Will we all have to go back to the UK?

[baypond]

Gluestick. It was not a cop out. I have never said or meant to imply that banks should not shoulder a share of the blame. What I have always said is that the regulatory environment was deliberately lax due to a political desire to see momentum in UK growth sustain their political ambitions to be re-elected. I do think though, that borrowers have forgotten that loans have to be repaid out of future earnings, and that house price inflation is unlikely to help in the near term.

[Gluestick]

[quote user="Richard51"]NickP - then why not go elsewhere.

Gluestick - So now we are blaming the salesmen (women) rather than the bankers. That I agree with - but remember the buyer can always say no.

Mr R51

[/quote]

Not at all: the bank or indeed any other institution is responsible for the acts and commissions of its servants.

In law it is called Vicarious Liability: and "servants", legally, means employees, directors, shadow directors, contract employees, contractors, where control and responsibility flows back directly.

Being a director means setting and implementing and controlling strategy and tactical operations: and being responsible for disasters.

It's called Fiduciary Liability: and every director of a limited liability company or PLC is thus responsible.

A good example of such hands off incompetence was Barings Bank and Nick Leeson: it was and is no excuse for the head honchos to cry "We didn't understand what he was doing!": that is precisely what directors ought to know!

Nothing new here: a similar debacle happened in the early 1970s with Lloyds Bank International's Lugano branch. Where foreign exchange traders took heavy and wholly erroneous positions and caused massive capital problems.

What were the directors doing in allowing such levels of autonomy?

As Harry S Truman's desk sign said "The Buck Stops here!"

No excuses for idiotic incompetence in my book, I'm afraid.

[baypond]

[quote user="NickP"]

Not true, Abbey National made it a condition of giving us a mortgage that we took out an endowment .

[/quote] All lenders want life insurance cover, but a lender only requires an endowment if it is an endowment mortgage no?

[Gluestick]

[quote user="baypond"]Gluestick. It was not a cop out. I have never said or meant to imply that banks should not shoulder a share of the blame. What I have always said is that the regulatory environment was deliberately lax due to a political desire to see momentum in UK growth sustain their political ambitions to be re-elected. I do think though, that borrowers have forgotten that loans have to be repaid out of future earnings, and that house price inflation is unlikely to help in the near term.[/quote]

I would totally agree with that.

However, lenders were hugely irresponsible in lending increasing sums, on ever-increasing LTVs and Income Multiples and excessive tenor.

And from historic experience (1970s and late 1980s) ought to have exercised greater caution.

[NickP]

[quote user="baypond"][quote user="NickP"]

Not true, Abbey National made it a condition of giving us a mortgage that we took out an endowment .

[/quote] All lenders want life insurance cover, but a lender only requires an endowment if it is an endowment mortgage no?[/quote]

Maybe, but they told me; to get a loan from them to buy the house; I had to take out an endowment, what part of that don't you understand? They also told me who to apply to; to acquire the policy. Many years later when  I complained to the ombudsman, who  said I couldn't claim for mis selling because I took my endowment out before 1983, Abbey National said "nothing to do with us take it up with the Endowment company as the guy who sold you the policy worked for them not us". So back to Mr & Mrs R, if it was the borrowers  being greedy why did the endowment companies have to make so many payouts for mis-selling? [8-)]

 

[Richard51]

Because of the nanny state.

Mr R51

NB Please take our comments  independently.

[Richard51]

Gluestick - Most of the salespersons at the time were commission brokers - usually self employed or certainly 'in business on their own account'. 

Mr R51

[NickP]

[quote user="Richard51"]Because of the nanny state.

Mr R51

NB Please take our comments  independently.
[/quote]

I do apologise, but it's slighly confusing when you both have the same family photo, and after all what's an s between friends. [:P]

[Russethouse]

Maybe, but they told me; to get a loan from them to buy the house; I

had to take out an endowment, what part of that don't you understand?

They also told me who to apply to; to acquire the policy

 Same happened to us, but we purchased in 1979 and in fact the endowment did cover the mortgage it was meant to in the end, but there was no 'gravy' as was forecast at the time.....

[Gluestick]

[quote user="Richard51"]Gluestick - Most of the salespersons at the time were commission brokers - usually self employed or certainly 'in business on their own account'. 

Mr R51

[/quote]

Check the Law of Agency sometime, Mr R.

Additionally, the lenders ought to have exercised greater caution over the security of the  peripheral and linked asset they were structuring their loan around: an Endowment Policy which would not necessarily discharge the principal sum on maturity.

