Treasury's Rock?
A slightly odd from Northern Rock this morning about how the expressions of interest in saving it - from the likes of Virgin - are all terribly preliminary and uncertain. Whoever drafted it has a Masters in the use of the conditional tense.
What does it mean? Err. Well, I mentally paraphrased it as "the share price is too high". Ouch.
The point is, and to give credit where it's due, Northern Rock would not be in business and hopeful of recovering from its recent spot of bother if it were not for the Bank of England and the Treasury.
Without the £13bn and rising of emergency loans made by the Bank and underwritten by the Treasury, Northern Rock's liquidity crisis would by now have become a solvency crisis: it would have gone bust.
And in the absence of the 100% insurance provided to all Northern Rock retail depositors by the Treasury, the bank would find it hard to raise a bean in new money even now.
The Treasury is being paid for all this support - though its refusal to disclose how much makes me fear that it is not being paid enough.
Also, the putative bidders for Northern Rock - Virgin, Flowers, Cerberus - would not be remotely interested in doing a deal if the government had not stemmed the Rock's crumbling by gluing it together with public money.
So what bemuses me is why the Treasury is not taking equity in the Rock. The hard truth is that the Rock's shares would be worth a big fat zero without the support of taxpayers' money.
That's our money, to state the obvious. And there is quite a powerful argument that we should share in any upside in the value of Northern Rock, since it’s our readies that to a large extent are generating that upside.
If, for example, Virgin and its well-heeled friends were proposing to acquire all of Northern Rock's existing shares at a decent premium and instantaneously terminate all public support that would be one thing. But they aren't.
The Virgin consortium simply wants to heavily dilute those long-suffering holders by buying a vast quantity of new shares for the cheapest price the Rock's board would tolerate and repay the Bank of England loans over time.
The risk of converting the Rock into Virgin Money would be shared with the current shareholders, and with taxpayers, unless and until all those emergency loans can be repaid and that state insurance is cancelled.
Some might feel it would be simpler and cleaner for the Treasury to be the bidder. But since it is queasy about carrying out an explicit nationalisation, it should perhaps take some of the equity action as and when a takeover takes place.
If the public-sector financial support remains in place for weeks or months after a takeover (as it will have to, as the sine qua non of a deal, whatever the Treasury may hope), the quid pro quo should surely be an option or warrant over new Rock shares for the Exchequer.
If we are paying for the elaborate care that should eventually take the Rock out of intensive care, shouldn't we get some of the spoils?
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Fair point Robert. On the other hand, does the treasury REALLY want to take part in a business whose model depends on short term acces to capital markets? Probably in todays context a very shaky business model. On the other hand is not The BOE getting some money back already trough interest charges on the loans?
All of us Northern Rock savers who have stayed loyal to the company, do we get some kind of loyality bonus coming our way??
Perhaps I don't appreciate all the nuances of high finance but if it has taken almost 20 years to finally secure £16 billion for the CrossRail Project shouldn't we be worried one rickety former building society has managed to absorb that amount in public hand-outs in only 5 weeks?
Is it just Northern Rock the government is bailing out or is it secretly attempting to shore up the whole sub-prime property market?
The BOE was forced to bail out the Northern Rock because of the failings of the SFA in the proper regulation of the mortgage market. Anyone with a slight interest in the mortgage arena knew that banks were gorging themselves on lending to people with poor credit histories. Now it has to reduce its exposure so the best way is to have a firesale. The markets should have been left to deal with their own mistakes. So the problem remains.
Why should the treasury make money out of media scaremongering? Why should the treasury be speculating on private companies?
The only reason they are involved is because the media yelled fire in a crowded market place then stoked up the panic by fanning the flames that weren't there.
Whilst the treasury continues to stand theoretically exposed as securing the deposits even you, Mr Peston,must concede by now that the "crisis" was never there.
