Bitten by the global credit crunch

I have never been to Mobile, Alabama. But if I do go there, I want to have a long, hard conversation with Chuck and his hound dog, Freddie.

Why? Well, because of the likes of Chuck and his hound dog Freddie, I'm worried about my bank account and my money.

It's a long story, but it's got to do with Freddie the hound dog's bad hip, Chuck taking a loan out to pay for it, and then Lehman Brothers collapsed because Chuck couldn't pay, and one bank was linked to another and then it all came crashing down...

Look, it's a long story, but bear with me and I'll try and explain how you and I and everyone else are in this money mess right now.

Scenario

Freddie's a hound dog who likes to chase raccoons around his 13th street neighbourhood in Mobile, running after creatures that wonder by the two-bedroom clapboard house his loyal owner, Chuck, called home.

Now, Chuck didn't work much, and whenever he did, he'd prefer cash. He'd take a cheque, sure, but the trouble with cheques was he'd have to put them in his bank account and wait for them to clear. There was also a record of work being done, which means the Internal Revenue Service would want their share of taxes: Less cheques, less taxes.

One night last summer, Freddie's outside doing his doggie business when there's a yelp. It turns out that the raccoon was a pretty good runner and made it under the chain link fence before the dog did. Freddie is entangled in the mesh and is yelping like a sick puppy. Actually, he is a very sick puppy.

So Chuck brings the sick puppy to the vet. The news isn't good. Freddie's hip needs surgery, then there's the recovery and the drugs and the whole bill is more then $12,000. One look in that hound dog's eyes and there's no way it's going to be put down.

But there's a problem. Chuck's credit cards are maxed out and overdue: there's no actually money in his bank account, because he's trying to pay less taxes, remember?

The vet wants his money and the dog's in pain. Next morning Chuck picks up the phone and calls 1-800-INEEDCASH.

Loan sharks step in

INEEDCASH mortgage brokers have branches in quite a few areas of Mobile.

"Sure, anyone can get a loan, it's 24-hour approval, if you're a homeowner, you're guaranteed, and the initial terms has a special introductory low interest rate," the nice lady at the other end of the line tells Chuck.

"Our representative will even come by your house with the paperwork. And if you want more than the $12,000, that's not a problem because you own your two-bedroom home. Why, others in the neighbourhood are going for $100,000."

Things are looking good for the sick dog.

"And if you want, you can even borrow up to 75 per cent of the value of your home, and you can use that extra funds to pay off your other credit cards, take a vacation and upgrade your vehicle," she says.

Chuck has hit the jackpot, and he can feel the Cancun sun beating down on his next already, and the 1994 Chevvy in the driveway was running pretty rough anyway. Might as well go for the whole thing. The agent will be around with the paper work at 8pm that evening.

Chuck tidies up the place a bit, cuts the grass and gets the tax returns out of the shoebox.

Sure enough, at 8pm, along comes the agent and it's all going pretty smoothly. Yes, the house is Chuck's, the money is for the dog and to consolidate his debts. Chuck has the income tax returns to show as proof of income, and the "Other Income Source" box is filled in, not too low because he doesn't want the agent to know everything, and not too high or the IRS might find out.

Next evening, Chuck has the loan for $75,000, the dog's looked after, and he credit cards are mostly paid off, because Hawaii was actually a little more expensive than the Mayan Riviera, and he wanted an SUV and the dealership also had a good finance plan.

The agent is also happy because he has a three per cent commission and INEEDCASH Inc. has reached its monthly lending quota.

Reality check

Now this is where things get a little complicated, because we're entering the world of high finance. I'll try and keep it simple, but there's a lot of terms that you and I and, let's face it, even the bankers might not fully get. Here goes:

INEEDCASH (Mobile) Inc is just one division of Firstneeds Capital of Atlanta, Georgia.

In all, Firstneeds Capital, manages $100 million in assets. And all the assets are insured.

Let me explain something: $100 million in assets doesn't actually mean that the company has $100 million sitting in its accounts at Big Regional Bank of America (BRBoA). No, all that means is that it is managing loans worth $100 million to all its INEEDCASH clients, a lot of whom are just like Chuck. So you see, a questionable loan is really an asset.

Oh, by the way: Chuck's $75,000 loan on the books is really worth $100,000 because he's going to be paying interest over the seven years' life of the loan. Don't forget, Chuck's house is only worth $100,000; so if he can't repay the loan, he's going to lose everything. Now, because Firstneeds Capital has $100 million in assets, it's a really good client of BRBoA.

Firstneeds can borrow large amounts from BRBoA at a cheap rate. Why? Well, because its loans are secured by its $100 million in assets: all of those houses with all of those loans. You see, at this level of banking, these Chucks loans and all others are all bundled together and called Asset-Backed Commercial Paper (ABCP).

ABCP is as good as money in the bank. It's a secured asset, as in secured against Chuck's home and all the other homes of all the people like Chuck who took out loans.