Furthermore, as I previously explained, major assurance companies pressure sold estate agents into becoming agents directly for the assurers.

If you remember the fiasco grew and grew and banks and assurance companies such as Lloyds and the mighty Pru bought into estate agency big time (Blackhorse Agencies; remember?) since they saw a unique opportunity to sell vast numbers of assurance and investment linked mortgage products.

And they were hardly going to push straight repayment deals!

Both Black Horse Agencies and the Pru's outfit collapsed. Amongst many others.

[Chancer]

I never took out life insurance on any of my repayment mortgages, had no need of it.

I bought my current UK house in 1986 and it was impossible at the time to find anyone who would grant you a repayment mortgage, they were all on the gravy train.

I had my previous mortgage with the Nationwide, had always paid on the dot yet they refused me a repayment mortgage on the new house saying that the last months payment was 3 days late due to the conveyancing and i was therefore a bad risk, but not so for an endowment!

I was only borrowing 70%, earned  far in excess of the multiple needed yet no-one would give me what I wanted they all pushed endowment, and all sang from the same hymn sheet "can I ask what it is you have against this wonderfull product?" none of them could answer my question, - how is my ability to repay the loan and changed by whether it is endowment or repayment?

It was begining to look like I may lose the house, my accountant said his pal at the Alliance would grant me a mortgage only it turned out not to be the Alliance Building society but another IFA who had set up next door under the name of Alliance Financial Services, I then realised that everyone was in on the scam including my accountant.

I was naive but realised that everyone else must be making a packet out of this in commisions so would the endowment really pay off my mortgage and allow me to retire in the sun at the age of 45 with Pamela Anderson? as they were all painting the picture? - I thought not.

I had no choice so reluctantly took an endowment with Norwich Union covering a mortgage with the Abbey but only after checking in detail that I could indeed cancel and redeem it after 12 months.

That is exactly what I did and I even made a £40 profit on the endowment, I converted to a repayment mortgage with the same lender over 24 years to keep to the same term, the manager was not happy, tried his best to sell me yet another endowment or even a pension mortgage but I stuck firm, probably the best decision of my life.

When the interest rates dropped I kept to the same repayments and very soon my pre-payments meant that the term had reduced to under 15 years, misguidedly I used this cushion as a buffer and had a payment holiday while I treied to get my first unsuccessfull business off the ground, I did not have the pressure of the mortage for 18 months but at the end of it I was back up to repaying over the original term.

I learnt from this and after the initial famine of starting my second business once the money started coming in I still lived frugally and made big payments to the mortgage each year just before they calculated the interest for the following year, in this way I was able to pay off the mortgage outright in just over 3 years.

After that I relaxed the regime a little, started to enjoy life just a little but still carried on saving, aside from the money I paid into pension funds which I now consider to be lost I carried on saving and after spending 2 years repaying the losses I incurred after being ripped off on a large contract I was able to quit working at 44, travel round the world and buy my place in France without selling the UK property.

Close to 7 years later the original endowment mortgage that I did not trust would now mature, and I would  be left with a massive shortfall on the original mortgage to fund. No sign of the yacht and Pamela Anderson either!

And guess what all the French IFA's are currently pushing to the naive wannabee houseowners, or the middle class cadres that want to boost there retirement income?

Plus ça change..............

[idun]

I remember friends of ours having an endowment mortgage in the 1970's and did quite well out of it. I was never sure how it worked and then we moved to France anyway, to have 17.6% mortgage and the interest rate offered on our savings in 1981 which we had to have to get the mortgage was around 1%.

Rip off times in all countries I think and probably still is.

[Richard51]

For the law of agency to apply there has to be an agent / principal

relationship.  Further, the basic duties of an agent broadly define the

agent's role: that of acting in the interest of and for the profit of

the principal.

A fiduciary agent has, at very least, the following duties:

1. to act in the utmost good faith to their principal;
2. must not make a profit from the trust placed in him;
3. not to place themselves in a position where their own interests conflict with his duty;
4. may not act to their own advantage or the benefit of a third person without the fully informed consent of the principal.

Thus, the general nature of these duties are (1) personal interests

and the duty must not conflict; and (2) one must not take personal

advantage of their position of trust; and (3) proscriptive and not

prescriptive.

Clearly these duties are in direct conflict with the business of an IFA

or intermediary who's business is to recommend the best product on the

market for his client - even if that product is the product of a

competitor. 

