 2009.

On Tuesday, the Halifax house price index reported that house prices fell by 2.5 percent in March from February, more than six times as much as analysts had forecast and the largest monthly decline since September 1992.

All this comes just just a week after the IMF said that UK house prices are overvalued by nearly 30 per cent.

As well as downgrading the UK’s growth forecast, the Financial Times reports that the IMF noted that the financial market crisis that emerged last August is:

the “largest financial shock since the Great Depression” and said that the world’s developed economies will not recover from it quickly. Already, its spillover effects are being felt in most developed economies, particularly those in Europe and especially in the UK where financial institutions are exposed to the US.

Iceland seems to be one of the first countries to feel the full brunt of the economic turmoil engulfing the globe as a recent run on the krona has seen the country’s currency lose a third of its value.

Iceland has had to hike its interest rates to a whopping 15% to hold down inflation, currently running at nearly 7%. as according to the Sunday Herald:

financial institutions, working as a pack, start selling shares in Icelandic banks, in order to create a crisis from which they can benefit by selling their short positions (essentially bets that a company or a currency is going to collapse in value). In the past, the international financial “community” might not have bothered about a country that is a mere pimple on a map of the Arctic Circle. But nowadays, with the credit crisis, every billion counts.

The question is whether Sterling is next up for the speculators. It happened before in the 1990’s when, as could soon again be the case, the UK economy was in recession and involved in a Gulf War.

The country was also in the European Exchange Rate Mechanism (ERM), until September 16th, 1992 that is. On that day, otherwise known as Black Wednesday, the then Conservative government had to withdraw the pound from the ERM, due to pressure by currency speculators—most notably George Soros.

Interestingly, Soros said 11 years ago that the UK should join the euro to safeguard the value of sterling.

According to Soros back then, something had to be done to stop the chaos of uncontrolled free markets ultimately bringing down the capitalist system. He said better international co-ordination was essential to protect national economies from the effects of crises in financial markets, pointing in particular to the benefits of being sheltered from the full force of any future bouts of turbulence that may sweep the currency markets in the future.

Could it be that Soros’ future has finally arrived?

Eds: Have added UK to the title of this post as it was meant to be UK-specific.

  • slug

    The Bank has decided that to counter the low growth predictions it will cut interest rates and let the pound devalue. These actions tend to stimulate the economy.

  • barnshee

    Spare a thought for all those investors who bought in N Ireland at 64p to euro and have just had 20% knocked off the value -and that`s before the property crash really gets going.
    However is there now a chance for new entrants at 80p rate to make a killing?

  • However is there now a chance for new entrants at 80p rate to make a killing?

    Only if you think that 80p will be, or will be worse than, the likely long-term rate between Sterling and the Euro. Personally, I think 80p is a bit cheap but always thought if the UK joined the Euro it would do so at a rate around €1.30 to the pound rather than €1.50, unless you wanted to destroy what remains of British industry…

    For about five years, in talking about the property market, I’ve been feeling like the kid who was shouting that the Emperor has no clothes. Basically, many governments allowed historically cheap and easy credit to inflate the housing market in their countries beyond remotely sustainable level. All the way, they were cheered on by economists shilling for major lending banks and real estate agencies spouting bullshit about ‘changed fundamentals’. Every time you hear a Halifax economist on the BBC you should be told that these people have a vested interest in talking up the market and that their index has consistently been more optimistic than the official government one in England since that was introduced a few years ago.

    The British government, with Gordon Brown in total control of economic policy for the entire period in question, has been one of the world’s worst offenders, generating ‘wealth’ by allowing the value of an asset which is almost entirely illiquid for all but the very well off to rise to unsustainable levels while saddling the youngest and most productive workers with enormous debts, and in all likelihood serious, long-term, negative equity. You reap what you sow.

