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Money for Nothing

Updated Wednesday, 26th November 2008

Transcript of the BBC TWO Credit Crash Britain programme.

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MAX FLINT

The global financial crisis has shaken our economy to its foundations, and all across Britain we’re feeling the impact.

Bills are rising fast, jobs are disappearing and house prices are falling – so how did we get into this mess.

Tonight in the second part of our investigation into Credit Crash Britain, I’ll be finding out how the borrowing boom came to an end, why the credit’s dried up and asking can we survive without easy money?

As our debts reach record levels, we’re now counting the cost of a decade of laid back lending.

CHRIS GILES

How could we have been so stupid, how could we have not realised that some of this lending was just dumb and it was always going to go wrong?

MAX FLINT

Now the banks are hoarding their money – and years of high living have come to an end.

MERVYN KING

For the time being at least the nice decade is behind us.

SANDY CHEN

I think when the historians look back they will see a society whose lifestyle was subsidised by money that was far too cheap.

MAX FLINT

As mortgage and loan defaults soar, the future for many of us looks bleak.

ANNE INGOLDSBY

We don’t have a life. We have no money to pay for things. We can’t go out, we live on basic food, rations we have no money to spend.

MAX FLINT

As the banks stop lending, how will you cope now the cheap credit has dried up?

News headlines

Meltdown on the markets and the crisis is far from over

Billions lost, banks collapsing and government bail outs – in the last few weeks, not just our economy, but the whole system of global capital has been shaken to its foundations.

LEHMAN WORKER

It’s like death, just a massive earthquake

NEWS HEADLINES

Market have fallen here and around the world…

ROBERT PESTON

In the last 24 hours a sharp fall on Wall Street led to declines in Asia and then into Europe

MAX FLINT

The warning signs of impending disaster started 15 months ago, when the banks tried to stem huge losses on the U.S. housing market. The resulting credit crunch claimed its first casualty – mortgage giant Northern Rock.

The aftershocks of the financial earthquake are still being felt across the world – and some of the biggest names in banking have crumbled.

Over the last few weeks, the future of HBOS, the mortgage market leader, has been hanging in the balance. As chaos spreads through the financial system, one thing is certain - the credit crunch promises to have an even bigger impact on all our lives.

Faced with chaos in the financial system, the banks are now more worried than ever about borrowing. For many of us, that means the end of the decade long boom in cheap and easy credit. For some though, it’s not just the end of an era, but a way of life.

Unable to keep up with his debt repayments, former marketing executive Bruce Eyre is finally admitting defeat. His home – along with 45,000 others this year - is about to be repossessed by the bank.

Before he hands over the keys, it’s time for one final look round.

BRUCE EYRE

The garden, yes, we will miss the garden. The property, bricks and mortar you can move on from that but I think it’s the time spent growing these things that we are going to miss.

MAX FLINT
As well as falling into arrears on his mortgage, Bruce has amassed over 60,000 pounds of credit card debts. He’s now decided to start afresh - by declaring himself bankrupt.

BRUCE EYRE

We’ve now gone on to completely different way of life one which is taking a bit of getting used to it we have to have the money in your hand before you actually get something now we’ve moved onto the stage where if you don’t have the money we can’t have it.

MAX FLINT

Since the credit crunch began, interest payments on mortgages, loans and credit cards have soared by 94 billion pounds. As a result, every five minutes someone is going bankrupt.

As personal insolvencies rise, business is booming for auction houses.

Here in Nottingham, many of the lots I saw going under the hammer were from bankruptcies - and one promised to be the bargain of the day.

So what’s the story behind this?

ADAM

Again this is another personal bankruptcy from a lady who was only too willing to give us this vehicle she wanted end a chapter in her life

MAX FLINT

New this is a 50 -55 thousand car.

ADAM

Correct however it may only generate 13 or 14 thousand there’s no reserve it will have to sell and all the proceeds will go to settling that particular case.

