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Good article Robert. I like the bluntness which is so lacking in the financial world where complexity disguises incompetence.

Can you name those banks taking on the debt as soon as you find out?

I'm sure those involved were rewarded with bonuses to make it even more laughable.

There's a danger that if there is a deep economic recession, the stupidity of many business practices could actually threaten London position as one of the top 2 financial centres.

I see - more dodgy deals financed indirectly by - you guessed it - our Pension Funds.

But then I always say that.

After all Pensioners never complain - they just lose out time and again.

Interestingly the places I drive through have had quite a few For Sale boards up but they get quickly replaced by Sold boards.

So property near me is moving (couldn't say at what price though).

Robert,

Doesn't this beautifully illustrate why the "long-suffering citizen" has lost faith in the workings of the "financial markets".

Most of us expect that there will be guys and dolls out there beavering away to find "value" by buying into something they can sell on when the conditions are right.

Most of us realise that the financial markets don't actually create real wealth - just the ephemeral idea that something can be said to be worth more than it really is, so staff can get paid a lot of bonus money.

I freely criticise Brown for his stupid change on taxation which hit private pension schemes.

I also criticise the companies who took "pension holidays" because the rapid rise in the stock market value of their holdings made them feel invincible. If they had consolidated their gains into real cash, there would not have been the disintegration of final-salary schemes that Brown helped to engineer.

If you sell tangible, deliverable things, such as products or consumed services, it is reasonable to pay bonuses against the "value-earned" benefit for a company.

If you are paid mega-bucks for creating a notional value improvement from the financial markets, there should be some mechanism to ensure that any perceived "growth" has an on-going value. In other words, the fact that shares rise by N% over the year doesn't mean that there is any true - persistent - value in that "gain".

I would be very happy to see hard-working people rewarded. But it would be good if a "notional" bonus was only paid out at (say) 25% in the measured year, with the remainder delayed until the real value was proven over a 4-5 year period. If, over that period, the "notional value" actually fell, then the rewards would also fall.

That may start to cut the extreme short-termism which seems to be the main driver in financial service companies.

It would also be good to know that people who gain massive incomes actually check what they are doing. I find it hard to imagine that companies simply went out and bought sub-prime mortgage, packaged up in attractive wrappings, without making any real effort to understand the "value" of what they were buying.

If Joe Citizen made such appaling choices, there would not be a very welcoming response from his local banker...

It seems there truly is a sucker born every minute!

Can't blame Countryside for taking up the option. But you have to question just how deperate the banks were when they agreed this?

I imagine a few senior bankers will be asking some very serious questions re their underlings who signed up to this deal.

Every story that comes out makes me more and more convinced that anyone who claims to be a banker shouldn't be allowed anywhere near money.

I have worked in financial services for nearly twenty years and never cease to be amazed as to how stupid some of these so called expert bankers are.

A wise man would have got out of bank shares at the first sign of the credit crunch last year and invested conservatively in commodities such as gold, food stuffs and oil.

Isn't this a good description of the problem? And what's starting to happen now? ( I say 'started' because I truely believe our prob;ems have only just begun and the next 2-3 years are going to be catastrophic)


Fiat Currencies (a.k.a. debt based economies).

This allows unlimited credit creation. Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit.

It's just emblematic of the financial system. Fair play to Countrywide for negotiating these terms.

But you try the same as a member of the public with your mortgage and the banks will punish you.

Large companies are able to dictate their own terms and conditions, and move around to the best tax environment.

The whole financial system is based upon business plans and future forecasts that don't stand up to scrutiny. It's only with the credit crunch that it gets found out.

And as people say, these Masters of the Universe run our pension plans etc.

It's going to get worse, as the majority of estate agents seem to be cutting their rates to attract customers.

Once again the sheer incompetence of the banking industry has been shown up.

These are guys who only need O level maths and a bunch of jargon, but have raked in millions in bonuses over the last 10 years.

What do they care if the banking industry goes under? They have enough to comfortably retire to the Caribbean.

Those of us who work at the sharp end of engineering and have been creating real wealth for the country never see any bonuses - in fact we are just seeing our real wealth diminish.

I cannot for the life of me understand why people on here are discussing ways to 'reform' the bonus system. If it was up to me I would make them repay the bonuses they have already received, and only offer a salary on a par with what everyone else in the real world earns. If that means we have fewer bankers then so much the better.

"The buyer, Apollo, obtained the mist astonishingly favourable terms from lenders "

Yes a typo but 'mist' might be relevant as to this where the bankers were in doing this deal and 'heaven knows' how many others.