    Fianna Fáil were equally bad, but at least have the excuse of the ECB setting bank rates for German, not Irish needs. Mind you, they didn’t exactly make use of any other policy levers to keep the housing frenzy in check. The Republic is now saddled with tens of thousands of empty houses in uncommutable bogland in County Laois, which were built so a few gombeens could get rich letting them out to Eastern Europeans who were only in the country because of the work generated by the housing bubble and are taking increasing numbers of one-way Wizzair flights to Wroclaw now the frenzy is over.

    Let’s also remember the number of South Tipperary builders’ merchants who thought they were cute hoors buying up property in places like Budapest, Istanbul and some town with an unpronouncable name in a country they couldn’t find on a map. I know Istanbul and we Irish have made ourselves hated buying up central Istanbul’s tenement blocks up, evicting the families who lived there, selling them to one another in a price spiral that soon left even upper middle-class Turks out in the cold and… Whoops, Paddy from Kanturk Golf Club now owns a flat on the wrong side of Tarlabasi Bulvari in the middle of the transvestite/heroin addict district (which he didn’t know because he can’t speak a word of Turkish and would have paid no attention to any Turk who told him the facts of life). He paid €400k for a flat that he can’t even let for the €600 a month he’s looking for it and as he knows nothing about Turkey, the Turks, the Turkish property market, and Turkish land law he is, not to fine a point on it, fucked. Along with the Irish and British economies more generally.

    Oh, and if you’re one of these people who still thinks that property can only go up in the long term, try googling for Japan 1980s property bubble. Property in Tokyo today is still at less than 40% of its 1989 peak value.

  • Pete Baker

    The IMF also had something to say about the euro-zone, George.

    The IMF said it now expects the euro-zone economy to grow by a modest 1.4 per cent this year, down from a January forecast for 1.6 per cent and an October projection of 2.1 per cent growth.

    For 2009, it expects growth of just 1.2 percent. In 2007, the euro area grew 2.6 per cent.

    And that

    Inflation remains uncomfortably high in the euro zone, but the IMF said it expected pricing pressure to moderate in 2009.

    Perhaps Soros’ future will have to wait.

  • George

    Pete,
    just about to put up a separate one on Ireland.

  • Niall

    Brilliant Sammy, may I endorse the exaspirated comments of yer man Morse.

    I sincerely hope that all those would be international Landlords get what they deserve. Bankruptcy with a bit of justice.

    As for our economy, there is a financial meltdown on the way. The NI mortgage market contraction lags that in england but yet house price falls are already at 3x that they are using to try and beat the BOE with to reduce interest rates.

    The good news is that the place will be affordable for generations to come unlike some recent predictions. Bad news is if you bought in last 3/4 years your stuffed for a long long while.

  • What am I missing?

    “Bad news is if you bought in last 3/4 years your stuffed for a long long while.”

    Why so? I bought a house in Belfast just over two years ago and I’m happy living where I am. The mortgage is very manageable and I’m not intending to move anywhere soon. I have a good bit of disposable income after my car loan is paid – I feel very comfortable.

  • ulsterfan

    It is not all doom and gloom.
    The FTSE is now hovering at 6000 points.
    The downturn of US economy is not as significant as it would have been a few years ago.
    As long as Europe can at least stand still or move slightly ahead in growth along with India and China we are insulated from USA.
    If they get the cold we will not catch the flu—-Heres hoping!

  • Niall

    What am I missing?

    Well that’s fair enough comment. For me though the thought that houses are 80k less, which in NI i imagine they will easily be is unpalatable.

    The fact that this 80k is borrowed will mean that I will pay back (using the bbc mortgage calculator) at say a generous interest rate of 5%, £473 for 25 years on the 80k which is already lost from the market value of my home.

    Thats £473 to keep the banks ticking over and the developer in style.

    It is painful though surely to month after month be shelling out that much cash in that situation when it is possible ten/eleven years later the house may re-appreciate to previous levels but the “investment” in the house has been inflated away over that period.

    Also the crash will mean that your house is very difficult to sell if you wish to do so you may not cover the mortgage.