MAX FLINT

It’s got a smashed screen do most things come to you in a bad condition because people don’t have the money?

ADAM

They’ve been trying everything they can to pay off their creditors and you will find that the tyres may be worn because they have no money to replace these items that do need replacing and this is typical of bankrupt items.

MAX FLINT

Its not just assets from bankruptcies being auctioned today – there’s also the fallout from business insolvencies, and the latest gadgets that high street retailers just can’t flog.

But just how much interest will the day’s star lot attract?

Actuality – Porsche auction

ADAM

55k car – 10 to start the bidding?

This is going to sell today – no reserve 5 for the Porsche. 5,000 – 6 I have 7- 8

10,000 are we all finished? I’ll take 200…10,200.

MAX FLINT

Somebody went bankrupt and has sold this car so in a way you’re profiting out of someone going to bankrupt

ADAM

Unfortunately that’s what happened with the credit crunch a lot of companies go bankrupt now that’s why it’s a good time for buyers now

MAX FLINT

But for you, you’re saving money in the credit crunch

ADAM

Exactly. Lucky me but someone unlucky

Thank you very much and goodbye

MAX FLINT

For some, the credit crunch may be a time for killer deals, but many more are struggling beneath the burden of borrowing.

This year, consumer debt topped 1.4 trillion pounds –more than the entire GDP of the country and the highest in Europe.

So, how did we become so addicted to credit? To find out, we need to turn back the clock.

In the old days to get a loan to get some money, you had to use your shoe leather and come and visit banks in the high street – of course all that’s changed because this bank is now boozer.

Hi Chris you alright? Can I have a pint of bitter?

Today, the atmosphere may be relaxed – but when this place was a bank, an appointment to visit your manager could be a terrifying experience.

So what qualifications would I have needed to get my hands on a loan?

CHRIS GILES

You'd have to know your bank manager pretty well. You'd certainly have to have a record of the savings at that bank so that he, and it almost certainly would be a he, would understand exactly your income and your outgoings and your circumstances.

BANK MANAGER

If you could tell me a few more details to put me fully in the picture

CHRIS GILES

He might want to give you more time to show how prudent and not profligate you were and you'd have to go and persuade him that you were the sort of person that deserved a mortgage.

BANK MANAGER

So we shall be wanting 20,000 pounds pretty quickly?

MAX FLINT

In the 1980s, many banking regulations were swept away, and with them went the bank manager’s conservative approach to lending.

CHRIS GILES

Suddenly you could go to any bank - you wouldn't have to necessarily have your savings there if you wanted a, a loan or a mortgage because the market was much, much more competitive.

MAX FLINT

As traditional bank managers shed their stuffy image, many building societies were demutualised – changing from places to stash your savings, to PLCs driven by profit.

At the same time the credit card industry was going through a revolution of its own.

That’s alright money I’ve got it.

Market leaders like Barclaycard and Access sold themselves as a convenient form of credit when abroad.

They seem to be getting out of their depth. Access your flexible friend.

GORDON MAW

A credit card was really your get of jail card. It was in case of emergencies. It was there if you're - if you're on holiday abroad, um, it was also a safe way to buy things.

MAX FLINT

In the mid 90s, American companies like Capital One and MBNA invaded Britain, determined to change our attitude to plastic.

GORDON MAW

The US companies really challenged a lot of what uh, existed in the UK credit card market at the time EDIT there were things like annual fees in the UK, which became under pressure also they changed the practice in terms of the way these cards were marketed and they were a lot more aggressive in terms of um, direct mail

MAX FLINT

Don’t worry I used our new Capital One card.

The Americans targeted a new kind of borrower – the low risk revolver.

GORDON MAW

A low risk revolver is really a credit card company's ideal customer and really that means people who are prepared to have a balance on their credit card, and for a long period of time but pay back perhaps the minimum. So they never default but they're always earning interest for the credit card company.

MAX FLINT

By 2000, fuelled by innovations like the O% balance transfer, borrowing on plastic had surged to a record 81 billion pounds.