As for some handout for loyal borrowers as one commenter has requested. Where would that come from? Given that shareholding was dented by the media fire-sale, I suggest asking "fleet street" for a whip-round.
"The hard truth is that the Rock's shares would be worth a big fat zero without the support of taxpayers' money."
Eh? No they wouldn't. Someone with a head for figures would pour over the books and buy the company for a song. The difference is the price would be marginally lower, but not zero.
I'm sorry... You want to nationalise the bank? You want to get the government involved in the banking sector even more than it is? I suppose it's one way to make Monetary Reform an issue people should be talking about.
NR are paying interest on 13 billion of loans. Money which was conjured out of thin air by the BoE, how can they lose?
The Treasury support is virtual. They haven't been called on to actually spend anything to shore up NR customers.
If virgin buy in does this mean my shares will be worthless am I better to sell now or just sit on them for a few years ? any advice would be appreciated
Robert Peston has got this completely the wrong way round - maybe he is being provocative. B of E failed in its responsibility to keep the banking market flowing. If a business model is risky because it depends on banks having confidence in the banking business then there are a lot of risky businesses out there. I agree that NR amongst others have been unwisely extending credit boundaries and Bof E should also have taken a stand there in the interests of the home loans market and house price growth. That is where the risk in NR policy lay, not in the solvency of the bank. Remember that Lloyds Bank also would have been unable to raise the funds to purchase NR due to the illiquid state of the market and Lloyds surely were not a credit risk or dodgy business model. A bit of early direction from the Treasury would not have gone amiss during the past months. Perhaps the then Chancellor was too busy arranging his move next door so if T. Blair had gone earlier this might not have happened, so blame it on him.
A loyalty bonus from Northern Rock...
at the moment I reckon best we would
from our distiguised board of directors is a biro!!!
> there is quite a powerful argument
> that we should share in any upside
> in the value of Northern Rock,
> since it’s our readies that to a
> large extent are generating
> that upside.
Who’s spreading this idea that us taxpayers won’t get our share? And who in government would be fool enough to bail out a firm without getting a good of the upside?
I'd be flabbergasted if a
politician-type tried to stiff me out
of my takings on this. I want a tax
break out of it, or a least 5 new
hospitals with enough cash left over
to run them for 5 years. So let’s tuck in, eh? We don't want these capies playing us for chumps.
I do not see why Richard 'the vulture' Branson or anybody else should get their hands on this business, cross-subsidised by the biggest-mug-of-all-time, the long suffering English taxpayer.
I think the business should now be fully taken over by the BoE and gradually run down, returning whatever is possible to the shareholders.
Meanwhile, NR depositors should 'act rationally' (not emotionally, you loyal Northerners) and extract their remaining savings now.
Yes, I know the BoE is 'guaranteeing' up to whatever Darling has in mind today, but it will still take you six months to get that money.
Your decision.
Do we have state intervention in markets or not? If so, the price we pay for protecting failing banks (but not pension funds!!) is state intervention. Presumably, the BoE believes it is better to let one lender with poor practices off the hook, rather than risking a collapse of the small banks sector.
In any other sector, poor companies are allowed to go to the wall. Why not banks, especially if small investors are protected.
One could argue that the benefit to the taxpayer is a deal that preserves almost all of the jobs of the employees thus reducing the longer term cost of benefits - unemployment and so on. Oh, that and the fact that the cash cost is way higher than it should have been because the Bank of England hadn't a clue what it was doing
Why is everyone looking at what is bad here? At the end of the day Northern Rock has an extreamly solid mortgage book. Additionally it has secured a huge amount of low cost mortgage funding that it obtained when prices were low (2003 to 2006). This will surely allow the bank to generate some profit going forward.
Just think for a moment what would have happen if the bank of england had left Northern Rock to crumble.
Angry customers would be blaming the FSA for their lost money. The whole banking industry and FTSE would be in turmoil as share prices tumbled.
Who cares about greedy shareholders you might say? Well just take a moment to think about where your pension fund might be invested and the damage that 911 did to the Global markets!