    Ulsterfan,

    What does that mean if the ftse is 6000 today and was at 5500 last week?

    Interesting ideas on us focusing on China and India while in your view the USA is not doing too bad. Many are saying the USA is in or close to recession. As someone who worked, lived and maintains business accounts there, the sentiment is terrible.

    It’s not all doom and gloom, but it is the worst it’s been in the memory of most people I work with.

    The upturn will come but there is pain on the way first.

  • Comrade Stalin

    Agree with all of Sammy Morse’s comments.

    Nobody with a rudimentary amount of common sense could possibly believe that the house price boom of the last while is or was in any way sustainable. The price of my house almost doubled in the 18 months after I bought it. Clearly it could not keep doing that.

    I have also been very weary of the property market and I’ve always been very suspicious of people, including friends of mine who work in the major banks, who tell me that a property crash is impossible – after all, you have to live somewhere. Yes, that’s true, you do have to live somewhere. The people who lived through the major house price collapses in the early 1980s and early 1990s also had to live somewhere. So what did they all do ? They all sold up or went bankrupt, and rented, or lived with their parents or friends, or somehow clung on until the storm passed and they were able to get themselves sorted out. Human beings are surprisingly good at this – “making do”.

    When we’re talking about who is responsible for any crash which happens, the first folks to point the finger at are the banks. Ah, my pals who work there say, it’s all the fault of the estate agents, talking up property prices and encouraging the punters to bid the properties up. That’s also not true, of course. How can house prices rise more quickly than inflation ? The answer is : money supply. Money supply derived from banks loosening their lending criteria to get more business in. I’ve seen 105% mortgages, 5x salary multipliers, and all kinds of enticements to get people in the door. I’d not be too surprised if any coming collapse leads to a major investigation into mortgage lending practice.

    To the talk of a recession : comparison to the Great Depression is way, way ahead of the mark. That is a depression where runaway credit failure led to a complete collapse of the US banking system. There is no reason to believe that this is going to happen again. The banks with the bad loan books have taken their hit and gone public about the extent of their problems. These have been priced into their stock prices.

    I remember people coming out with this utter “oh, the world’s going to end” nonsense during the dot-com bust in 2001/02. Fundamentally now, as in 2001/02, the economy is not doing too badly. Financial services are going to take a hit, but consumer spending has not been dramatically hammered in the way that some suspected that it would do by the interest rate increases over the past two years, so I’ve no reason to expect that the high street will collapse. There are no dramatic economic failures on the horizon. The weakening of Sterling comes with benefits – UK manufactured goods and services become cheaper abroad, and it’s cheaper for tourists to come and visit. I’d say that this will be on the scale of 2000/01 again with possibly a few nasty bruises on the property market. Outside of that, I’d say we’ll pull through and be out the other side of this in 18 months.

  • dewi

    Observations of all are interesting but economic rules apply – if the value of your house has doubled then u can borrow to stimulate the economy, or start your kids on the ladder (the usual pattern). If prices are falling then can’t do that. UK daft and unique in reliance on this economic nonsense but it grabs u. I bought instead of rented 20 years ago and made real (economically valid) money from doing that.
    My prediction a 30% fall in 8 months – and that causes real slump in UK economy.

  • dewi

    Dreadfully sorry – I read Iceland as Ireland on first read…..Goodbye and thanks for the fish…..

  • sammaguire

    …tens of thousands of empty houses in uncommutable bogland in County Laois, which were built so a few gombeens could get rich letting them out to Eastern Europeans who were only in the country because of the work generated by the housing bubble…”

    Posted by Sammy Morse on Apr 09, 2008 @ 05:33 PM

    Sammy Eile, think you’re a bit cynical here. If they got their fingers burnt that’s tough luck on them but surely these “gombeens” were just investing their hard earned money to make a modest return like any other investor. No different to those “gombeens” that invested with Northern Rock. You seem to think people (eg pensioners retiring with a lump sum etc etc…not exactly the stereotype you want us to accept) investing in property are greedier than those investing in stocks, commodities etc. Don’t think so…

