I have written regularly on banking folly – a subject everyone now knows to be inexhaustible. In Accountancy, March 2005, I wrote: “The size of the credit mountain is without precedent…… should we ask whether it is sustainable? Or should we worry?”
I noted that five of Britain’s top-10 companies were banks, compared with none 20 years earlier, and that there were more credit cards in Britain than people. I quoted Bradford & Bingley’s announcement of mortgages of 130% of home values, and the priceless comment of the Chairman of one US bank: “You’d have to be an insolvent arsonist not to get a loan right now! Yet auditors disclaimed any responsibility for assessing banks’ business models, no matter how moronic.
Banks’ reserves and depositors’ funds were being “invested” in tranches of securitized mortgage bundles of dubious origin, whose actual content was never probed by agencies handing out Triple A credit ratings. The auditors’ main concern was that these spurious assets should be shown at “fair value” by marking them to the very “market” on which they were being so blithely traded. The flawed accounting model exempted directors, auditors and regulators from considering such mundane questions as recoverability of underlying loans. Only losses actually incurred hit the accounts.
The flawed accounting model exempted directors, auditors and regulators
After all, they reasoned, any consideration of expected future defaults may require prudent provisioning (uggh!) and we just don’t do that any more. This aberration enabled banks to pay dividends, effectively from capital, which has been slightly illegal for 200 years! Blind subservience to compliance has its dangers.
Anyway, here we are. After losing billions of other people’s money banks were bailed out by the Bank of England’s programme of quantitative easing to enable them to (i) rebuild their ruined balance sheets; and (ii) initiate some sensible lending, by criteria that would feature in any elementary banking course.
Have they complied?
Individual borrowers, even with an unblemished record, face usurious terms based on an unprecedented 10 per cent “turn” between borrowing and lending rates, as I described in my January column this year.
And businesses? I can cite the renewal terms currently being offered by a major bank to a residential property enterprise with 30 employees. It acquires run-down East London properties and refurbishes them to a high standard. (The bank, incidentally, is predominantly state-owned because of its earlier lending practices!)
The property company’s policy has always included selling houses at a profit, but such is the insanity now gripping the banking sector that mortgages on reasonable terms are virtually unobtainable. There is no shortage of buyers or sellers, but the crucial mortgage market, whose function is to oil the process, has undergone a psychosis and lost touch with reality.
Valuers of the portfolio, appointed by the bank, report a valuation of close to £12 million, which exceeds the company’s indebtedness by 25 per cent. The properties are fully let at rentals that comfortably cover current interest payments and administrative overheads. All the company seeks is a renewal of existing terms.
Here is the bank’s “offer” (and I am not making this up): (i) insistence on loan repayments of £1.25 million on each of the next two anniversary dates regardless of cash availability; (ii) fees, up-front, of £215,000, and £600,000 on exit or 5th anniversary, regardless of the cash position; (iii) during the entire term 100% of all rents and sale proceeds must be banked in a new account over which the bank will have sole signatory control; and (iv) no properties can be developed or sold without the bank’s prior written consent.
This is effectively a hostile takeover bid – but why hand your keys to someone who keeps crashing his own car?
Sensible lending will kick-start the economy, but there is no point in quoting terms so palpably mad that no management will accept.