Bruce Eyre from Wiltshire was one of the millions targeted by credit card companies trying to expand their market share.

The credit card companies found you quite attractive then

didn't they? They kept on offering you cards.

BRUCE EYRE

Yes definitely, I applied for four credit cards and maxed them

out.

MAX FLINT

Maxed out - so you spent them to their limit?

BRUCE EYRE

Yes maxing out is just a term where you spend up to the maximum amount of money that you're allowed on a specific card and then you go on to the next one do the next one.

MAX FLINT

At the time did that seem daft

BRUCE EYRE

Given the credit that was advanced to me on the basis that the property that I was living in at the time was increasing in value continuously I thought well the worst comes to the worst I'll sell the property get rid of the debts.

MAX FLINT

By the beginning of the decade, property prices were rising by 30% a year – keeping Bruce and millions of others afloat.

Anne Ingoldsby and Nick Haywood from Worthing were also swept along by the credit card craze. When Anne first started using plastic, she was a single mother living on income support.

ANNE INGOLDSBY

It wasn’t enough to pay for everything that you needed. The food, nappies that you need and it was very very hard, so the credit cards were very useful.

MAX FLINT

Despite being on benefits, Anne was given more cards – and her debts began to build.

ANNE INGOLDSBY

I had no problem getting credit. Whenever I came to the maximum they would kindly send me a letter saying they have increased the limit. I never thought I would have to use it but unfortunately you do.

MAX FLINT

Faced with 4,000 pounds worth of credit card debts, Anne took out a loan to reduce her interest payments.

ANNE INGOLDSBY

When I took out the consolidated loan I did pay off all my credit cards and that felt really great. But then life gets in the way and you start using the cards. You just don’t have enough money when you’re on income support to survive.

MAX FLINT

Like many others, Anne was no longer using her cards as a stop gap, but as a way of making ends meet.

GORDON MAW

The design of the credit card product had changed essentially to become a flexible um, loan product, rather than um, a way of paying for things that you could already afford. It was a way of paying for things that you couldn't actually afford.

MAX FLINT

Britain was falling in love with borrowing – but for the Bank of England, concern about spiralling debt was overtaken by two events of global significance.

9/11 and the bursting of the dot com bubble raised fears of a major economic depression. To ward of this threat, the Bank took decisive action.

HUW EDWARDS

The Bank of England lowers interest rates to their lowest level for nearly half a century. The new governor has made a dramatic start. The base rate is now 3 ½ %.

CHRIS GILES

For customers it did something that was quite remarkable, it made borrowing money, particularly for mortgages, extremely cheap. And so you saw the volume of lending rise very, very quickly. And banks – because they were competitive in a very competitive industry, were more than happy to meet this demand.

MAX FLINT

By making borrowing cheaper and cheaper, the Bank of England hoped to avoid a recession – but at the risk of unleashing forces beyond its control.

EDDIE GEORGE

Confronted with what we saw we knew we were having to stimulate consumer spending. We knew that we had pushed it up to levels that could not possibly be sustained. That pushed up house prices and increased household debt. My legacy to my successors has been sort this out.

MAX FLINT

As interest rates plummeted, credit card companies dreamt up new devices to get us to spend on the ‘never never’.

GORDON MAW

We saw um, credit card cheques evolving in this period, um, cash back offers, um, new reward schemes as well. And they were all really designed um, to do the same thing which is to encourage you to use their card and to spend more on that card.

MAX FLINT

As the banks and credit card companies so hard lend money to us at ever cheaper rates, it seemed almost rude not to take up the invitation. Buoyed by rising house prices and armed with a little piece of plastic, Britain went on a bit of a splurge.

During this period, we splashed out 38 billion pounds on fashion items, and spending on long haul holidays rose by an astonishing 41% to 8 billion pounds.

By 2005, Britain’s craving for cheap credit had become an addiction.

