The Love of Money and the Financial Crash of 2008

4 September, 2014

I’ve just finished watching the hour long programme on BBC 2 called “The Love of Money” and it was shocking to be reminded of the utter negligence, the abhorrent greed and thoroughly bad lending decisions that went on in the sub-prime mortgage market of America.

By way of some background, the financial markets of London and New York compounded/created this whole credit crunch issue by making cheap money available to lend to sub-prime borrowers and then they packaged these loans up, added a bit of credit default swap insurance into the mix (almost said bye bye to AIG for this bit) to gain a AAA rating from the ratings agencies (Moodys and S&P – also heavily to blame) and then sold these packaged loans up to unknowing investors and financially illiterate pension fund advisers etc by securitising them into mortage-backed securities. I have to confess I worked on the AML due diligence side of things for my bank, a bank that was heavily involved in this kind of business, and now nearly all the loan structurers responsible for making the lending decisions and packaging up these loans for onward sale to investors have all but gone. Most sacked…. others left before the big crash for they could see what was around the corner and made their escape early. The rest of us were left holding the baby! I for one paid a heavy price too. When the credit crunch hit and he couldn’t sell the property that he intended to buy, do up and then sell on for a profit (known as a flip) he took the soft option of bankruptcy. His property investment decisions went bad and I ended up losing £31,000 of my own money on that deal. Ouch!

How does this affect you? Well in essence your savings in your pension fund and other investments were invested in this rubbish and thus when the crash came, the banks lost hundreds of billions and your investment values were decimated. Thanks to the banks we all have to work longer and retire later!

I couldn’t feel sorry though for the girl that was interviewed throughout the programme. She worked for Ameriquest, a major sub-prime lender and it’s been said the founder of that company was the grandfather/founder of sub-prime lending. Ameriquests sales tactics were debateable (they eventually paid out many hundreds of millions of dollars to satisfy lawsuits brought against them in 49 out of 50 states in the USA for “predatory lending”!) and the girl was forced, like others in the firm, to hard-sell loans. She made a lot of money. One man made nearly $1 million dollars in one of the years. Yet now she’s lost her job and is in danger of losing her home. She and her kids will have nowhere to go. My issue is that if she made so much money… where did it all go? Why didn’t she save some… have a buffer fund for the bad times… pay off the damned mortgage if she was that flush! Why do people think that property prices will always go up and they can then borrow further against them.

So what’s the lesson. Easy. Now is the best time of all for you to start saving and making lump sum payments off of your mortgage if you can. Reduce the balance, reduce the interest costs and then, when interest rates go up again (as they will) you’ll be better placed to survive the increase in mortgage payments. Get a side business, work two shifts, do overtime, find another better paid job, become a consultant, earn money by blogging and writing about your hobbies and passions, monetise your knowledge, do whatever it takes to get more money and cut expenditure.


The next part of the series will be shown on BBC2 next week at 9pm. Watch it and learn…

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