Sunday, October 19, 2008

Explaining the credit crunch

A number of readers have written or emailed asking for a clear explanation of why the world economy is in its current parlous state, what they can do about it, and whether it would be a good idea to invest their life savings in a buy-to-let apartment in Greenland.

Frankly, in the immortal words of Patrick Moore, we just don't know. But that won't stop us in our mission to explain. At no small expense we have retained the services of respected investment analyst George Imallright- Jacques, and here, for the benefit of that dwindling group of readers who still have more money than sense, is his Bath Chronicle Cut-Out-And-Keep User Friendly Guide to Surviving the Credit Crunch and Global Banking Crisis.

Q: What is a hedge fund?

A: Suppose that Bank A is in debt to the tune of £1bn, while Bank B owes £2bn. This means that Bank A is £1bn richer than Bank B, and thus acquires what we bankers call leverage, which it can use to buy long-date Government bonds, offsetting the cost by liquidating its existing assets in Bank C and placing them on the Far East currency markets.

At this point the hedge fund facilitates the arbitrage on the operating surplus and recharges it to Bank B, making its own profit on the transaction by capitalising on the gearing ratio between short-term fluctuations in the inter-bank lending rate.

This of course is only a simple example, but it goes a long way towards explaining why some people are very rich and you aren't.

Q: If all you bankers are so clever, why are you broke?

A: It's not us bankers that are up the creek, it's our banks. Individual staff members have continued to enjoy large bonuses, all-expenses- paid skiing holidays and champagne hospitality at premier sporting events throughout the current crisis. There's no point in being envious, it's just the way things are.

Q: Why has no one been round to empty the bins this week?

A: The stagnation of liquidity in the local government sector is an indirect result of the freezing of Icelandic investment opportunities.

Q: Isn't that just a load of hot air?

A: No. Have a Glacier Mint.

Q: So what is a hedge fund? Really?

A: How simple do we have to make it? Look, everyone borrows from everyone else. Money makes the world go round. All's well that ends well. Too many cooks spoil the broth. End of story.

Q: I'm a 35-year-old man with a £100,000 mortgage. With property values going through the floor, what steps should I be taking to ensure I don't fall into the negative equity trap?

A: The National Lottery isn't such a bad punt. Alternatively, if you have a soon-to-mature Cash ISA or a woolly sock filled with £1 coins hidden away under the mattress, you might consider purchasing a stake in a Personal Toxic Debt Recovery Fund, which should see a higher return in direct proportion to the fall in value of your house. But this is a long-term option and will be tied firmly to the Bank of England base rate.

Q: What does that mean in layman's terms?

A: It means it might work or it might not. Listen, mate, there aren't any laymen in the financial sector. As soon as you open your first Kiddisave Account with your friendly high street bank you're swimming with the sharks. And don't even think about dabbling in property unless you've got the cunning of a sewer rat and the killer instinct of a wolverine.

Q: I bet you don't sleep much with this crisis on your conscience.

A: Maybe not, but I am solvent.

Q: You don't actually know what a hedge fund is, do you?

A: Not telling.

The value of your investments may go up or down as result of following or not following the advice in this article, either fully or in part. Can't be certain, really. Anything could happen in the next couple of weeks. You should consult your financial adviser before taking any decision which might affect your future prosperity. You already have? Oh.

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