Being a banker in a liquidity crisis

Church and credit

So it’s pretty easy for a pastor to talk to a teacher, a nurse, a doctor, a social worker, a student or a child. But what does a pastor say to a banker? (No, it’s not the start of a “What did the pastor say to the banker…” joke - neither is this post in reference to my own pastor who is a great listener, as are my friends). It’s generally a sensible approach to assume that bankers are people too (at least in this context) and approach them as people. However, these are not sensible times. So I guess what I am getting at is how can I as a Christian, or my church as a gathering where there are bankers and surveyors and lawyers and other people in the finance related industries, speak to the real life concerns and stresses thrown up by what is commonly known as the “credit crunch”?

Give me one pound and I’ll make you millions

Firstly, let me describe what is going on, and where it could all end up if uncontrolled (note, this is my opinion and in no way is it the official or unofficial opinion of my employer, caveat caveat caveat.)

- A person on a low income borrows money to buy a house. The lender (lets call it Bank A) provides money at high rate of interest (allowing for a % to not pay back and still make profits) and then sells the loan to another bank (lets call Bank B). A rating agency (an independent institution) says, well your single mortgage was quite risky but if I packaged those with 1000 other risky mortgages, we’d diversify the risk and so we could rate that as a safe package of loans (after all, they were assuming the risk was that one individual would not pay back, rather than just about everyone). That safe package of loans is then used as an asset by the new bank to borrow more money. I.e. I have this package of loans worth $10m, so why don’t you give me another $19m on top of that. Then that bank then lends this money to other banks (lets call Bank C) around the world, helping money flow round the system.

Hmm, where will I store all my money? Bigger barns?

Bank C says, ok I have lots of money. Interest rates are low because inflation is low. (oh yeah, and because there’s lots of money in the system so supply and demand says rates can be low) So where do I put my money? Well lets look for higher returns. (Oops, immediately forgetting finance 101 that says higher returns = higher risk. Risk and reward generally go hand in hand, and so the banks were moving up what is known as the risk curve). Everything still is ok. So Bank C has loads of these high risk packages of mortgages on its books, even though it thinks they are low risk. Bank C now starts lending like there’s no tomorrow (well not quite, as then they wouldn’t get repaid but not far off): 1) lends money to people at 9x the amount of money they have themselves (this is called prime broking and the people are hedge funds, sometimes this ratio can be 30-50x or more) 2) lends money to people who borrow in countries with low interest rates and move that money into countries where there are high interest rates (this is called the carry trade) 3) buy commodities because they believe there is a structural shift in China and India to buying more rice, oil, coal, iron ore etc (this is called a bubble) and 4) lend to real estate investors (where the view is that the assets are so safe that the money is not at risk).

 

 They marched them up the hill, and then they marched them down again

And what happens? All of this money flows in and flows in and flows in, all over the last decade. And then here’s what happens - the price of these assets are pushed up and up and up - and the scale of the investment gets greater and greater and everyone is playing the same game. And then what? POP. Someone somewhere failed to be able to pay their mortgage in the US. And then another. And then another. And then bank A suddenly has problems. And bank B realises its package of loans is not diversified at all, and so its assets are worth a lot less than it thought, and so when it revalues them, it has far too many loans out the door. So it stops lending to the people at multiples of what they had in the first place. And those people then no longer provide money for Bank C. So Bank C’s pool of money dries up (a la Northern Rock) and then it has to pull back from prime broking (and hedge funds have to sell assets to repay prime brokers, so stock markets tumble) and carry trades (and so countries like Iceland have to jack up interest rates) and commodities (still hanging in there but for how long) and real estate (and so commercial property deals dry up and values start to collapse because there are no buyers).

Eating a hole in YOUR pocket

And that seems to be where we are at the moment. So far so good? Great, because here’s where it gets bad. Your Bank C is also your mortgage lender and it has a very limited pool of money so it starts pulling its mortgage products from the market left right and centre. So the number of people able to buy new houses collapses, bringing with it a massive fall in house prices. And then anyone related to the housing market (estate agents, builders, joiners, DIY, gardeners, roofers) starts to suffer. Anyone taking money out of their mortgage when their house price went up (mortgage equity withdrawal) can no longer do that and so retail spending stops impacting retailers and suppliers to retailers.

oooh, CRUNCH!

But it gets worse. Bank C is also a big lender to real estate investors. It now starts to increase the cost of its debt to these people, making new deals more expensive. It also starts to restrict new deals because of a lack of money. And then it has to deduct more value from the assets it holds on its books as many of those are backed by commercial real estate which is now falling in value because the banks are restricting money. Property deal makers, bankers, lawyers, surveyors, valuers, construction companies all start to lay off staff. Property companies have to support higher debt costs, so they slash their own costs - cutting back on staff, and increasing their rents. Which leads to the tenants (the retail companies of above etc) then cutting back staff etc.

Are we doomed?

But the real worry is this - funding to other financial institutions dries up. Because there is no money circulating, everyone is hoarding. Before if you had $1 then you could use that to lend $4 and they would use that $4 to lend $16 and then they would use that $16 to lend $64. So you could turn $1 into $64. That process has rapidly reversed. And the worry is that there are highly leveraged vehicles (things with lots of debt to the value of their assets) out there, and countries, that could just massively unwind, leading to an entire collapse of the system. A systemic collapse is a central banker’s worst nightmare and could send the world into a 10 year depression, including millions of job losses.

Which is why the central banks are trying to change it all.

Should you be afraid? You may well see your house fall in value by 30%, you may lose your job, you may have no spare cash, and food prices and energy prices may continue to go through the roof.

There’s still hope

But you may not. The picture above is an extreme picture of what could happen, and there is an equally robust bouyant scenario which would suggest that the worst is already past. Don’t let the papers panic you, and don’t think that anyone out there really knows what’s going on fully and what’s going to happen over the next year. I just wanted to show how everything is interlinked (I have grossly simplified the reality for the purpose of this blog and I make no apologies for that).

So back to my point - what can the church, or the Christian say to this? I have found little on the web about it, which has surprised me. However, I did come across this post from lifechurch on how economic uncertainty affects the church. Which was not really what I was looking for, as I really want to think about how the church can serve its community, its neighbours in a time of trouble. What does it mean to be a good samaritan in a credit crunch? We have a great story of life changing to share, and we also have hope, joy, peace, perspective and love to share - all things that are very welcome. But I think a big part of it is about listening (and not trying to fit the phrases debits and credits into the gospel so that we can evangelise to bankers and accountants) and creating listening environments.

So next time you meet someone in this field, why not ask them what they do, how they are impacted by this, how you can pray for them, and how you can stand alongside them in what, for many, must be a very worrying time. And if there’s people in your neighbourhood that lost their jobs, their homes, their cars, their credit ratings - why not stand with them, help them rebuild, help them survive, share what you have, show them a way of financial independence and act as a friend and not as a judge.

Jesus is my hope, my purpose, my life. But Jesus also loves bankers and cares about what we do.

Do you?

 

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