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How to prime the sub-prime
January 31, 2009
Mighty oaks from little acorns grow, they say. So, too, may the financial crisis spreading in ever-expanding circles have started with a small episode such as I experienced during a recent visit to England.
My son, a student there, received one of those bank circulars disguised as a personal letter promising him a mortgage. Since hallowed British banks were teetering on the brink of collapse and Gordon Brown at his wits' end propping them up with state funding, I asked Deep to accept the loans manager's invitation and allow me to accompany him. He wasn't to introduce me, however. I would be the proverbial fly on the wall.
The manager, an attractive and pleasantly-spoken young woman, led us into a small conference room, served coffee and spread out her papers. Her first question was whether Deep lived in a self-owned or rented accommodation.
Her preference dashed my notions of banks helping people to own the roof over their heads but I held my peace. It was Deep who blurted out at that moment, "But I'm a student. I don't have a job!" The young lady was unperturbed. "Oh, we know that" she said.
That satisfied her and she offered me a second cup of coffee before explaining that there was no security about employment. Hiring and firing was the order of the day. Jobs came and went. Today's grand salary could end tomorrow.
Deep wanted to know how he was expected to pay back a mortgage, to say nothing of interest, since he didn't earn a penny. Nothing could be simpler, she smiled. From the rent of course. That's why bank advances were only for property to let. The rental income would cover the interest.
Let's finish the formalities, she said briskly, asking Deep to sign. Opening my mouth for the second time, I asked if there were any liabilities. Only the cost of the paperwork, she said breezily, a mere 3,000 pounds. That's when we drew back.
I now understand that thanks to this new thing called 'securitisation' -- as clumsily unEnglish as 'ongoing' and 'prioritisation' -- the bank alone might not have to bear the loan.
Why owe money here, there and everywhere? They plead, pass it all to us. But I don't owe money here, there and everywhere, I exclaim indignantly. Your credit cards then, they retort. I tell them my credit cards are from a different bank.
But someone must eventually repay loans, just as someone must be able to rent accommodation and pay rents. With 70,000 hapless folk sacked in one day and the ILO warning of up to 30 million new-jobless this year, I wonder who.
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