Banning 100 Percent Mortgages Is Pointless

I've started contributing City View columns for Moneyweek. For anyone who can't access it online, here's a taster of a piece about why banning 100% mortgages was completely pointless. But do buy the magazine...

Gordon Brown has proposed that 100 percent mortgages should be banned. Slam. Barack Obama wants limits on banker’s pay. Slam. The German Chancellor Angela Merkel promises tougher regulation for hedge funds and rating agencies after a European Union summit in Berlin last weekend. Slam.

Right around, the world politicians and financial regulators are busy shutting doors on horses that haven’t so much bolted as climbed on board a rocket and left for a different planet. They are wasting their time. There is no point in trying to fight a banking-led financial and credit bubble now. It is too late. No doubt the world economy will recover eventually, and, in time, a fresh bubble will get going. But when it happens we’ll find a whole new way to mess things up – and it won’t be anything to do with the plethora of controls on the financial system now being proposed.

It would be better to devote time and energy to fighting the next crisis rather than the last one.

Take a look at Brown’s latest plan to save the British and world economy. Resurrecting the word prudence, which appear to have gone missing from his speeches in the last couple of years, the British Prime Minister argued for the return of the “traditional savings and mortgage bank” making loans “on prudent and careful terms.”

The old 125 percent, self-cert, buy-to-let, mortgage, with a discounted initial rate, plus a free flight on Ryanair chucked in, is now to be a thing of the past. Brown has banned them. Mortgages will only be made available to people who have saved carefully for a deposit, got a steady job, and presumably can prove they get to bed at a sensible hour and don’t drink too much either.

There’s a problem, however. The market has already done that job.

Maybe nobody has shown the Prime Minister how Google works, but it only takes about five seconds on the internet to discover that 100% mortgages are about as easy to find as Bernie Madoff’s trading records. There aren’t any 100 percent mortgages out there. There aren’t even many 80 or 90 percent deals available. To get a decent rate, you need to be putting up a 40 percent deposit. In reality, banks have returned to the policies they were satirised for many years: they’ll only lend money to people who can prove they don’t need it.

There is no real mystery about that. In a rising property market, it is perfectly good business to lend people 100 percent of the money to buy a property. If prices are going up 10 percent annually, within a couple of years, the borrower has a healthy chunk of equity in the property. It is only in a falling market that the maths turn toxic. Within a year, you are looking at 10 percent negative equity. And with the housing market still in freefall, banks need those 40 percent deposits to have any confidence their loan will still be backed by an asset at least equal to the value of the debt in three or four years time.

A ban of 100 percent mortgages makes about as much sense as a ban on riding your horse and carriage down Regent Street. Or a ban on taking your spear onto an aeroplane. Since there aren’t any on the market, and no one had any intention of launching any, it isn’t going to make much difference.

The same is true of a ban on bonuses or caps on bankers pay. The way that banks do business has changed fundamentally over the past year, and is going to carry on changing over the next twelve months. The days of trading their own books like a giant hedge fund, or rewarding dealers with “heads-I-win-tails-you lose” bonuses are over. Just look at the way the Swiss giant UBS has introduced the ‘malus’ – a bonus that gets awarded in one year, then gets taken away in the next if your unit doesn’t carry on making profits.

Everyone in banking is well aware that they have created a system with lopsided rewards and woefully inadequate risk controls. Heads have already rolled, boards have been humbled, and shareholders have demanded new strategies. Banking is going to be a dull, conservative industry for the next decade: think the water industry, but without the excitement. Those kinds of jobs pay dull conservative salaries.

The same is true of calls for more regulation of hedge funds. You’ve more chance of raising money for the Fred Goodwin memorial statue in Edinburgh than you have of raising funds for a hedge fund right now. They are closing faster than Icelandic BMW dealerships. What is there going to be to regulate exactly?

Politicians love to fight the last crisis just the way generals feel comfortable fighting the last war. After the dot com collapse, we took it out on auditors and analysts for not keeping a tighter eye on all those flimsy companies. Arthur Andersen went out of business. But the next time around, it wasn’t the auditors or the analysts who fell down the job. The problems were elsewhere.

Three years ago, when Brown was Chancellor, it would have been a great idea to clamp down on 100 percent mortgages. Even a warning about house prices would have been good. Yet Brown remained silent.

A ban now, alongside clampdowns on bankers pay, and regulations on hedge funds, is simply irrelevant. It is just mood music, designed to make politicians look busy and decisive.

In time, there will be another bubble, probably caused by the frantic printing of money designed to tackle this one. But the politicians and regulators will be so busy kicking around the ash and embers from the last fire, they won’t notice the new one starting next door.

Sport and the Free Market

On Bloomberg today I've been writing about how every flimsy businessman usessport as a vehicle to legitimise themselves, a piece that was also picked up by The Times. Sir Allen Stanford is only the latest example. It seems to happen all the time. Sport is a challenge to people who, like myself, broadly believe in free markets. Football is the most glaring example - it is hard not to believe that the Premier League has been killed by the influx of money, since, although skill levels are higher, there isn't much meaningful competition. Indeed, with the demise of Chelsea, it doesn't look as if anyone can challenge Manchester United for the title for a long time, and there is not much fun in that. I suspect salary caps such as they have in American football may be the answer, together with limits on foreign players - but it is not going to be easy to achive.

WeRead

I've signed up to WeRead, and there are extracts from Death Force and more information about the book on the site.