Radio News Archive

BBC Radio 4 - the Bank of England has warned that rising credit card debt could be a threat to the economy. There’s already been a sharp increase in the rate at which lenders are writing off consumer debt.

MAX FLINT

Despite already consolidating her debts, Anne Ingoldsby was still spending more on her credit cards. Her new partner Nick realised she was in trouble.

NICK HAYWOOD

When the phone would ring she would always dash to answer the phone and then end up hanging up. It was obviously people phoning about the debt she was in.

ANNE INGOLDSBY

It never feels good owing money. When the letters came through the door I felt physically sick. I opened them, I cried. I didn’t know what to do, became very depressed

MAX FLINT

To help make ends meet, Nick started borrowing on credit cards. Before long, he was in as much debt as Anne.

NICK HAYWOOD

It was just unbelievable how quickly these credit card people increased your limits (EDIT) When it’s a £1000 you can cope with it, but when it gets up to £10,000 on this card and £10,000 on that card and before you know where you are your paying off all the interest, the minimum payments and every month it’s going up and you’re not spending any money on it.

MAX FLINT

For Bruce Eyre, rising house prices provided an excuse to take on more debt. A holiday to South Africa costing 8,000 pounds was paid for with plastic.

BRUCE EYRE

The holidays that we've had over that period is where a substantial amount of the credit card money went. It was the only way that we could pay it but it was there, money was easy to get hold of to pay for these holidays.

MAX FLINT

Did you really not think about it when you handed over the credit card for various purchases? Did you not think that's not real, that's not my money?

BRUCE EYRE

No because the culture of the credit card availability is such that they virtually throw the money at you, and if they're prepared to do it then they should be prepared for you to spend it. I mean that's the way that if if the that's the wrong way to look at it, but it's the way that the majority of people who've got credit cards and have got a lot of credit cards look at it. Well if somebody's going to give us the money we'll spend it.

MAX FLINT

After remortgaging his house, Bruce took out loans to pay off his credit cards – but his debts escalated.

So how much do you think you borrowed on credit cards in total?

BRUCE EYRE

Total owed 62,000 pounds on the credit cards and that was in addition to 100k mortgage and 120,000 on the secured loan – so a total of 272,000.

MAX FLINT

Who do you blame? Do you blame yourself or do you blame

the credit card companies?

BRUCE EYRE

Well I can't blame the credit card companies for spending the money cos I actually did that so I would put 70% of the blame on my shoulders. However, the ease with which I was able to get that credit made my situation worse as I went along. So I would 30% of the blame on them and 70% of the blame on myself.

MAX FLINT

Despite growing alarm about debt levels, in 2005 the Bank of England cut interest rates yet again.

Archive News

Faced with evidence of a slowdown in the economy the Bank reduced rates by ¼ of 1% to 4.5%.

MAX FLINT

Cutting the borrowing rate helped to boost the flagging economy – and encouraged a new wave of lending by the banks.

CHRIS GILES

So uh in this period, this when you, the period you could say was maybe the nutty lending period. Where because their books, because house prices had risen so far - most of the loans on their books were absolutely rock solid. So at the, at the extremes they could have some really quite silly lending offering extremely high loans of up to a hundred and twenty-five percent.

MAX FLINT

For the high rollers of banking, it seemed low interest rates and rising property prices were here to stay – and they began to take bigger risks.

Mortgages were repackaged as financial products and sold on – but when home owners in the U.S. defaulted on the original loans, the house of cards tumbled. By the summer of 2007 analysts realised the game was up.

SANDY CHAN

At the beginning of August we put out a note that was called The End of the World as we Have Known It. Well the title was pretty self explanatory. And what had just happened was just a lot of that structure that had been feeding banks for the past ten years really had begun to really just stop.

MAX FLINT

Frightened of their exposure to huge losses, the banks froze. The whole system of global finance collapsed – and a new phrase was born.

Evan Davies Archive

As we barely know which banks are affected and no-one wants to buy loans anymore, the era of easy lending over – it’s known as a credit crunch.