One thing is certain, everybody wants it cheap!
What are you talking about???
The Treasury deserves a stake? Why?
They made a loan and they get interest paid on that loan. When I have paid off my mortgage to the bank they don’t then get a stake in my house because they lent me some money.
Your assertion is ludicrous!
Do you understand business in any form?
In hindsight great move and good for taxpayer but this support is too risky to take. I think, if we want to make some short term money for tax payers, it is better to invest in stock market rather than supporting fragile organisations.
BETTER COMMENTARY ON NR from Robert Peston in place of the inaccurate "Virgin boss to 'rescue' NR".
We the tax payers, who have had our money pledged by Alastair Darling and co. as a result of poor oversight (arranged by one Gordon Brown don't forget!) to really rescue NR depositors and to some extent the shareholders too should clearly receive a substantial slice of NR's equity, not leave it to the opportunistic speculators such as Branson and his financial partners - all seemingly not UK tax payers!
How wrong you are Robert, the Bank of England is only going about it's normal business, lending money, it's what it does! And it gets the interest for it's trouble as Juan C points out.
Susan? your reward is knowing that you have remained sensible throughout this sorry debacle.
Adrian? "rickety"? "handouts"? "bailing out"? "shore up"? , you REALLY don't have a clue what has been happenning here! and the same applies to you kanerot, you really should learn more and speak less untill you do.
The problem with Virgin is that it is a front vehicle for all the usual finance providers just like Tesco.
It would be easier for the Bank of England to tell Northern Rock directors they were guilty of toal mismanagement and have lost their authority to manage the company. They should then put it into a wind down situation and sell off the mortgage book piece by piece.
It appears more so now han ever before that the value of the parts is greater than teh whole so let them get on now and do it rather than find in 3 months the Taxpayer is subbing a defunct firm £20 billion.
Gordon Brown created the nonsense of a tri-partite regulatory body so he should be leading from the front to get this matter closed.
The new Chancellor has shown a total lack of ability or foresight in all his actions to date, therefore to expect to see, under his management, anything but a botched up end result where the taxpayer loses out would be as likely as my walking on water.
This whole affair has left the UK looking like a thrid rate banana republic.
Gordon Brown is responsible for not just his lack of control over banks, who he appears to be frightened of; but also the setting up of an unworkable regulatory committee which he no doubt designed ot hav the final say over. Well all I say is Mr Brown stop the talking and do something now!
Robert makes some valid points but must bear in mind that NR business is based on credit management. Whether the funds from puntive central banks or private banking system it is still a functional business. I can see NR coming through this stronger than before.
So what's in it for Branson!
You are aware that the risks of buying stock in a troubled company like NR are that you will get no return. That is the nature of the stock market, The US funds would certainly be looking to buy senior debt that will be converted into new equity in the event of a bankruptcy and restructuring, or at least that would be the case in the US where chapter 11 provides bankruptcy relief. In the UK, the BOE normally seeks to provide a more discreet solution. The numbers for Northern Rock make it an excellent target if the equity can be purchased for around GBP2 per share...unless there is some really unplesent surprises in the balance sheet. I can't help wondering why Lloyds walked away, they would surely have been the BOE's preferred acquirer
Robert, you never cease to amaze me in your bitterness towards NR and it's shareholders. HM Treasury is being paid a damn good rate of interest on the money lent to NR. It is not giving it to them or lending at a preferential rate, so why on earth should it be given any shares. That is like saying that if you take out a bank loan to invest ina business and it does well, the bank should share the profits. Ridiculous article.
Mr Peston forgets that the BoE facility is fully secured and at a PENAL rate of interest. So the public purse is getting a profit for the Tripod incompetence that has stopped the inter-bank market
For once I actually completely agree...
The only reason Northern Rock is still in business is that the government used tax payers money to bail them out.