Now, I know what you're thinking: How could one bank be so stupid as to believe the ABCP was worth something?

This is where a little bit of magic comes in: The managers at BRBofA were actually quite smart. They got together and marketed their ABCP to different types of banks - those on Wall Street called "merchant banks."

Merchants banks are not the kind of places where Chuck could walk in and get a loan. No, these are for sophisticated people and governments and other banks and really rich investors who are smart with their money. Not like Chuck.

They deal with big national and international clients and because of a lack of regulation - they're smart enough to know the risks they're taking, so leave them alone - they are all linked together with other merchant banks and big insurers.

It's where safe money is lent and swapped and moved around, not just in America, but all around the world. And their top bankers get really big salaries and bonuses and shares to make sure they keep making money.

Okay, so BRBoA and its other regional banks want to get money from Wall Street merchant banks. But the guys on Wall Street aren't stupid: they know when assets aren't up to snuff.

So how can all that ABCP be used as an attractive asset on which to borrow more money?

Easy! Insure it. Get someone like AIG to insure it, making it a more valuable asset. That way Wall Street will lend against it. In the unlikely result the asset goes bad, there's an insurance policy on the money, and some else will pay.

After all, when Chuck borrowed money on the house, the insurance for INEEDCASH was the house itself.

And First Capital was insured also.

And so was BRBoA.

And there's nothing more secure than banks and insurance companies put together. Right, I mean Wall Street is built on that...

Pack up

That hound dog is at it again. This time, it wasn't a raccoon; it was a squirrel. Freddie went after it, through the backyard, tripped over a lawnmower and blew its hip out again. Another $8,000. And that's on top of the health bills for Chuck's bad back and the physiotherapy, meaning he hasn't worked as much as he'd like.

Then came the letter by registered mail.

"Dear Chuck, you haven't paid your loan, we're foreclosing. Pack up, move out. And we're suing you because the $75,000 loan is worth $100,000 with interest and the legal fees and insurance bills are actually mean you owe us $125,000."

INEEDCASH Inc. closed most of its branches around Mobile because Firstneeds Capital was in a spot of bother. Many of its clients, Chuck and the like, skipped and the real value of that $100 million in assets was really only worth $5 million because there were so many loans like Chuck's out there.

Big Regional Bank of America also had a problem. You see, its balancesheet wasn't nearly as healthy as it looked, with all that Asset Backed Commercial Paper on its books. Its stockholders didn't like it, so they punished the bank by selling off its stock.

When other shareholders at other banks got wind that all of those assets that were supposedly good weren't all that good, things started to really go wrong.

Asset-Backed Commercial Paper, it turns out, wasn't really worth the paper it was written on. Let's say that the stuff was really only worth five to ten cents at most for every dollar tied up in real terms. It's like me giving you a $100 dollar bill, but it's actually really only worth $5.

You'd be angry, right? You'd lose a lot of confidence in me? You wouldn't want to do business with me? Well, that's just what happened. Shareholders got angry, and they lost confidence in the banks and insurers, merchant banks and brokers. Everything is all tied up together.

But the world is a lot smaller place, right now.

My Blue Corner Bank in Dubai lends money to your Red Corner Bank. Red Corner Bank had invested in the international funds that were made up of these assets.

International Big Builder borrows funds for that new apartment building going up next to mine in Tecom. So too does the companies digging the holes, setting the forms, renting the cranes, buying the lumber. See where this is going?

Now here's the final kicker.

It's an election year in the United States.

For the past 25 years, starting back with Ronald Reagan, politicians have been loathe to interfere in the market. Some call it Reagonomics; others neo-liberalism; others, the free market economy.

Normally, free marketeers would be totally opposed to using taxpayers' money to prop up the economy, itself, never mind bailing our mortgage brokers or banks. The money is hard-earned, like Chuck makes on his declared income!

When the right cellphones in the right pockets begin to ring at the wrong time, there's a right problem. You just can't let big banks go down, and there's an election and votes to be won. Better do something.

A bailout: $700 billion to secure the assets of the big banks. (yep, those assets are the bad loans given to Chuck in the first place).

And the central banks have just cut interest rates. Why? To make it easier for banks to borrow money so that they can lend you and me more money so that we can buy stocks and invest in the companies that were caught up in this in the first place.

Makes sense, doesn't it?

Actually, if you ask me, and I'm no economist mind you, but wasn't money too easy to borrow in the first place? Isn't that what got us all into this mess in the first place?

And whatever happened to buying when you could afford to?

By the way, no animal was hurt in the writing of this and all characters are actually fictional.

The only hard fact is that my stock portfolio is now worth about 45 per cent less this week than it was last week. I'm on the next plane to Mobile looking for Chuck! I'll put the airfare on my credit card.

You just can't let big banks go down, and there's an election and votes to be won. Better do something.