    Posted by Sammy Morse on Apr 09, 2008 @ 05:33 PM

  • Comrade Stalin

    sammaguire, people shouldn’t invest in anything without properly understanding the risks, and anyone who does – sadly – deserves whatever they get. The media is full of horror stories about people who invested abroad and subsequently got their fingers burnt, often because they did not understand some finer point of property law in the foreign country, or indeed because they didn’t know the neighbourhood. I cannot fathom how anyone with any sense would invest blindly like this. What they are doing is really gambling, not investing; they’re taking a punt without being in any way aware of the possible outcome.

    If you don’t know anything about investing, just stick your dough in a savings account or a low-risk fund. If you invest and it falls through, you have no right to bitch about it. You better make sure you understand that before you do it.

  • picador

    A couple of years ago I had the novel idea of going to Turkey for Crhistmas. The night before I was due to fly to Istanbul I went out in London and got seriously pissed up before returning to my digs to pack. I awoke the next day to find that BA had almost certainly left without me.

    Undeterred, I caught a train to Dover and took a ferry to Calais. Three days later I found myself with an Australian friend in the delightful settings of Cesky Krumlov in the Czech Republic. We drank lots of cheap pivo and went to midnight mass. During the ceremonies the guy standing next to me dropped like a stone to the floor and lay comatose while first a doctor and then a priest were summoned. It was God’s way of telling me to mend my evil ways (or so I imagined at the time).

    Stopovers in Vienna and Belgrade punctuated long train journeys into the Balkans and beyond. On the morning of the 28th I awoke to find the blue waters of the Sea of Marmara alongside the railway track.

    I spent a couple of days wandering around Istanbul, checked out the Haghia Sofia, the Blue Mosque and the Topkazi Palace, ate lamb kebabs in the Grand Bazaar and paid a so-called ‘masseur’ an insignificant sum to dance across my back like a loyalist in a Romper Room. Then on New Year’s Eve I found a ‘western style’ pub adjacent to the railway station by the Golden Horn. Who should I bump into but a property speculator from Dublin who spent most of the evening bragging about the large sums of money that he’d made investing in property in various exotic (and not so exotic) locations. I listened politely but chose to invest my own scant resources in pints of stron but cheap pilnser while a group of Turks sang boisterously at the next table. On learning that we were Irish the locals raised their glasses in a toast to Bobby Sands to the evident embarrassment of my lily-livered Free State companion. It transpired that they were leftist ex-political prisoners, several of whom had spent long periods of time on hunger strike themselves. They sang political songs and filled us full of Efes. Next morning I awoke in my hotel room wondering how to hell I’d got there. My head throbbed and my arse felt undisturbed.

    On arrival at Ataturk airport next day I found that BA had kindly cancelled the return leg of flight due to my no-show at Heathrow. I cursed them for a miserable shower of c**ts and took a taxi back to Sultanahmet.

  • sammaguire

    Agree with you Comrade especially on the foreign investments.
    But this “gombeen” thing is a bit of a myth concocted by people who missed out on the property boom. I didn’t have the spare cash to invest at the right time myself but I don’t begrudge anyone who did well out of it. Nor do I sneer at those (the so called gombeens) that got their fingers burnt.

  • Crataegus

    Sammy

    Good post regarding Turkey etc. It never ceases to amaze me that people invest in a foreign country they know nothing about, on the off chance of letting, or selling, to other foreigners.

    You can actually do some good in these countries by investing in construction for local demand. In many developing countries there is a shortage of just about everything. Do your homework, and redo it, employ locals get a good feel and you can use our very high currency values to do a lot elsewhere.

    The problem is that to do that you need to be in with a larger group or part of a company. Do it right and forget all the TV invest abroad, fantasy land stuff. Property is like everything else, where is there demand, and for what. Supply it at a price people are willing to pay. It is that simple.

