The Banker's Dilemma

Posted by Mark on 11th Aug 2008

“Developers haven’t turned bad overnight” was an expression I heard twice in meetings with bankers last week.

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To be fair I think they were completely wrong; it’s just hard to disagree with them.

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“Many developers weren’t that good in the first place” is probably how I would have put it. 

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Many industry professionals will have laughed condescendingly as time after time clueless amateurs on Property Ladder were bailed out by a rising market, despite having bought in the wrong location, “over-spec'ed” and over spent. 

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One of the saddest effects of a prolonged housing slump might be seeing the back of Ms Beeny, especially as she has such a pleasant front; even if, as Mrs R regularly points out, she does have terrible hair.

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But aren’t many of the companies in trouble, guilty of exactly the same thing?

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As an industry we have all looked good in the soft focus of an ever improving market, and like the over flattering close ups of the old hags in Sex and the City, all it has done is covered up some deep and unattractive flaws in the market’s facade.

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It would be an interesting exercise to review a sample of both residential and commercial developments to see what the returns would have been, stripping out the effects of excessive gearing and the underlying market improvements.

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The banker’s predicament is not unlike the guy (or girl for that matter), that wakes up on a Sunday morning in an unusual bed with a throbbing hangover.  Unfortunately their arm is pinned to the sheets by a less than pulchritudinous lump that they would be less than happy to introduce to their parents, never mind their friends.

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Rather than Morgan’s “Prisoner’s Dilemma”, this is the Stumper's Dilemma.

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Do they take the cowards way out and gently try to remove the arm and so risk waking the monster? The potential result being a relationship, marriage kids, divorce recrimination and a premature, lonely, alcoholic death; or, take the short term pain and chew their own arm off?

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Acknowledging that there are some bad developers out there also means admitting that some credit decisions were pretty poor too, but far better that than continuing with relationships that frankly would never have got off the ground if they hadn’t had their beer goggles on.

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Until this happens, the weak won’t be allowed to go to the wall and one of the most important parts of capitalism, creative destruction, cannot help build better and more robust companies, and banks, going forward.

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