Jingle mail landing is not a happy sound

Apr 4 2008 by Ian Shepherdson, The Journal

DURING a meeting at a major New York bank last week, it was hard not to be drawn to the words someone had scrawled on the office whiteboard, which was otherwise blank.

It said: “Long-term plan?” The answer, judging by the mood I encountered on a 10-day jaunt to the heart of financial darkness, is “survival”.

No-one working in the financial markets today has ever experienced a situation like this, where the people with cash-pension funds, insurance companies and other major investors, are too scared to put that money on deposit with banks.

Instead, they have been buying very short-term government bonds, which pay a much lower rate of interest but are safe.

The return of capital is currently deemed more important than the return on capital.

The cash flow from the investing institutions is the oil in the financial market engine. Even if all the individual parts of an engine are sound, it cannot run for long if the oil is draining away.

Eventually it will seize up, and parts of it will be damaged.

A competent mechanic ought to be able to repair it, but he won’t be able to make it run again without fresh oil.

The mechanics at the US Federal Reserve have been hard at work, attempting to fix the broken pieces of the system, so the fear that another major bank could go bust has faded. But that has not yet been enough to persuade investors that the engine is sound.

The good news is that this situation cannot last forever, because pension funds and the like have cash inflows on a daily basis, and sooner or later they will seek better returns than can be achieved in the short-term government bond market. The oil will flow back into the engine.

This process will take time, though, and until a semblance of normality is restored, the troubles in the markets will directly affect anyone looking to move home or re-mortgage their existing property.

Lenders price their mortgage rates against the cost of the money they raise in the markets, and that cost has risen by nearly 0.5% over the past two months, even though the Bank of England has kept base rates steady.

When everyone is scrambling over the same, diminished pool of cash, its cost rises.

At the same time, increasing fears of a sustained drop in house prices are making lenders very nervous about borrowers with small deposits, having noted the American experience when house prices fall sharply.

“Jingle mail” is the term for an envelope containing house keys, returned by the borrower when he decides to walk away from a mortgage worth far more than the house.

It’s not a happy sound.

Ian Shepherdson is a former City and Wall Street economist now living in Newcastle