As an aside, the sub-prime market was created to allow banks and

building societies to demand different interest rates according to the

risk profile of the borrower.  The only way this could be done was to

route the sale of such products through an intermediary to be

accumulated in a warehouse or SPV.  The life of these portfolios was

usually around five years as both parties saw these loans as a stepping

stone for sub prime borrowers; allowing them to build a 3 year credit

history so they could then remortgage to prime debt.  Without this

there would have been no way of sub prime borowers getting a foot onto

the property ladder unless this was subsidised by charging higher rates

to prime customers.

So, actually, the off balace sheet, subprime market was created as a result of over regulation not under regulation.

Mrs R51

[Richard51]

Have checked with the appropriate professional.

Mr R51

[Gluestick]

"The purpose of an agency agreement is to set out the terms and

conditions of the relationship between the business which wants to sell

stuff (the Principal) and the intermediary who agrees to sell it on

their behalf (the Agent). When a sale is made by the Agent, the law

deems that a contract is formed between the Principal and the end

customer."

For brainache see here:!

And more: See here:

Oh that it were simple.......

Disagree about how sub-prime came about.

The Eurobond market back in the late 1970s used differing interest rates dependent upon the obligor's perceived credit risk: and this was part of its problem.

"Mexico wanted money: they couldn't afford it: so we'll lend it to them and charge a premium for the extra risk!"

Then there were Junk Bonds.

And we all know how high risk Latin American Sovereign Risk debt turned out: and many junk bond issues!

Commercial lending by banks has always carried differential interest rates: "Fine Rates" to Blue Chips are and have been for as many years as I've been involved (40 odd) far less than SMEs for example.

The worm in the sub-prime fiasco of recent times, was securitization: and  banks and mortgage lenders being involved in levels of business far out of step with their effective capital bases: they borrowed short term on the interbank market; turned the money on, then securitized the resultant debt obligation; packaged this into an SIV (Structured Investment Vehicle), "Bundled" it with better class debt instruments, obtained AAA credit rating on the back of derivative debt warranties underwritten by such as AIG; and then sold off the resulting package to the investment market.

Forfaiting and Block Discounting are nothing new: smaller finance houses grow using such methods: however, it was and is always full recourse.

"Sub Prime" lending, by the by, started in Japan: loans at well over usual rates to Japanese "Salary Men".

The US market picked up the concept and used it mainly for personal loans and credit cards etc.

[Richard51]

I have sent you a pm

Mrs R51

[Jay]

For the law of agency to apply there has to be an agent / principal

relationship.  Further, the basic duties of an agent broadly define the

agent's role: that of acting in the interest of and for the profit of

the principal.

A fiduciary agent has, at very least, the following duties:

1. to act in the utmost good faith to their principal;
2. must not make a profit from the trust placed in him;
3. not to place themselves in a position where their own interests conflict with his duty;
4. may not act to their own advantage or the benefit of a third person without the fully informed consent of the principal.

Thus, the general nature of these duties are (1) personal interests

and the duty must not conflict; and (2) one must not take personal

advantage of their position of trust; and (3) proscriptive and not

prescriptive.

Clearly these duties are in direct conflict with the business of an IFA

or intermediary who's business is to recommend the best product on the

market for his client - even if that product is the product of a

competitor. 

As an aside, the sub-prime market was created to allow banks and

building societies to demand different interest rates according to the

risk profile of the borrower.  The only way this could be done was to

route the sale of such products through an intermediary to be

accumulated in a warehouse or SPV.  The life of these portfolios was

usually around five years as both parties saw these loans as a stepping

stone for sub prime borrowers; allowing them to build a 3 year credit

history so they could then remortgage to prime debt.  Without this

there would have been no way of sub prime borowers getting a foot onto

the property ladder unless this was subsidised by charging higher rates

to prime customers.

So, actually, the off balace sheet, subprime market was created as a result of over regulation not under regulation.

Mrs R51

[quote user="Gluestick"]"The purpose of an agency agreement is to set out the terms and

conditions of the relationship between the business which wants to sell

stuff (the Principal) and the intermediary who agrees to sell it on

their behalf (the Agent). When a sale is made by the Agent, the law

deems that a contract is formed between the Principal and the end

customer."

For brainache see here:!

And more: See here:

Oh that it were simple.......

Disagree about how sub-prime came about.

The Eurobond market back in the late 1970s used differing interest rates dependent upon the obligor's perceived credit risk: and this was part of its problem.

"Mexico wanted money: they couldn't afford it: so we'll lend it to them and charge a premium for the extra risk!"

