Thursday, 12 February 2009

Subprime Crisis in Plain English

(cartoon courtesy

The financial crisis currently sweeping the world, was triggered by the collapse of the “sub prime” lending in the United States. What is sub prime? This post is a semi rant saying it is just gobbledygook invented by the industry to clothe “we screwed up big time” in some sort of mystical term which gives some false respectability.

In plain English, here’s my take on what happened over the last many years (obviously a rant)
  • We (the bank/financial institution/fund/whatever) have to double profits every 3 years (or some such wildly unattainable goal). Only if we do that we’ll be the darlings of the stock market.

  • How the heck do we do that ?

  • We have to triple lending and charge high interest rates.

  • But the bloody central banks are reducing interest rates everywhere.

  • Lets do a massive campaign to lend more.

  • F@#$ – last month we didn’t grow our lending at all . Nobody seems to be wanting money. All the guys we can sensibly lend to have already gone to the others and don't need money anymore.

  • God , our inflow of funds is massive. The Chinese and Arabs seem to be printing money, the way they are coming and depositing it with us.

  • What do we do with all this money – we can’t be storing it in the bank’s vault.

  • Right guys – lets give some money to that idiot Joe Bloggs who’s been pestering us for a loan to buy that fancy car he simply has to have.

  • But he has a terrible credit history – he didn’t pay back his previous loan to the bank down the street; that’s why nobody will give him the money.

  • Well; we’ll charge him a penal interest rate for his loan for covering this risk.

  • Wow our loans grew 20% because we lent to Joe Bloggs and our income grew by 30% because we charged him higher interest rates.

  • Our share price jumped 10% on our results announcement.

  • We met all our targets for the year, thanks to Joe Bloggs. We got a fat bonus and all of us were promoted.

  • This is fantastic. We grow our loans, we exponentially grow our interest income, the stock market is happy, we get a nice bonus – life is great thanks to Joe Bloggs.

  • Wait a minute – wouldn’t the shit hit the ceiling if that bloke doesn’t pay back.

  • Yeah, but maybe he will pay back – he seems to be doing well these days. And in any case, that’s a problem 3 years from now. Who the heck cares. By then we’ll be somewhere else.

  • But the f&^%$#@ bean counters are saying that its still a risk and you have to provide for it and therefore you can’t show all the income (and can’t get all the bonus)

  • Lets get rid of the risk thing – that smart MBA who joined us yesterday has invented something called a credit default swap. Can’t figure out what he means, but apparently if Joe Bloggs doesn’t pay, some punter down the street has to carry the shit, not us. Fantastic; now the bean counters will let us carry on with the party.

  • This is super – we charge high interest, lend a lot and pass the shit on to a punter. Lets give that young MBA a raise; he’s a genius.

  • We’re starting a campaign to find all the Joe Bloggs of the world. There are a lot of such guys around. They may be called Smith, Patel, Chen or Watanabe, but they are all Joe Bloggs you know.

  • We just announced our next year results. Profits up 200%, share price has gone through the roof. Our bonus is in the stratosphere. Everybody is happy. This is life.

  • The Board is reviewing our outstanding performance today. Have to work hard to get the charts right.

  • That was a piece of cake. They all nodded their heads wisely and said we were doing a terrific job. Only that old fool, who’s chairman of some old world industry, kept on saying that this was too good to be true and that Joe Bloggs was going to haunt us. But when we told him that we had “hedged against the risk using credit default swaps” he shut up. I bet he didn’t know what a credit default swap was.

  • Just passed the Audit Committee review yesterday. This is the lot who carefully examine whether we are taking some huge unfathomable risk. You know what – the old geezers never even went into what we have done. You see they go by the last year’s audit programme. In that, credit default swaps did not exist – how could it, it was only invented by our bright MBA this year. So they didn’t even check it (not that they would have made much of it anyway). So they wrote some words to the effect that the risk reward equation was appropriate, which meant we are OK.

  • The regulators just left yesterday. They were a pain – asked a million questions and stayed for 1 whole month. But the bright MBA explained to them how the credit derivative swaps made it all very safe. He’s a genius. They swallowed it like a dog. You know, that pretty young thing in their team even wrote that credit default swabs were a great innovation. She couldn’t even spell the thing right.

  • We had a stunning year this year. We found 10 million Joe Bloggs. Our ERP collapsed because it couldn’t count the number of zeroes in our profit line.

  • By the way, did you know that the original Joe Bloggs who started our boom those years ago – apparently he didn’t pay the money back. The punter down the street didn’t get hurt either because he passed it on to somebody else. We heard that finally two Chinese, five Arabs, four Japanese and one Eritrean (now where’s that) were left holding the shit. Serves them right.

  • Oh my god – apparently many of the frigging Joe Bloggs are not paying back. That punter down the street has shot himself. Now we can’t even give the what’s it called swaps to anybody else.

  • This place stinks. We are drowning in the shit.

  • The fireman is coming tomorrow to bail out the shit and extricate us. He’s asking what caused the mess. We have to find something that doesn’t look like shit and smell like it.

  • That bright MBA is a genius – he says it was all down the to the collapse of the sub prime market. Not our fault.
PS – you know we didn’t even have to pay the fireman for coming to clean all the mess. All the neighbours got together and paid because they couldn’t stand the smell. We still have some dollars in the till. Lets pay ourselves a bonus for our hard work.


Vinod said...

This one rocks Ramesh. ingo is the word! I love the way your writing style. I enjoyed this one thoroughly. Fun reading as well as informative too.

Ramesh said...

Thanks Vinod. Thankfully you aren't a banker; else you would sock me !

Prithiv said...

For these mongrels pockets, people pay the price.

Nice Read though.


Ramesh said...

Thanks Prithiv. One of the tragedies of the situation is that the guys who made the huge bonuses are now gone and the guys who are trying to retrieve their companies will be subject to pay caps !

Prince said...

Even with your approach, it still hurts. A variation of this bollywood flick is when the staggered repayment from the NINJs runs into an extended period simply because the housing market would not play ball. The MBA bundles the staggered payments and creates a new paper which the HNIs buy into, motivated by the high return but cover their !@@#@ with a loan from the issuers and offer the underlying documents as colateral.The last I hear is the pile of @^*% collapsed on the issuers - a scene remininscent of the young Smartcat billionaire. Can even this pass away ?

Ramesh said...

Ha Ha Prince. Superb addition.

Saldo said...

Ramesh - this is really good. Reckon you should take a shot at writing a book!
A Booker may not be far away!

Keep blogging.

Anonymous said...

Pradip- great read!

Ramesh said...

Saleel, Pradip - Thanks. Everybody loves a good rant !!

Aashish said...

I'm booking, in advance, 100 copies of the future bestseller. As yet un-titled, so let's just call it Ramesh's Rants!

Appu said...

If only i had read this a little earlier or right in the morning my day could have been better.

Ramesh said...

@zeno - Ditto ; for any of your comments, which I actually read first thing in the morning !

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