Welcome Back Len Deighton

At least there is some good news out there. Harper Collins have announced that they are to republish all of Len Deighton's books. All of them will have new introductions by the author. Of course, Deighton hasn't really been unavailable. He sold so many, you could always find plenty of copies of his books at your local charity shop. I've been working my way through them, and, for pace, suspense, humour and insight, he is hard to match. The Harry Palmer books and the Game, Set and Match series are rightly praised. But even lesser known works such as Winter are fantastic. Welcome back.

A £2,000 Cap On Bank Bonuses Is Fair

David Cameron's proposed £2,000 cap on bonuses at those banks bailed out by the taxpayer is completely fair - as well as quite a neat way of dealing with the issue, since it means junior staff can still get their performance-related pay, but the City traders don't. The arguments against don't begin to stack up. It doesn't matter if people leave. RBS isn't going to go back to being a hyper-aggressive global bank, so it doesn't need them. Neither is HBOS. As for the contracts, test it in court. The bank was bust, so presumably all the employment contracts can be re-written. The fact the government has taken so long to get to grips with this issue show just how clueless it is.

Responsibility Moves Closer To Brown

Responsibility for the banking crisis is moving closer and closer to Gordon Brown all the time. The allegations of the HBOS whistle-blower Paul Moore may or may not stack up. In the end, it doesn't really matter. The facts are already quite clear. Brown created the regulatory system, and it clearly failed. At the very least, it now has to be admitted that the FSA is a failure, and responsibility for banking supervision needs to be handed back to the Bank of England. The UK has the worst banking crisis of the major world economies, and sooner or later Brown will have to own up to that.

The Banking Mess

Over on Comment Central today, there is a fascinating tidbit about how Mervyn King warned Gordon Brown and Tony Blair that it was a disaster to seperate out regulation of the banking system from the Bank of England. Brown, however, went ahead and created the FSA. And a disaster it has proved. Plenty of people warned about that at the time. You can't split central banking from supervision of the banking system, because, in a crisis, there are the same thing. As we deleve deeper into what looks like the worst recession of our lifetimes, the blame is going to shift more and more onto Brown - and of course on Ed Balls as well.

Why Did So Few People See The Crash Coming?

In the Spectator this week I've been writing about the relatively few people who managed to get the markets right. John Paulson famously got the US housing market right, and a small number of London hedge funds made some good calls, yielding big profits. But by and large very few people in the markets saw this catastrophe coming down the tracks. Of course, most fund managers have to stay fully invested because that is their mandate. And plenty of private investors, I suspect, had become very suspicious: I sold most of my portfolio of shares in 2005, and I'm sure I wasn't alone. But the hedge funds and investment banks failed spectacularly - and they may well never recover from that.

Banking Bonuses

I don't think the scale of the contraction in the banking industry has started to sink in yet. In my Bloomberg column this week, I was speculating that pay in financial services is likely to fall around 50% to get back to long-term sustainable levels. It could be further, however. A whole generation as grown up assuming that banking is the place to make money and that isn't going to be true for a long time.

Death Force Reviewed By Material Witness

There is a great review of 'Death Force' over on Material Witness. I liked the way it picked up on the nods to the Commado comics which all small boys in the 60s and 70s used to read. Needless to say, I was a big fan.

Death Force Hits New Zealand

Naturally enough, and like any author, I'm anxious for indications of how 'Death Force' is faring in the shops. So I was pleased to see on the Mighty Ape online bookshop in New Zealand it was one of the most popular books of the week. It's a small market, true. But if it can work there, it can work other places.

Die Welt

It's not often I get a by-line in Die Welt, but they ran my Bloomberg column on bankers.

Devaluation Doesn't Work

There is a lot of nonsene out there being pushed as economic wisdom. One of that worst is that the collapse of the pound will lead to the revival of the UK ecomomy. It's not going to happen. Today's terrible industrial production figures make that clear. Output fell by another 2.2% in December, and is now 10% down on its peak. Of course, it is hard to export when the whole world is in recession, but there should be some signs of stability by now. If Britain could devalue its way out of trouble, we would have been booming all through the 60s and 70s. In reality, the UK needs a strong currency, and it is not going to have that until the government gets to grip with taxes and spending.

Bankers Slip To The Bottom Of The Pile

I was pleased to see my Bloomberg column on how bankers are being turned on by their wives and mistresses picked up plenty of places this morning - it is running on two of my favorites sites, RealClearMarkets and FT Alphaville. The most interesting response came from another blogger Mrs Robinson, who's take on the story is well worth reading.

Win A Signed Copy of Death Force

Over on the All In London website you can win a signed copy of Death Force,

Reykjavik On The Thames

Britain isn't quite Iceland yet but it's economy looks in more and more trouble by the day. There has been a lot of glib talk about how the collapse in sterling will help out the British economy. But that ignores our reliance on imports. I noticed today that both Ford and Carlsberg said they were planning to raise their prices to take account of the fall in the value of sterling. We'll see a lot more of that in the year ahead. The net result is that inflatin will remain stubbornly high even as we move into a full-blown recession. One result will be to lower consumer spending even further, hitting demand. Another is that the Bank of England will have to think twice about lowering interest rates any furher. In a worse case scenario, it might even have to raise them. If that happened, the economy really would be plunged into a full-scale depression.

The Big Thrill Features Death Force

Death Force is highlighted in this month's issue of The Big Thrill. You can read about it here.