Fascinating stuff really. For there’s not a derivative, toxic or not, in there. There’s not even trading problems. It was a simple, classic, over-extension of credit to the property sector. It’s happened before, no doubt it will happen again.
But do note that: it’s nothing to do with “The City”, the wholesale money markets, FX, share trading, bonds, derivatives, CDOs, CDS, futures, options, excessive trading. It’s purely and simply lending too much money to the wrong projects.
And that pretty much caps the investigations into what did go on. Lloyds was buggered because of the losses in HBOS that it didn’t know about when it was “encouraged” to take it over.
RBS fell over because it bought ABN Amro at the top of the market. No, it wasn’t derivatives, options, futures, FX or any of all the rest there either. Northern Rock suffered a classic liquidity failure. It wasn’t even their 125% mortgages, their Granite bonds, certainly not futures, options, FX, that caused it. They were simply borrowing short from the wholesale markets in order to lend long on mortgages. When those mortgages could be bundled, securitised, they sold them on as those Granite bonds.
And it wasn’t the Granite bonds that failed. It was the financing short term of the mortgages already issued but which had not yet been securitised which was what failed.
So who else was there? Dunfermline Building Society? Too much in commercial property. And so on through the list of the British institutions that did actually fail.
Sure, there was plenty of hubirs around, plenty of very silly decisions, but they were all about rather plain old banking problems, problems that people have fallen over before and which people will fall over again. But here’s the really important point: none of them, none of them at all, were the result of excessive trading (of leverage, perhaps, but not trading), none of them were as a result of High Frequency trading, none were in Foreign Exchange, options, futures, commodities…..
And yet the solution proposed is a Financial Transactions Tax. Something which has absolutely no relevance at all to hte problems which actually happened.
So, err, why?
Tim Worstall blogs on http://timworstall.com