MAX FLINT

Over the last year, banks and other financial institutions have been hoarding their cash, reluctant to lend to each other, and to us as well. Not only are they cagey about new borrowing – they’re also calling in old debts as well.

With over 50,000 pounds owed on loans and credit cards, Anne and Nick have turned to their local Citizen’s Advice Bureau for help. They’ve set up a plan to make their repayments more affordable. However, one lender isn’t happy about the arrangement.

ANNE INGOLDSBY

OK well we set this plan up about three months ago I believe and most of the creditors have been fine not a problem at all but one creditor is hassling us and really we’ve come back to you to find out what we do next

DAVID CHAPMAN

and what sort of things are they saying to you?

ANNE INGOLDSBY

well now we’re getting letters, knocking on the door, bailiff type thing and that’s very worrying and concerning

DAVID CHAPMAN

this is something which is happening more and more as more people find they are getting into debt and obviously the problems on the banks are increasing they’re becoming much harsher and fiercer in trying to persuade people to pay up their debts they know they cant get back much through the courts they know in order to get some money back they will threaten you at this stage

MAX FLINT

Under their debt plan, most of Anne and Nick’s disposable income is going to their creditors – leaving them with just 100 pounds a month.

ANNE INGOLDSBY

We don’t have a life. We can’t spend any money. If anything goes wrong or breaks we have problems. We have no money to pay for things.

For them and the 600,000 other people who’ve signed up for debt management plans, life without access to easy money has changed dramatically.

But what if you’re still looking for a loan? To find out how the credit crunch has changed the lending landscape, I’ve enlisted the help of three young borrowers.

Solicitor Natalie Berman has four credit cards which she’s used to fund holidays - and a taste for designer fashion.

Her sister Verity and friend Lydia are both saving for a deposit for a mortgage.

Money expert Michelle Slade has studied our group’s personal finances - and she’s about to reveal how the credit crunch will impact on their lives.

MICHELLE SLADES

Mortgage rates have gone sky high, credit cards have gone up. Loan rates are at their highest rate in seven years. So consumers just need to make sure that they shop around to get the best deals etc.

MAX FLINT

Michelle’s first tip is for Natalie. She recently consolidated her debts into one loan – but she hasn’t cancelled her credit cards - and that could mean being turned down for other loans.

MICHELLE SLADES

Lenders have really tightened up on the credit scoring now they’re really looking at who they’re lending to so they’re cherry picking the best customers and if you’ve got existing lines of credit open to you they’d rather you use those than give you further lines of credit.

MAX FLINT

To make matters worse, Natalie could even be penalised for not spending on her cards.

MICHELLE SLADES

some of the lenders now bringing in fees for low usage so even if you don’t use it you may be stung with 20 pound fee so you know worth cancelling them

MAX FLINT

However, for these young women, it’s the mortgage market where the credit crunch hits home – the amount needed for a deposit has risen from 10% to an average of 20%.

How much more do you need to save on your deposit now?

LYDIA

Well I guess at least 10 grand more

MAX FLINT

For Verity, the youngest member of the group, the end of easy money means more years of living with mum and dad.

VERITY

Well I’m just using it as an opportunity to save up some substantial savings to put towards gigantic deposit I have to achieve so I have to be realistic, 20% is what I’m looking for so I do have to stay home and be a bit more sensible these days

MAX FLINT

The banks may have raised the bar, but at least these young women can still hope to borrow.

For a growing number of people, however, the credit options are running out.

Over the past six months, two million personal loan applications have been turned down, three million credit card applications have been rejected – banks are just keeping their money locked up. For some people, borrowing isn’t just more expensive – it’s impossible.

So, where do you go if you need credit but the high street lenders have shut the safe door?

Jo Manning may be able to help. She’s one of around 11,000 agents working for Britain’s biggest doorstep lender, Provident Financial.

While many high street banks teeter on the verge of collapse, the boss of Provident says its developed a winning formula.

