The government, in conjunction with the banks’ boards, must get hold of this situation quickly and, even if you don’t like football, the relevance of a comparison with the turnaround of my team – Spurs – is difficult to avoid.
Spurs – where it went wrong
Just a few short weeks ago, Spurs was at the bottom of the League, with no win in their first eight matches. Its manager, Juande Ramos, gave unclear messages, expecting the players to fill in the gaps (exacerbated by the fact that he didn’t learn English).
Ramos made no attempt to understand the culture of the English players, and he hardly ever spoke to them one-on-one.
I was on the players’ plane once, going to a European match, and I witnessed at first hand his unreasonable behaviour, banning the paying VIP guests from having breakfast in case the players (who were only allowed fruit) could smell the food.
Even an old English favourite, tomato ketchup, was banned from the training ground.
The results of all this could be seen on the pitch. The players were disorientated and demotivated.
As each defeat totted up, failure became the norm. Very little that was creative or new was tried, until the board brought in a new manager.
New leadership and vision
In Harry Redknapp’s first visit to the Spurs training ground, he brought some tomato ketchup with him and said “I hear you boys have been a bit hungry”.
He took every one of the first team squad to one side and told them they were world class, international players.
Redknapp is no slouch when it comes to tactics, but, if he was a portfolio manager, he would be an instincts man rather than a chartist.
In the next 13 games, that same group of players won 9 and drew 2. Great for a Spurs fan, but how does this help with our analysis of the credit crunch?
How does this relate to the banks?
Well, the bankers that I meet are shell-shocked by what has happened to their industry. Many have lost colleagues and large chunks of their personal wealth.
They did not predict the liquidity freeze to their boards (who did?), so those that are still in work are falling over themselves to be pessimistic about the outturn.
I met a banker the other day who was now predicting that we would not see an end to the current recession and liquidity freeze until 2013.
The bankers’ general mood is being tortured by the government’s lack of skill in man or corporate management.
The banks are being asked to attack (lend more to help the economy) and defend (lend less to build up their balance sheets) at exactly the same time.
They are being summoned like errant schoolboys to the corridors of political power, in the full glare of the media, and told to reduce the loan rates they charge customers when the costs of the funds they used to make those loans has not gone down at all (in some cases) or by much (in others). See the Spurs connections?
On top of all this, the government is charging the banks 12% (yes, you heard it right, 12%) for the provision of support capital, adding further to the cost base and the confusion.
Now, of course, I’m not saying that the banks got it all right in the boom times, nor that the government was wrong to step in when they did.
The current situation is far too complex for such platitudes.
What needs to be debated, however, is how we get out of this mess, and we simply won’t do it without the banks starting to lend again.
Unless, between them, the government and banks can start thawing the current freeze, the recession will be far deeper than it needs to be.
How do we resolve the lending crisis?
To kick off that process, the government needs to understand that it has no particular skill in running banks nor, by recent evidence, is it that good at understanding or motivating bankers.
There are plenty of good and wise men available to assist the government, and the new lending panel is well positioned to act as a buffer between the government and the banks if the right appointments are made. With the right motivation, the banks’ depression could be arrested.
The government then needs to work with the banks to achieve some priorities that will get them lending again.
Recent hastily put together government initiatives have been significant by their lack of impact on new lending availability.
Some measures that might have an immediate effect could include:
1. If the banks can demonstrate on a quarterly basis an increase in lending over the previous quarter in such areas as credit facilities and overdrafts to small business, and residential mortgage loans to prime customers, then they could be given an incentive by way of a reduction in the 12% preferential rate;
2. The government could consider guaranteeing loans for first time buyers, just as they do with the shared equity Homebuyer Scheme, but to 95% LTV and collecting a premium from the many, that should fund the claims of the few; and
3. The government could bring about the re-introduction of wholesale funding, delivering capacity and competition to the market by implementing Sir James Crosby’s recommendations.
Smarter brains than mine can, I am sure, come up with a host of further and better ideas.
But this issue needs to be addressed quickly. Unlike Spurs, we can’t sack the manager.
So unless the current manager (the government) realises that the results are still going against him, we will get relegated – to the lower leagues of third world economies.
To read more go to the Checkmate website at http://www.checkmatemortgages.co.uk/.