    This is just another recession, they happen every 8 years or so and in 8 years time we will repeat the same mistakes. What could make this one different is the dependency of State finances in USA on property related tax, and the scale of any Fed intervention. Equally in Britain are we going to see any attempt to reduce government borrowing?

    This crises has been running since early summer of 2007 and we are probably past the worse by now. No more Northern Rocks which was a real fear a month or so ago. There were some really serious rumours doing the rounds.

    So by the end of this year we should have hit the bottom. Middle of next year should see improvement but it is going to be slow. If you are buying a house late this year reassess but often if you get a sharp drop there is a bit of a bounce. So as with any market timing is critical. But if it is a house you want buy it if you can afford it and enjoy yourself. A house is for living in only very sick people regard them as assets.

  • Anon

    Can anybody answer this question – is the dollar going to pick up against the English Pound anytime soon?

    I’ve been working in the US for several years, my saving are in USD and I’m thinking about returning home.

    I was thinking about buying a house upon return to Ireland. Would it be better to wait. Are house prices in Ireland going to continue to drop – any ideas when they will ‘bottom out’.

    Thanks!

  • Lafcadio

    sammy – it has irked me too over the past few years to listen to people who refuse to believe that property is anything other than a one-way bet. and there’s no doubt that easy credit has played its role in inflating the bubble. but to say that economists have been shilling for banks is a bit too much – not many economists that i can think of were claiming anything like a “new paradigm” in uk property, and in fact in The Economist, for example, they have been matter-of-factly been talking about the overvaluation of the market for several years now.

    the japanese slump took place in rather special circumstances – but if anyone wants to see other examples of property prices going down as well as up, have a look at germany in recent times, or even more recently obviously the US (google case-shiller for some dramatic graphs of the top 20 [IIRC] metropolitan areas in the states..)

    i’d agree with comrade stalin that the doom-mongering is overdone. this is a nasty mess, with the US probably already in recession, and slowdowns in europe starting to take place. i wouldn’t say all of the pain in the financial sector has been felt – there is still a lot of uncertainty about banks’ exposures and capital bases, but it doesn’t look like any of the other big investment banks are going to do a bear sterns. but there is more to come for sure, more writedowns, more job losses (i’m glad to get through each day at work without hearing that we are all sacked, and live for the 15 of each month when my pay arrives :-))

    a big risk is panicky, knee-jerk re-regulation, a la sarbanes-oxley post enron. one thing is certain though, no matter what happens, this mess will be got over, and future financial crises will happen at periodic intervals – and then too we will be told that the world will grind to a halt, and then too, it won’t.

  • Crataegus

    Anon

    What you ask is difficult to say with any certainty because so much depends on intangibles like confidence.

    I can’t see the dollar strengthening this year. Nothing is likely to happen this side of the Presidential election. New President, new mood, new policies and who knows.

    This side of the Atlantic it is highly unlikely that house prices will do anything other than fall all year. Some sectors such as new housing (some heave discounting) may have hit bottom already, but existing houses are slow to respond as the owners generally are less exposed than developers. So say 1% or less decline per month through into the beginning of next year. If unemployment rises significantly then we may be in for sharp decline. However against that the trend in interest rates in Britain will be down this year so affordability will improve with each drop.

    Confidence is a strange thing something as unrelated as the Olympics pull people out of their downers. If there are no more Banking surprises in the next 3-4 months we are out of the worst of it.

    Wonder what China will do? Recession in the US could cause pain for them.

  • Harry Flashman

    [b]picador[/b]

    Great story, I had no idea there was such a big Irish property investment scene in Turkey, when did that start?

    [b]Comrade Stalin[/b]

    Good analysis, I too believe we’re past the worst of it, I have no doubt that the slowdown in the market will continue for another year or so and a lot of people are going to suffer but the threat of a fundamental collapse of the world finacial system which seemed to be looming only as recently as a month or so back is gone.

