Bankers + Greedy Buyers = Innovation gone wrong

I have lived in the world of finance for most of my working life, and when I quit banking I could still look at it with a humorous bent, not something everyone would like. Ofcourse the oldest dictum remains that banks want to lend when you do not need their money and avoid you when you do need them. However, they also have an amazing panache' to invent financial products. So much so there was a phase of financial engineering that consumed Wall Street (and every other street where banks were) resulting in Interest Only securities and Principal only securities (splitting the revenues streams) and ofcourse hedge funds which were never really hedged.

The property boom of the past decade also brought out their own set of fun innovations. When the concept of selling 'off plan' apartments emerged the idea of buying a 'hole in the air' caught on. A well known journalist friend of mine told me of how he went to a dinner and found he and another guest were the only two people in the room who did not own 'a hole in the air'. The fact that everyone in the room proudly talked of this 'hole in the air' that each owned made his friend feel out of place and sure enough some months the journalists friend also proudly owned a hole in the air.

How did it all happen? Well you selected a 'developer' who was smart on marketing ideas and images and he sold you a hole in the air with one two or three bedrooms and views to die for. You then went to a banker who ofcourse had more money than Carter has pills, and the banker suggested he can lend you 90% of the value of the hole in the air. Ofcourse you asked him for the balance 10% as you didn't have it, and indeed the banker said no problem for the 90% we create a mortgage on the air where your home will be and for the balance 10% we give you a personal loan. Presto! were it not for our banker friends how would we own these lovely well designed holes in the air.

Then a few months later you met someone else and decided he needed your hole in the air badly enough to offer you more than you paid, and guess what? His banker was also willing to lend him in the same way to buy the hole in the air. Thus the cycle of trading holes in the air was born and happy bankers got their fat bonuses for the business they brought, and the developer got his hole in the air sold and the whole cycle of 'success' started. When the hole in the air never became anything but the hole in the air suddenly the notions of all these holes in the air on the balance sheets of banks became issue.

The moral of the story ofcourse a greedy banker plus a greedy buyer and a developer who does not know how to build a hole in the air do not all make good bedfellows...