Then there were Junk Bonds.

And we all know how high risk Latin American Sovereign Risk debt turned out: and many junk bond issues!

Commercial lending by banks has always carried differential interest rates: "Fine Rates" to Blue Chips are and have been for as many years as I've been involved (40 odd) far less than SMEs for example.

The worm in the sub-prime fiasco of recent times, was securitization: and  banks and mortgage lenders being involved in levels of business far out of step with their effective capital bases: they borrowed short term on the interbank market; turned the money on, then securitized the resultant debt obligation; packaged this into an SIV (Structured Investment Vehicle), "Bundled" it with better class debt instruments, obtained AAA credit rating on the back of derivative debt warranties underwritten by such as AIG; and then sold off the resulting package to the investment market.

Forfaiting and Block Discounting are nothing new: smaller finance houses grow using such methods: however, it was and is always full recourse.

"Sub Prime" lending, by the by, started in Japan: loans at well over usual rates to Japanese "Salary Men".

The US market picked up the concept and used it mainly for personal loans and credit cards etc.

[/quote]

So do we all have to go back to the UK then?

[baypond]

[quote user="Gluestick"][quote user="baypond"]Gluestick. It was not a cop out. I have never said or meant to imply that banks should not shoulder a share of the blame. What I have always said is that the regulatory environment was deliberately lax due to a political desire to see momentum in UK growth sustain their political ambitions to be re-elected. I do think though, that borrowers have forgotten that loans have to be repaid out of future earnings, and that house price inflation is unlikely to help in the near term.[/quote]

I would totally agree with that.

However, lenders were hugely irresponsible in lending increasing sums, on ever-increasing LTVs and Income Multiples and excessive tenor.

And from historic experience (1970s and late 1980s) ought to have exercised greater caution.


[/quote] There is no easy answer to this. I work for a bank that became inefficient with too many employees making too little money vs their peers. Their answer was to move too far down the credit chain and take too much poor quality debt on their books to try and raise the margin on their lending. When the credit crunch unwound, the bank was very poorly positioned. I have two main observations: Firstly by being inefficient the bank took risks to keep up with competition (ie not totally due to greed or 'master of the universe' traders) and secondly that if regulators restricted banks from taking on too much poor quality debt via regulation, the result would have been that the bank would have to be more efficient to compete rather than operating with poor lending polices to compete. It keeps coming back to regulation I think.

[Gluestick]

[quote user="baypond"] It keeps coming back to regulation I think.[/quote]

Agree, completely.

Since I am presently in process of finalising an analysis of this, I'm carrying out much research.

The Secondary Bank fiascoes of the early 1970s were a precursor of what was to come.

Heath-Barber's recipe for economic Boom-Bust were replicated by Thatcher-Lawson.

Blair-Brown sort of Turbocharged the model!

However, the knee jerk regulations imposed after the secondary bank problems in the early 1970s were unwound by removing many regulatory powers from the B of E and vesting same in a new, naive and unproven agency, the FSA.

Without doubt, building societies losing their preferential status and the subsequent competition for residential mortgage business, plus the de-mutualisation of BSs, created the Northern Rock crisis.

Financial probity had been abandoned for growth models: same with Fred the Shred's RBS "Strategy".

The S & L scams in the USA (Under Reagan), presaged future louche regulatory perspective and attitudes.

Increasing de-regulation from Clinton onwards (Repeal of Glass-Steagall et al), created an increasingly unregulated financial market where almost anything went.

At the end of the day, all that really interests and concerns us normal mortals, is a relative level of stability in "Main Street": the returns on our savings and investments and the costs of realistic borrowings; be it for house purchase, car finance or business.

I fear that a hidden knock-on effect lurks in the bail out of Ireland: as once more, tax monies are to be used to prop up commercial operations - banks - who like their government have borrowed far too much and lend on to blind insane property speculations.

The numbers are quite frightening.

And thereafter, in all probability, both Portugal and Spain await their turn in the wings............

It aint all over 'till the Fat lady sings!

[cooperlola]

I am no expert, far from it, but it has always seemed to me that letting "the market" (ie anybody who has the potential make a buck as a result) regulate and control entire economies, is a dangerous game.

[Gluestick]

Totally agree, JE.

We now see the end game realities of Thatcher and Reagan's love affair and over-reliance on their beloved so-called "Free" market theory.

To those of us with anything much resembling a brain, there aint no such beast as the "Free Market": since a majority is wholly contrived and intensely monopolistic.

Such as Oil and Gas, Energy etc.