    I must admit to being no great sage, back in January I was on the point of selling everything and buying krugerrands and klashnikovs and heading for the hills but I’ve calmed down somewhat now. Sit tight, sure your investment funds aren’t going to look to pretty for the next eighteen months but if you can afford to then simply batten down the hatches and ride it out. In actual fact there’s a lot of stuff that’s beginning to look absurdly cheap right now but I haven’t got the balls to get stuck in right at this moment.

    If one good thing has come from this it is that we’re all very much wiser now about where and with whom we place our money. A decade of so-called easy money meant many of us let our guard down, don’t trust any of the bastards, doesn’t matter how “respectable” the institution might seem, check, check, check and check again (as a dupe of the Equitable Life a decade ago I know of which I speak) and spread your risk all over the place.

    But then who takes financial advice from blokes called Stalin and Flashman?

  • Dewi

    “but the threat of a fundamental collapse of the world finacial system which seemed to be looming only as recently as a month or so back is gone.”

    Famous last words Harry….

  • BonarLaw

    “It’s an Equitable Life, Harry…”

  • Prince Eoghan

    >>picador @ 10:31 PM<< Lol, great stuff! How do you know yir erse was undisturbed, a cause for comparison in the past perchance? I only bought a much bigger house myself a year and a half ago, got it cheap enough and not a great area. Spent probably 20 grand doing it up and was counting on selling perhaps in about 2 or 3 years. I've been watching things closely, and moves by the US Feds especially this past six months have alarmed me. Not to put it too mildly, I think we are effed for a wee while, perhaps even for the medium term.

  • Harry Flashman

    Someone a lot more knowledgable than me in these matters might like to help me out here. I seem to recall back in the early nineties British banks writing off billions in loans to the third world. I read at that time that this should not be regarded as them writing off the debts, no, they were merely taking them off the balance sheet but meanwhile still continuing to seek repayment from the debtors. It also helped with the banks with the tax bill.

    I suspect something similar is happening now, the banks can “write off” billions given their enormous profits of recent years and it helps against their tax liabilities but of course the people that owe them the money still owe them the money.

    Even if a large number of those sub prime mortgages do indeed default there will still be a majority that do not and they will be earning the bank a nice little profit on an asset that was supposedly written off. Furthermore even the defaulters don’t get to keep their homes the property now belongs to the bank and even if it isn’t worth much it’s still worth a helluva lot more than the zero value currently put on it by the banks.

    Have I got this wrong?

  • Crataegus

    Prince Eoghan

    moves by the US Feds especially this past six months have alarmed me.

    The Fed is the one to watch at the minute and the extent of any bailing out that it may do (dressed up in whatever way they decide).

    Flashman

    I assume you are right money owed is on the plus side of the balance sheet so they are just reducing it in line with reality (we hope). However by doing so they are reducing their worth.

    On the value of repossessed properties, the problem here is the value often plummets when a property is left vacant. Vandals get in strip the roof, take out the copper etc. I wonder at the wisdom of evicting people. I often think it would be better to have them as tenants paying some rent and looking after the property and sort out the financial mess after the storm. Co ownership with the bank or some such would be a lot wiser than eviction. I think that many lenders should think through better solutions for next time round, but of course if they had applied more sensible lending criteria in the first place none of this would be happening. So don’t expect them to learn for long.

    What really puzzles me is why any idiot would buy bundles of mortgages of other institutions? Common sense must kick in somewhere and surely someone must have, for one fleeting second, thought if these are so good why are they being sold. If I buy land or a bit of property I do my homework, who in the banks bought all these liabilities and who should be overseeing and managing? Heads should role. It is gross incompetence, there is no other way to describe this.

  • Harry Flashman

    Crat, never underestimate the power of herd thinking among bankers, nor the invigorating effect of too much Colombian Harpic.

  • DK

    Harry – I think they only write off the loss – i.e. missed interest payments and the fall in value of the house. They don’t just set the house value to zero.