CHRIS GILLESPIE

Our business model is largely unchanged for the last 125 years CUT what we provide is small sums of credit that are provided by an agent that will call on you at home and then will come back on a weekly basis to collect the repayments.

MAX FLINT

Today, Jo is visiting Gaynor Davies, one of her regular customers.

She’s taken out a 1500 pound loan to help pay for her wedding. The loan repayments are 45 pounds a week for just over a year.

JO MANNING

Alright how much you paying this week?

GAYNOR

The full amount please.

MAX FLINT

That’s a total of 2520 pounds – or an equivalent APR of 56%.

GAYNOR

I was going to ask you actually Jo, if its ok when I’ve nearly paid off the wedding loan, if Provident would consider borrowing some more round about Christmas.

JO MANNING

Let me know nearer the time when you want it we’ve have a look at the book and go from there but I can’t see a problem with that.

See you next week.

MAX FLINT

Provident says its premiums reflect the costs involved in operating a face to face service for its 1.7 million customers – many of whom have low incomes or bad credit scores.

CHRIS GILLESPIE

if you feel your circumstances are changing you can have a conversation with your agent and in that conversation come to arrangement to miss payments for a while and the important thing is if that happens there are no late payments or other fees associated with perhaps dropping into arrears or making reduced payments.

MAX FLINT

However, some critics say borrowers should be wary of this form of credit.

JOHN GATHERGOOD

Some of the concerns with doorstep lending is that it is quite expensive for households the most expensive form of credit consumers might not realise they can go to somewhere like a credit union and get a very similar deal with a similar credit history for maybe 1/10 of the cost.

MAX FLINT

Back in Devon, Bruce Eyre is looking to another credit crunch growth industry to re-launch his career – he’s now a debt advisor.

Hello Bruce!

With over a quarter of a million pounds owed to his creditors, he says he’s well qualified.

BRUCE EYRE

I've got the empathy with people You actually see it on their faces when you say well actually I've done that, or I'm going through that. They go oh you know there is somebody else out there who's in the same situation as me.

MAX FLINT

There’ll be no shortage of people for Bruce to comfort – another 40,000 have gone bankrupt this year, and home repossessions are running at over 100 per day.

The continuing financial crisis and the credit crunch have signalled an end to a decade of laid back lending – years which have redefined our attitude to borrowing.

GORDON MAW

I think the credit card companies created um, the kind of products that - that made us feel good about debt in fact, you know, you down to the pub and people talk about how maxed out their credit cards are now. There's no shame in it at all now.

MAX FLINT

As the credit dries up, many are now adjusting to life without easy money. Analysts who’ve studied our spending habits say that means a reality check.

SANDY CHEN

What we discovered was for the bottom forty per cent of the UK households, um, had, they had negative cash flows, i.e.

They didn't make their ends meet. Now a year ago that wasn't a problem because you could get that extra credit card or you get that one and thirty per cent loan to value mortgage, um, easily. You can’t do either of those things nowadays.

MAX FLINT

The banks are now counting their losses – but we’re all paying the price for the risks they took. Living on borrowed money may soon be a thing of the past.

CHRIS GILES

If you're at all risky you're going to find it very hard to get credit. Because the banks are now going to be saying 'the last thing I want on my books is another risky person who might default if there's anything dodgy in your credit history, if you're young, if you need to borrow a lot of money it's actually going to be your income that will determine your spending in the future you will not find so easy to go out and have credit and go and spend and go and party without having the income behind that.

MAX FLINT
Next week, I’ll be investigating the property market slump.

Repossessions are rising, mortgages are getting more expensive, so is it really worth buying our own home?

We’ve done the sums to find out…

MERRYN

I suspect it’ll surprise quite a lot of people.

MAX FLINT

Are bricks and mortar still worth investing in, or is renting the way forward? Find out next week.

 

This episode of Credit Crash Britain was first broadcast on Thursday 6th November 2008 on BBC TWO.

 

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