Authors like Gillian Tett (Fool's Gold) and Robert Peston (Who Runs Britain?) try to explain this question but can assume the reader knows more than they do know about the topic. I read Gillian's article (see previous blog) but had more questions than answers. I have dropped her an email so let's see if she can provide the answers.
As you know banks lend money and sometimes borrowers do not repay the loan. Business failure, illness, redundancy etc may be the cause of this failure to repay. So, being conservative people they put aside some money to cover these defaults. Technically its called "Risk Management". Then in in 1990's a group of young bankers come up with a way of reducing the amount the bank needed to put aside but maintained or even reduced the risk. This is where it all went wrong. You may like to watch this short cartoon video to understand the rest.
The Credit Crunch Cartoon
What I would lke to know from Gillian is:
a) What percentage did banker's in the UK put aside before the introduction of this new method (Credit Derivatives)?
b) What was our FSA (Financial Services Authority) doing whilst all this was going on?
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