So many of us have been talking about the credit crunch since it changed the economic landscape several years ago. But one thing which bothers me does not seem to have entered much in the discussions. My train of thought on this subject started many years before when I read the biography of Nick Leeson. Whatever you think of him, what happened at that bank was not entirely his fault. Sure, he got all the blame and it was certainly his own failings as an investor that caused the collapse of the bank in the first place. But I put more blame onto the bosses of that bank for being totally clueless about what was going on.
Nick Leeson got into difficulty with some of his investments and made it worse by hiding losses in the hope that by investing greater and greater sums, he could eventually cover all his losses. In order to do this he had to ask the head office of his bank to fund these larger investments. Hundreds of millions of pounds were involved. The bank sent this money to him unquestioningly believing him to be making profits.
If the bosses had even a slight clue about what the true state of their financial affairs was, they would not have allowed this to happen. But the truth is that they were completely and utterly ignorant of what was going on.
In steadier days when the bank made a profit, they were perceived as experts. But the ultimate demise of the bank teaches us that they were anything but experts.
And so it is the same with the credit crunch. One of the major sources of the problems were these so called "sub-prime" mortgages. The clue should have been in the name but what happened was that these lenders found many thousands of new customers by lending money to people with poor credit histories. In other words, they lent money to people who had a track record of not being able to pay money back.
This alone should be blindingly obvious as a bad move. But in the early days when some payments come back in, the true risk was never perceived and the profits, on paper at least, looked excellent. So the banks enthusiastically moved into this market on a big scale.
But the situation was far worse than this. A market opened up whereby these companies would sell on these liabilities on the open market. These liabilities were often bought by companies who then used accounting to tie them up with other types of investments and then sold these on to large investors. These large investors should have known what they were buying but they clearly did not.
The chairman of Royal Bank of Scotland was blissfully ignorant of the fact that his bank was severely exposed to these poor mortgages because he had a team of investment bankers who were buying these complex investment packages without having a clue what they were letting themselves in for.
Whilst profits tumbled in (frequently only on paper), they all looked like successful people who had a gift for making money. The truth about their ignorance only became exposed one the liabilities finally realised their full toxicity. But ignorance such as this does not end there.
Another popular news item in these tough economic times is the demise of the high street. Most towns and cities in the UK have an ever increasing number of empty shops. The reasons for this are many but I would like to focus on one reason that perplexes me. Despite the dearth of tenants, property owners continue to demand high rents for their properties. But why is this the case?
Surely it is better to receive a lower rent than none at all. Surely this is inescapable logic. But somehow, this situation has persisted for several years but I do not know how this is possible. How can one afford to own a property that has to be maintained and receive no rent for it? Perhaps the next economic dip is about to happen as all these landlords suddenly realise they must slash their rents or sell up.
I do not know but I am sure we will see more changes to our high streets over the next few years.