I'd second #1's request for the list of banks/lenders in this deal and if this debt is trading at 61% face, the UBS deal with Blackrock might have thinner protection than at face value.....so what other deals are their between Blackrock and UBS?

Given the list of banks above perhaps their Directors might take responsibility and resign......

Mr Turner was being economical with the truth.

Ask him how he would describe the housing market today and any given description that would imply more than 'dead or just stopped' would be a gross exaggeration ...like describing the Titanic as 'unsinkable'!

How long will the market remain so?

The banks have curtailed morgage backed market activity by a third and everyone seems surprised that values will fall as a result! The Government says 5-10% the CML 7% think 15-20% this year and the same again next.

And another thing. I've been repeating the phrase 'inflation, inflation inflation' over and over since the Fed began sending US intrest rates into a kamakazie spin ...intrest rates next move here, will be UP and before the end of the summer too.

Oh dear!

Good stuff again, Mr Peston.
I enjoy reading anything which exposes our bankers for what they have really been, which rhymes with bankers.
Foresight? Reason? Prudence? No.
Our bankers seem to have lost their way in the last 5 years, splashing money around like water. Its almost as if they've been playing games.
Estate agents are just the first affected (after the banks).
I think most British people would like to say to the bankers, their agents and traders....Can we have our money back please?
After all, when we're all standing in the dole queue, they'll still be taking their Caribbean holidays.

The mortgage market will remain in flux for at least two years and building societies and other lenders will seek to improve margins over this period.

One of the key drivers in the recent mortgage boom Northern Rock has not only stopped taking on new mortgages but is effectively moving in to "run off" by rapidly downsizing their book of mortgages.

Much of the little extra capacity many lenders will have will be going to the safest of the NR mortgagees looking for a new deal.

Until we get back to 95% mortgages many first time buyers will remain priced out of the market for properties.

If the average property price is £180,000 approx and the average first time buyer is looking at maybe £130,000 they will need at least £15,000 and probably closer to £20,000 to get on to the property ladder once the legal costs, mortgage fees and other costs are added to a 10% deposit.

Expect continuing drops in numbers of sales and further falls in property prices.

I would not want to be an estate agent in todays climate! That's about the limit of my knowledge on this topic. Give me a few years. One day I'll crack this impossible nut.

I remember the sale of Countrywide and wondered why so much money was paid for something that was so clearly at the top of its market.

It seems the buyers were not as stupid as I first thought, or did they just offset some but not enough of the pain?

It is not at all surprising that the banks got the short end of this deal. Bankers have little idea of how to negotiate, possibly even worse than the typical solicitor, so if they are out of their comfort zone, they will get taken.

Up to the nineties there was this breed of people called bank managers. They were the middle management of the commercial banking industry. Not overly clever but, with practice, they became very competent and good at assessing character. Assessing character was a critical success factor in commercial banking, although bankers never really knew this.

In the early nineties people became very enamoured with business process reengineering (BPR), which was wonderful and innovative. But it was invariably badly implemented and BPR became a bad word. Banks were in the vanguard, and they set about BPR with a will.

Many decisions previously made by people were now automated. The idea was that only the tough decisions would filter up to the top layers of management. This was all very well, but there were a couple of unintended consequences.

The first was that after gouging out their entire layer of middle management, they replaced these bank managers with headless chickens. These headless chickens were basically customer-facing, which is a fancy way of describing the faceless mob with whom we have had to deal in the last decade. So the banks lost an entire generation of human resources from which they could source their future general managers.

The second unintended consequence was that the upper levels of management who were supposed to make the tough decisions were clueless. They may have been very clever but, when it came to making commercial banking decisions, they were and remain clueless.

We must forget investment banking, which is a completely different business. Here you want a bookie, a bookmaker, sharp and quick and with excellent gut-feel and trading instinct. And, by the way, what most of the investment banks seem to have forgotten, the best bookies do not go on risk themselves, they lay off every single penny.

So there is no-one to make the commercial banking judgement calls any more. The bankers made themselves extinct.

We are seeing them reap the whirlwind, in front of our eyes, and should shed no tears. In the USA and UK banks have lost around half their capitalisation and, I hope Robert agrees, this is not sitting around waiting to come back, it is vapourised. The banking big shots are out there with their soup-bowls, begging for billions, as the Wall Street Journal quoted the other day. Another few hundred billion has been and is being raised from rights issues. Their shareholders are captive, mainly pension fund managers, lemmings in a Catch-22 of their own making, forced to dip in, and throw good money after bad.