The FSA/BOE where at least partially to blame for the crisis of confidence and now the BOE is now benfitting from lending to NRK at a punative rate.
You believe the BOE should benefit even more by stealing equity from shareholders who have been the only real victims of this avoidable fiasco.
'We' are not paying for it - it's a loan paying interest in return.
Get your facts right.
I have just learned that the government guarantee on savers' deposits with NR can only be for 6 months under EC State Aid rules. That puts pressure on the Government to get someone in to take it over before savers complain that they have been misled by the Chancellor.
From reading through Mr Preston's comments over the last couple of months I would say (a) he quite clearly has a down on Northern Rock in general and Northern Rock shareholders in particular (many of whom are probably long term loyal customers who obtained their shares at the time of flotation), and (b) I think he doesn't know what he's talking about. If he was such a financial whizz he'd be making a fortune on the markets himself rather than passing on his dubious wisdom to us lesser mortals. NR has a large and highly profitable mortgage book with billions of assets but with a temporary shortage of ready cash, at least partly brought about by the scaremongering tactics of Mr Preston (for whatever reason I know not). They are fundamentally highly solvent, and we should not forget that! Once the money markets ease up their large mortgage book will be recognised for what it is (a great asset) and their shares will climb back up in value. We'll see!
This is economic gooblygook Robert. The Treasure is not giving NR anything. It is making loans at a high rate of interest against a good mortgae book. What on earth are you trying to do misrepresenting the position so wilfully?
If I took over your mortgage payments for a couple of months and you repaid me the interest your logic would require you to hand the equity in the house to me; nice deal, are you up for it?
Here's an idea Robert. Why don't you try writing a positive article about NR? You could cite the efficiency of the operation, the amount of people it employs in the NE, the charitable trust it funds etc etc.
If you did that (even once) to balance out all of the negative articles that you write, then you might seem a bit more impartial (as you are meant to be as a Ö÷²¥´óÐã reporter)
No government will allow a repeat of the NR fiasco when the BoE allowed liquidity in the market to dry up. Bank shares are an absolute banker for investors - now almost risk free and good returns.
NR's position is better than percieved by the pundits who take such little account of the politics. NR will continue to be granted loans because it will not be allowed to fail. It has a large and good mortgage book which is extremely valuable and on which NR made £500M profit last year. That mortage book will remain largely in tact while NR is able to draw down loans from the BoE. The profit will be squeezed because of the higher rates of interest NR is paying for its BoE loans. Branson uunderstands that he could make another fortune. Sounds like you understand that too Robert. It is thus impossible to reconcile you two positions - NR is worth very little but Branson could be making a killing? Time to follow the Branson calculation I reckon!
Once again Robert Peston gets his facts wrong in his blinkered approach to Northern Rock. The government has not paid out a penny under the guarantee!
The government had every opportunity to take a stake and buy shares at bargain basement prices when the hedge funds were shorting the stock to deliberately drive down the price. The truth is that the Treasury sat by whilst city fat cats cleaned up at the expense of many ordinary long term savers who exchanged mutuality for a handful of shares.
Most of the comment aimed at Northern Rock has been aimed at their method of borrowing money on the money markets to fund the mortgages that they offered. But what about the mortgages that they offered? We know that they offered loans of up to 5-6 time salaries and up to 125% of property value; but they claim to have an arrears rate of only half the industry average. How can a lender with their lending criteria have had a better than average arrears rate? It is all done with smoke and mirrors. Their "Together" mortgage offers loans of up to 125% of property value. It is structured as a conventional mortgage of 95% then the "facility" to borrow up to a further 30% as a personal loan. The typical borrower is probably not going to take the full 30% on day 1. They might take 5-15% to cover the balance of the purchase price, moving costs, furniture etc. Six months later, the borrower is struggling to meet the normal monthly mortgage repayment. But, hey presto, they have the facility to draw whatever they like from the balance of the personal loan to avoid going into arrears on their mortgage. And so on, thereafter. This way, a borrower's failure to meet the normal monthly mortgage payment could be concealed for years, and Northern Rock's arrears statistics would look really good. Until, at some point in the future, all the borrowers are maxed out at 125% of the original property value.
