When deciding upon a title for this piece I started thinking about those awful Hollywood hybrid horror movies where one classic monster – Freddie Kruger from Nightmare on Elm Street – is pitched against another – Jason Voorhees from Friday 13th. However my two seemingly innocent ‘adversaries’ are infinitely more scary and destructive than Alien vs Predator.
For example, in early September, shortly after the Northern Rock announced it needed additional funding from the Bank of England, the perception created by reports was that it was an institution in trouble and depositors felt that it was rational to stand in a 200-strong queue in the middle of their local high street.
The reality of the situation did not come until three days later, when Chancellor Alistair Darling appeared on the television, radio and in the press, guaranteeing that all their cash was safe. However, the damage was already done and it took repeated efforts over that weekend from all members of the Tripartite to restore the reality of confidence. One–nil to perception.
Relaxed controls
The reality of the US non-conforming market is that controls were relaxed and lending targets were driving the market rather than risk-reward, as there was the perception that the secondary investor market had an insatiable appetite for mortgage-backed securities. This has to be nothing more than a no-score draw.
Admittedly no one originally thought that the secondary, tertiary or mortgage-backed securities market would be quite so ‘sliced and diced’ to render the initial due diligence to such a diluted state that investor confidence should plummet.
An industry luminary put it to me very eloquently that ‘these guys thought they were buying prime sirloin steak but they actually ended up with a budget burger full of unmentionables and a tiny proportion of the good stuff’.
So global investors, even those that have their own mincing machine, shied away from the mortgage market as their perception of the market was dragged down, speculating over what other markets were bulking out their burgers. This has had a halo effect with AAA-rated prime securitisations being traded below par in the States.
So the investor perception is that all mortgage-backed securities are tainted, with the UK reality being that much more due diligence has been undertaken than across the pond in the last three years, impeccably so in the last three months. Perception two, reality nil.
Hindsight
If the only positive of war is invention then in the battle royal between perception and reality it has created the truism that ‘hindsight is a wonderful thing’. In Mervyn King’s first and only interview on the subject of the ‘credit crunch’ there was the best demonstration of this adage that I have ever seen.
Governor King owned up to the fact – or reality – that a major bank would have been minded to rescue the beloved Tyneside lender as long as it could secure a lending facility – not drawn – of £30 billion at Base Rate for three years.
King thought this appealing, but lacking the mandate, he turned to Darling, who disagreed. The reason? The perception that others may ask for it.
Now, the reality is that the Bank of England has lent Northern Rock more than £40 billion, in the hope that someone else may raise enough of other people’s money to pay it back. It’s a hat-trick to perception.
So undoubtedly perception is the stronger of the two opponents. Depressing? No, not really, because we are all in control of this monster. It is within our power to make it a destructive force or a force for good and prosperity.
Never has hard economic data sent a country into recession, you talk yourself into one – or out of one for that matter. I said this to a journalist and he said: “So it’s all the media’s fault, is it?”. No not at all, although it does have much influence.
It’s actually the millions of conversations we have every day that sets the mood of the market, the mood of the economy and the mood of investors. We need those investors back with a perception that the UK mortgage market is strong, sophisticated and very well regulated.
Until uncertainty is driven out of this market, it’s all of our jobs to tame the monster of ‘perception’ and talk up our market using all the positive features that are still around. At the very least, if you do catch yourself being negative, balance it out with a positive. Otherwise we’re all doomed.
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