Bad Loans
The vast majority of the losses suffered by Pyramid and the whole Farrow Group had been from ventures into commercial property, frequently lending aggressively to speculative projects. Doubtful loans were hidden in the books by various techniques, such as capitalizing fees and interest into the loan balance, changing the loan conditions, or even selling the property into a subsidiary company for a price that covered the debt. Staff were paid a commission on new lending business, which is proper enough, but also for improving bad loans, which gave them an incentive to rearrange the affairs of borrowers who were in default.
The Farrow Group also operated on much smaller interest rate margins (between rates received from borrowers and paid to depositors or wholesale lenders) than other finance groups. This was a deliberate strategy, set out by Bill Farrow in the group's 1986 annual report. He expected deregulation to force down what had traditionally been quite wide margins, to be replaced by an emphasis on fees for services. He was correct in that analysis, but in accepting small spreads the group was particularly vulnerable if bad loans reduced their effective interest income.
Read more about this topic: Pyramid Building Society
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