The Shambles Being Left by Gordon Brown.

The constant refrain from Gordon Brown’s embattled government is that
the financial crisis is something that they could do nothing about
because it happened overseas.

This is quite untrue.

The crisis arose because of a gigantic confidence trick on the part
of banks world-wide. In order to keep up their mortgage lendings -
and thus their wildly excessive bonuses - they packaged up parcels of
their existing mortgages and sold these on to other banks. These
packages were a mixture of good, bad and indifferent mortgages but
were treated as prime debt. By circulating these round and round the
banking system bank financiers took greater and greater risks until
the bubble burst. But while the bubble was being inflated they paid
themselves ever bigger bonuses, with fictitious profits.

Here in Britain the regulatory authorities ( the main regulator, the
FSA - Financial Services Authority- and the Bank of England) allowed
the scam to go on unchecked. This set-up was a creature of Gordon
Brown’s invention and the FSA , in particular, failed. The home-
grown element of the crisis was entirely Gordon Brown’s. The result
was the near collapse of our whole banking system of which we have
not yet seen the worst.

Almost unnoticed the now nationalised Northern Rock is losing money
still, hand over fist, and has just reported losses of £585 million -
Half-a-Billion pounds - in the first 6 months of the present year.
That’s your money down the drain - with more to go! The Bank should
have been allowed to go bust, instead of which it is today offering
some of the highest interest rates around! And we learn that the
govedrnment is prepared to write off £3bn of its debt! (Guess who pays)
As one comment in The Times says - - -
“So this government takes Northern Rock from private investors, pays
off its debts using public money, shores up the balance sheet and
guarantees the deposits using public money, then, when ready, it
expects to sell it back to private investors?!
Prudence? Or complete loss of reality?”

xxxxxxxxxxxxxxx cs
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TELEGRAPH 5.8.08
1. Never trust the banks when they say: 'Don't worry, we'll be careful'
By Tracy Corrigan

A year into the credit crunch, we are all older, and many of us are
poorer. Let's hope that some of us may be a little wiser.
Last August, financial markets wobbled, as losses in the US subprime
market caused investor confidence to slide. Banks stopped lending to
each other. Central banks tried to help, but some banks - including,
in this country, Northern Rock - did not respond to first aid.

A year on, banks are still struggling to right themselves, after
heavy losses eroded their safety margin of capital. Despite raising
fresh money, they remain strapped for cash and reluctant to lend,
just as companies and consumers struggle with economic slowdown.
There is no end in sight: rising mortgage defaults are likely to
cause a further downward spiral.

I have since come to the jolting realisation that, however sceptical
I was about the workings of the financial system before the credit
crunch, I was not sceptical enough.

The shock, to me, was that banks were running such huge risks in the
first place - big enough to wipe out large portions of their capital,
when things went wrong. It seems fund managers and regulators were
also unaware of the risks being taken and I don't believe that the
banks themselves were fully up to speed either. It certainly wasn't
possible to tell from the numbers they reported. What on earth did
they think they were doing? The answer is simple: making money. In
good times, taking more risk means higher profits - and bigger
bonuses. Remuneration is structured to reward risk-takers
excessively, when they get it right - which isn't terribly difficult
to do in a rising market.

One City executive told me recently he is finding it really hard to
motivate his team at the moment, because they know they won't get big
bonuses this year. Is there any other industry that would survive if
its staff lost interest in doing their jobs when times get tough?

Meanwhile, what of the regulators, who are supposed to police the
banks? It transpires that they, the rating agencies and to some
degree the accountants, were persuaded by the bankers that risk was
being eliminated through ingenious financial engineering.
The regulators forgot the cardinal rule that, like teenage boys,
bankers are not to be believed when they swear: "Don't worry. I
promise I'll be careful."

And so central bankers joined the party, deciding it was fine to keep
interest rates low, which only encouraged more lending by banks to
both companies and consumers, and riskier strategies by investors
keen to enhance their returns.

The trouble was, the bankers actually believed their own narrative of
risk-reduction and convinced regulators that by re-parcelling risk
and selling it on to investors, they were actually making the global
financial system safer.

They devised a catalogue of ever more ingenious financial structures:
the CDO-squared, for instance, a bet on a bet on a pool of assets,
such as mortgages. Increasingly complex, they made it even more
difficult for the rest of us to get a clear picture of what was going
on. The CDO-squared market imploded, inevitably, when the subprime
market collapsed, resulting in massive losses and a devastating knock-
on effect as banks sold assets to cover these losses.