The incredible shrinking banking sector. And with deals like the one with Countrywide, should we be surprised?

Isn't the act of saying that you can pay your debts for 3 years asking for trouble - indeed (inadvertently) wishing it upon yourself? If this recession is like '29 than can we not expect a long period of of declines and then only slow growth in the volume of property sales, perhaps over a period of two decades?

If asked I will always say that I can pay my debts - with no time limit. Putting a time limit speaks of liquidity stress.

So their business will decline by 40% this year alone (if the market reporters are right), however their overheads will be difficult to cut to match and indeed some will be 'fixed' so in effect losses must be far larger.

I would not lend any money to an Estate Agent today given their market conditions in fact I would be (discretely) calling in my loans. The sector must rightsize. This sector is riskier than banks as they are dependent on the sale of properties at whatever price (except that is for their rental management business.)

Interestingly we are also starting to see white goods traders saying that they must not talk themselves into a recession.

I like the word ...twentyfive.

Why?

It mostly describes ...as a perecentage... the increase in price (not value) in every day stuff, compared with this time last year, like...

fishcakes 58p ...now 89p

a loaf of bread 84p ...now 120p

a litre of petrol 91p ...now 116p

basic rate of entry income tax 10p ...now20p

Consumer Price Iindex is 3%

Real ...sorry... the Retail Price Index is (apparatently only...) 4.1%

I don't know about you folks but when I see, feel... prices rising and then get told they are but not as much as I think...I know my reaction is to say 'yeah right!'

I am an estate agent... here (Ipswich) the housing market has stopped, everything has stopped... no sales, no inquiries, nothing. The local biggest new site national builder has just reduced REAL prices by between £10,000 and £7,500 (after, not before or including other usual discounts).
That 2 bed flat is genuinely £10000 less today than it was last week.

In a couple of months those new riverside flats will be £20000 less ...and I'm not calling that as being the bottom of the market. And why does that matter? Because when those flats go down 20% they take the rest of the market ...that means you.... down 15-20% too.

Oh Dear!

This is the only Apollo deal where this is happening. They are excercising similar rights with Claire's Stores and at least one other investment

Comment #2 is spot on, if there is $1 trillion of sub debt issuance with a face value of $50 million now and some $200 million of declared losses, where do the other losses belong.
I agree that it is the pension funds and Insurers who have it and are desperate to hide it all in long term positions that wont shopw for years. That way they can right off moeny each year as against all the damage in one go.
Lets hope teh Actuaries and Auditors when they do their due diligence go looking in the right places before they sign off any books down the line

Good God. I had no idea. This is the banking inverse of those deals you see for overseas property.

Ie. Buy this property for 100,000 Euros and we guarantee you rental income of 9% for the next three years. Errr, how about you just knock 3x9,000 = 27,000 off the price and let me worry about the rental income for the next three years. Because it's insanely overvalued at that price. That's why.

So desperate were these bankers to get the loans on the book so that they could stick a bigger number than last year in the annual report that they approved these deals.

They approved the vastly inflated price of the 'asset' - in fact the more the better. An even bigger number on the annual report. And then guaranteed the 'rental' of the money to boot. Astonishing. Woo-hoo. Deal closed. We booked another billion quid in loans.

Meanwhile these private equity wallah's will be paying themselves monstrous bonuses out of borrowed money and when it all goes bust will just walk away leaving their investors, creditors and employees twisting in the wind.

What a scam. To hell with flogging dodgy timeshares, this is the real deal.

Robert,

a excellent blog!

Bonuses tend to corrupt people, I can remember when my organization paid 250 GBP for ideas that would save money. People were cutting each other's throats for what amounted to one per cent of their salary. When you can double, or treble or more times your salary, What would most people do?

Sounds like good business for Countrywide. It provides them with insurance to enable them to weather any downturn in business over the next three years. - shocking business for the banks though!

Robert.
Superb article. As an Estate Agent i wish that Gordon Brown would phone me to ask how things are on the 'front line'. In essence there is no market at the moment. I cut my teeth on the last recession and the property market now, is easily worse than in the early 90's. The Banks need to start lending again, even if they offered special first time buy deals only, and the rest of us at a 'normal' rate. This would help to keep things ticking over at least - Wishful thinking i know. Otherwise the government needs to come up with a proper rescue package now or they will see stamp duty revenue down by billions!! and a lot longer queue at the job centre.