For close on half a decade I have been trying to reconcile the problems of the mortgage market and the wider economy with the not-inconsiderable expertise at the disposal of the Financial Services Authority and government. The question I always came back to was simple – surely they couldn’t be that stupid?
I even began to believe that the corridors of power might have been infiltrated by a small but sophisticated Islamic terrorist group that was secretly conducting an economic jihad. After all, the logic behind some of the complicated mortgage derivatives that originated from the US ahead of the credit crunch smacked a tad too much of the Arabian Nights to be credible, but everyone seemed to ignore the danger.
Similarly, who in their right minds would have squeezed the building societies so hard, post-2008? With their long history of financial stability the mutuals could have stepped into the lending vacuum created by the demise of newer players in the market and their higher risk business models.
Returning to dubious financial instruments and the Arabian Nights analogy, I meant that the way they worked was shrouded in mystery but no-one wanted to show their ignorance and question the goodies emerging from the Aladdin’s Cave of Wall Street when there appeared to be no losers.
Over 10 years there was a 3.6% decline in mental reasoning in men aged 45 to 49 and a 9.6% decline in those aged 65 to 70
After all, low-income borrowers gained a roof over their head, mortgage originators made a financial killing, ratings agencies and mortgage administrators didn’t do too badly either and as for the investors, it was rather like printing money – or rather, to use a more contemporary term, it was as good as quantitative easing. Then in January I came across an article in the British Medical Journal which asserted that our cognitive decline can begin as early as 45 when the brain’s capacity for memory, reasoning and comprehension skills starts to deteriorate. Hitherto, it had generally been accepted that such deterioration sets in at around 60.
But what really raised my eyebrows was the revelation that the findings were based on a study of Whitehall civil servants over a 10-year period from 1997 to 2007 – the year the mortgage market began to unravel.
The study involved over 5,000 men and 2,000 women aged between 45 and 70. It included people who had not completed secondary school, those who had obtained higher educational qualifications at secondary school, and university graduates – the last category being the sort of high-flyer you’d expect to find working in the Treasury and upper echelons at Canary Wharf.
Eureka, I thought. The findings showed that over 10 years there was a 3.6% decline in mental reasoning in men aged 45 to 49 and a 9.6% decline in those aged 65 to 70. Just for balance, the corresponding figures for women were 3.6% and 7.4% in the respective age brackets.
That, I speculated, might explain why in 2007 Bank of England governor Mervyn King, then aged 59, was so slow to acknowledge that liquidity was the immediate issue facing banks and mortgage lenders, not capital – a viewpoint that was to have serious consequences. The percentages game and the margin for error can be important when the stakes are high.
If King can be included in the at-risk group, so can Sir Callum McCarthy who is now the European chairman of private equity firm JC Flowers, which until recently was hoping to buy Northern Rock. But back in 2007, he was at the ripe old age of 63 as chairman of the FSA and it was under his watch that Northern Rock went down.
Another senior executive who falls into that category is John Tiner, who when chief executive of the FSA was reported to have a fondness for driving a Porsche with a personalised number plate – T1NER. He was 49 in 2007 and head of the FSA, so he too should have been a tad contrite when Northern Rock savers were pictured on television queuing around the block desperate to get their money out.
Of course it’s possible to identify post-45 culprits among the lenders too. Sir Fred Goodwin, lately of the Royal Bank of Scotland, might serve as a good example, as might Sir James Crosby, architect of the ill-fated HBOS business model that he bequeathed to his unfortunate successor, the younger Andy Hornby.
Sir James went on to become deputy chairman of the FSA, a position he relinquished when his HBOS legacy became apparent, but another of his former colleagues at HBOS and yet another post-45-er, Peter Cummings, was allowed to continue at the helm of commercial lending with his integrated financial model.
This had the touch of an Aladdin’s Cave about it too so the money on loan appeared as capital rather than debt and so HBOS could increase its lending without increasing its capital.
That, coupled with some rather interesting lending partnerships involving retailers, property developers and hoteliers, many of them in Ireland, culminated in the fall of the House of HBOS and the ill-fated takeover by Lloyds TSB which continues to write off billions of pounds of HBOS’ bad debt.
All things considered though, the age and errors in the mortgage market hypothesis doesn’t really stand up and as for age and the decline of reason, why trust the medical experts anyway? Leeching was once a cure for almost every medical ailment and it was the now-discredited science of phrenology that was used to justify the racism of Nazi Germany.
And as for trusting the government experts right now, I was intrigued to see a chart compiled by David Smith in the Sunday Times recently of how the economic forecasters fared in 2011. In a table of 39 forecasters, the Office for Budget Responsibility came 30th but that was reassuring compared with the performance of the International Monetary Fund at 33rd and the European Commission at 36th.
The OBR scored just one out of 10. It was close on the current count deficit but was way out on gross domestic forecast growth (forecast 2.1% – outturn 0.9%) and inflation Q4 (forecast 2.8% – outturn 4.7%). Perhaps it is time to call in the witchdoctors and the magicians.