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Home > India > Business > Columnists > Guest Column > Sunanda K Datta-Ray

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How to prime the sub-prime

January 31, 2009

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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.

When he said the latter, she asked if that was the house he would buy. Ad-libbing, he said, no, as another flat, and she said at once, "To let, I hope?" When he queried the "I hope", she explained the bank didn't lend to buy a house to live in. "Only to buy property for renting."

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.

"We have your profile" and brushed aside jobs and salaries as being of no account as collateral security. Why was that, I couldn't help asking, whereupon she swivelled round to gaze on me in round-eyed surprise. What a silly question, her astonished look said. I quickly explained I was visiting from India -- a dehati in short -- unaware of sophisticated Western finance.

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.

A lofty designation might disappear. August firms vanished in the twinkling of an eye. So there was no point in relying on employment. Real estate was the only surety, she said, recalling that other saying, "Safe as houses".

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.

The principal needn't be cleared for 30 years. So, Deep shouldn't worry until he finished his D Phil and found a job. The market would surely improve by then.

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.

Apparently, lenders pool loans and re-sell them as asset-backed securities which are then repackaged, leveraged, tranched and resold many times over. Presumably it's spread here too, for one is pestered with telephone calls from unknown benevolent bankers (if that isn't an oxymoron!) offering to take over one's debts.

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.

Never mind, they ooze, we are here to handle all your debts. Who ever described a banker as someone who lends you an umbrella when it's fine but takes it back the moment it rains?

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.

If Deep had succumbed to the loan manager's blandishments, he would have been notional owner of a flat with no tenant in sight and no hope of paying back a huge debt. No wonder banks are going bust and driving people to bankruptcy.


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