    Effectively the bank has bought the house on the behest of the punter and the punter has gone walkies. So the bank has the asset, but the value of the asset has depreciated. Hmmmm – that sounds very like a sharia-compliant mortagage (except that in those, in theory the punter doesn’t walk but pays rent).

  • Crataegus

    Flashman

    I would sooner take the advise of the likes of yourself and Comrade Stalin than I would most Bankers and people of similar ilk. They are generally there to do a deal and make commission, they are about as reputable as car sales men.

    Good common sense goes a long way. What kills most investors is allowing greed to override common sense. Many seem incapable of seeing the down side. A safe clear profit is always better than a risky big gain. If it is too good to be true then think twice.

    DK

    There is a lot to be said for the punter staying put and paying rent. I have seen many repos over the years, there has to be a better system. One up for the Muslims?

  • Kloot

    I wonder at the wisdom of evicting people. I often think it would be better to have them as tenants paying some rent and looking after the property and sort out the financial mess after the storm.

    Apparently thats quite normal with the banks in the ROI. You cant afford your mortgage, so they take the keys off you and rent the house back to you. It saves the ugly press headlines of mass evictions

  • lafcadio

    harry & dk – let me dust off my old accounting skills if i can.. with a mortgage, the asset in the bank’s books will be the loan, not the property – and the bank’s loan portfolio will be subject to ongoing impairment testing, so if expected rates of defaults increase for whatever reason, they will book provisions to their P&L; as loans then become delinquent, they will be fully written off – then presumably (i’m not a mortgage expert)the lender enforces its security and takes possession of the property, which will be booked as an asset on its balance sheet.

    so theoretically if a bank was raising provisions for bad debts in its mortgage portfolio, and then for some reason circumstances completely changed and expected default rates fell again, they could write back these provisions in future years. unfortunately this has a tendency not to happen, and for any lender with a lot of US sub-prime loans still on their books i’d say this would be a fairly forlorn hope..

    most of the big headline-grabbing writedowns among the big investment banks though aren’t of mortgage books per se – rather they’re a combination of writedowns of unsyndicated leveraged loans, and mark-to-market losses on structured finance positions, largely US property related.

    what this means is that if a bank underwrote a leveraged loan of $1bn last july, and was unable to syndicate it before the credit crunch basically closed the market, it still has that loan of $1bn on its balance sheet – but in the meantime similar assets are trading in the secondary market at say 80 cents in the dollar, and they know that in order to sell the debt they would have to sell at a heavy discount (if they are able to sell it at all), they may have to write its value down in their books – which hits their P&L;. So if their accountants decide that the fair value of the loan is 80 cents in the $, that would imply a P&L;charge of $200m.

    likewise for the structured finance positions, for example portfolios of CDOs of RMBS – while the markets for these assets were liquid, they were carried in the banks’ books at par value, but since liquidity has evaporated, and the true risks of the assets become more apparent, suddenly AAA rated securities are clearly not worth what they were before, if anything in some cases. in these cases, mark-to-market becomes problematic (how do you when a market doesn’t exist) and fair value calculations become vexed.. in this case it is possible that some of the writedowns have been excessive, depending on what goes on to happen in the US housing market, and in that case the value of the securities will go back up.

    there will certainly be money made by hedge funds, vulture funds or other distressed debt investors – taking advantage of forced sales by stressed sellers in an illiquid market to snap up portfolios at bargain prices..

  • Pat Wallace

    Nacro analysis is all very well and thwt is why we have The Economist, crystal balls and Gerry Adams. By what percentatbge have irish house prices dropped and by what percentage should UK prices drop?

  • cladycowboy

    Gordon Brown has it in for me.

    He allowed, indeed assisted these property ‘investors’ with his tax reliefs for 2nd homes to price the trustfund-less young out of a home (sorry, housing ‘market’).

    Now when i want to go out and have a mighty session to celebrate this collapse the fucker has put up the price of a pint.

    One of these days Brown you and I are going to have a serious disagreement.