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Doom’s day

Have you heard? They are remaking the movie Temple of Doom but this time Alastair Darling is being cast in the role of Indiana Jones.

Yes, this is the latest insightful contribution from the Treasury select committee. What caused this protestation? The idea of starting the inevitable process of collapsing state-owned banks into each other, in this instance, Bradford & Bingley into Rock.

These institutions are insolvent, friendless, nowhere to go – in other words, worthless. The market cannot sustain 2007 capacity, lenders (and brokers at an increasing pace now) have to go to the wall, albeit in an orderly state-controlled fashion.

Sounds incredible even now but the odds look stacked in favour of a complete state-run mortgage and banking sector. Look at the mounting evidence, messages, hints coming from the Treasury, politicians, regulators, central bankers (the “authorities”).

Let’s start with the regulatory regime. Mortgages in or out of the RDR? Irrelevant because Mcob itself is now irrelevant. All the recent verdicts on the industry are saying the same – the current regime does not work. A damning indictment.

We (the authorities) do not trust the regulated mortgage advisory regime. We do not trust the regulated intermediary to give the right advice so we are going to tell them what their clients can and cannot have.

At the same time as not trusting the regulated intermediary to give the best advice to his client, the authorities do not trust lenders to “price for risk”. As Lord Turner said last week, “the theory of rational and self-correcting markets” does not always work. Lenders will price for the appropriate credit risk because the underlying credit and debt markets ensure that they do…er, no.

Just look at the giveaway sub-prime mortgage pricing of the likes of Merrill Lynch and Deutsche Bank in the UK before the market collapse in their pursuit of market share.

Regulatory capital requirements? Of course they are going to go up but this high-lights the very problem for the authorities. Make the require-ments too onerous and kiss goodbye to wholesale lenders whenever the debt market reopens.

Retail funding? As CML director general Michael Coogan rightly highlighted last week, the authorities again do not know what they want.

So the inevitable place this market gets to is state control. A handful of banks lending under Government guidelines (and therefore manageable to regulate), mortgage product criteria under Government guidelines (and therefore Mcob is redundant) and consumers not needing advice because there is only one type of mortgage (and therefore mortgage brokers are redundant).

Perhaps the TSC was right – the mortgage market is about to be cast in Temple of Doom.


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