It must surely all serve as a reminder that superior intelligence is
no guarantee against stupidity. The mathematicians who structured
these instruments were, without doubt, very smart people. So were the
Nobel prize-winners behind Long-Term Capital Management, the hedge
fund that had to be rescued 10 years ago. Both cases demonstrate that
highly sophisticated computer models can prove entirely unreliable
when it comes to real life. It is baffling why regulators continue to
place their faith in risk-management systems that fail with such
alarming frequency.

It is no surprise, though, that bank bosses and board members failed
to raise doubts about a highly profitable area of business. And
besides, like the regulators and investors, they probably weren't
keen to admit that it all gave them a bit of a headache. They lacked
both the wisdom and humility of investor Warren Buffett, who has
rarely owned a technology stock, on the grounds that he doesn't
understand the business.

Bankers commonly moan that regulators are not sophisticated enough to
understand the complexities of their business. I think we all now
know that their own grasp is not so firm.

People who had never heard of a CDO are paying the price for this
mess. The financial meltdown has spilt over into the real economy,
and the gap between banks and taxpayers is far smaller than we had
realised. While, in theory, weak banks should be allowed to fail so
that other banks are encouraged to be more prudent, in practice, the
danger of a collapse in confidence in the whole system is too great
to allow that to happen. If, then, the taxpayer is ultimately
expected to stand behind every British bank - as the case of Northern
Rock suggests - the system needs to be adjusted accordingly.

The City's espousal of light-touch regulation involved sacrificing
too much control to the risk-takers. It's time the regulators
tightened their grip. Regulation has a bad name because it is
presumed to be synonymous with cumbersome red-tape and bureaucracy,
but it is not. A strong but transparent regime would help ensure a
fair, competitive environment for business, protect the consumer -
and, it turns out, the taxpayer. At the very least, the banks should
be forced to set aside more capital and allow their financing plans
to be scrutinised.

Such is my current level of cynicism, I'm afraid, that I'm not sure
any remedy will actually prevent another banking crisis. It is
frequently noted that before Northern Rock, there had been no run on
a British bank since the 19th century. That may be true, but there
have been plenty of banking crises in between. Old mistakes, or new
variations of old mistakes, are bound to be repeated. Regulations
will be gamed and innovative ways of taking excessive risk will be
invented. All we can do is watch, with a sceptical eye, and make sure
that we don't buy into the next lot of hype.
==================
2. Northern Rock loses £585m in six months as mortgage customers
struggle
By Helen Power

Nationalised bank Northern Rock has lost more than half a billion
pounds in the first six months of this year.

The bank, which is based in Labour's North-East heartland and was
controversially taken into state-ownership in February, racked up a
pre-tax loss of £585.4m in the first six months of the year as home
owners who took out its mortgages struggle with their repayments.

"The external environment has deteriorated and the consequences of
this for Northern Rock are increased credit losses," the lender said
today.

The bank, whose difficulties proved a starting gun for 12 months of
financial turmoil in the UK, warned today that arrears on its
mortgage book were rising as house prices continued their slide and
the wider economy faced recession.

Repossessions have risen to 3,710 by the end of June compared to
2,215 at the start of the year, while arrears outstanding for more
than three months have more than doubled to 1.18pc of its mortgage
book .

Northern Rock admitted that "whilst this increase is partly
attributable to the company tightening the application of its arrears
capitalistion policy and the shrinking of the mortgage book, the
underlying trend is all too evident."

As the bank is state-owned it cannot fail, but the burden of its
growing losses will fall on taxpayers

The revelation of the loss comes almost 12 months after ex-Northern
Rock boss Adam Applegarth said that the world changed for ever for
the lender as global financial markets froze.
British banks have all been hit by rising mortgage defaults, but
Northern Rock faces greater difficulties than most because it offered
particularly high risk loans of up to 125 per cent of the value of
properties.

About 5pc of the nationalised lender's mortgages are already thought
to be in negative equity and another 15 per cent have been lent to
households with less than 10pc equity in their homes. That equity
will be rapidly whittled away next year as house prices tumble.

Northern Rock has also said it will cut 1,300 jobs and redundancy
costs have added to its losses.

However, Northern Rock said that it is on track to repay its £26.9bn
bail-out from the taxpayers at a faster rate than initially planned.
According to this morning's results, it has repaid £9.4bn of the Bank
of England loan. [BUT SEE BELOW -CS]
=================
THE TIMES 5.8.08
Taxpayers take another Northern Rock hit
Patrick Hosking

The Government's financial track record suffered a fresh dent today
as it emerged it was preparing to write off up to £3 billion of
taxpayer-funded loans to Northern Rock to strengthen the stricken
bank's balance sheet.
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