If you don't believe me, have a look at the Northern Rock website where the product is explained:
"Once your unsecured loan is set up, all it takes is one phone call to request an amount of money which will be transferred to your bank account within three to four working days.
You can use the unsecured loan part of together for any legal purpose."
All the comments I keep reading from the media hypists about how the Rock's brand name is forever tarnished, and how the only solution is a takeover blah blah blah, are total rubbish. It is only the media that have created this temporary instability.
NR are still a totally viable business with a very healthy mortgage portfolio. Agreed, the current directors are guilty of continuing with the wrong business model and failing to spot how the lending market was changing.
So sack them, bring in new management and keep the Northern Rock operating, because it can and should survive. It's staff, it's shareholders, and it's depositors deserve nothing less.
I have friends who are employed at NR - a little consideration for them please!! The Bank is the most cost effective in Europe which generally suggests they work hard... to continually read how dire things are isnt the best - a little media support would be appreciated...
Utter drivel. Why is the media so intent on pushing Northern Rock further into the mud?
How can a bank with a large loan book ever be worth nothing? The BoE lent the money to NR they did not give it. It must, and will, be paid back by whoever ends up owning them or themselves if they can manage it. The only reason the government guaranteed the deposits was to stop the panic and the long queues on the high street.
As for shoring up the sub-prime property market, if that is the case then what good would helping a bank who only deal in prime mortages do!
When will the media learn that the power they hold these days should be used very carefully?
Question is, why were there nearly £4million pounds worth of shares purchased in the last 5 min of trading today?
Once again you are missing the point. NR have borrowed this money at a punative rate - the taxpayer is making a fortune. If NR borrow an average of £10bn over 6 months that equals almost £700mill in interest payments....that is nearly as much as the Ö÷²¥´óÐã makes out of phone-ins.
I have to disagree with those comments that state that NR is paying a penal rate of interest. If NR is borrowing from BoE, at whatever rate, this must be because it cannot borrow at below that rate elsewhere. Thus the fact is that NR is borrowing from BoE at below market rates and this so-called 'penal rate' is in fact state subsidy. If BoE was offering a true penal (i.e. above market) rate nobody would borrow.
I'm amazed at people like Simon who seek to place blame with the FSA/ BOE for the mistakes made by Northern Rock's management team. Northern Rock ended up where they are now because management was too greedy - and I dare say that as our own sub-prime crisis comes home to roost there will be further casualties to come.
I take the view that the real value of Rock shares is near to zero.The present government would not be unhappy to see the shareholders wiped out,as part of 'rescue' of the Rock depositors.They would-seemingly-want a solution where new shareholders replace the old,and where the rump of Rock can be 'saved' by a third party such as Branson or J.C.Flowers.In the case of Branson he wants to lend the Virgin name to a rescue of Rock,without providing much of the funding necessary to complete a takeover.That's pretty standard for him.I believe it's called 'marketing spin'
First you assert (rightly) that "The Treasury is being paid for all this support"
but later "If we are paying for this elaborate care..."
The quality of journalism here isn't getting any better.
Did you read through your article before posting it ?
It's Northern Rock who are paying the taxpayer (via the penal rate of interest on the loan) for this "elaborate care".
The government won't countenance any deal which doesn't involve that loan being repaid, and in the meantime it's a nice earner for the BoE (and therefore us).
As much as possible should be done to save NR and keep it out of the hands of the Branson,Tosca etc. Far from being the saviours they claim to be they have in one form or another been instrumental in the performance of NR's share price. So confident are they of being able to scoop up NR at a ridiculously low price that they are already preparing to do the same to Bradford & Bingley and then Alliance & Leicester. Just look at how they have been shorting these shares over the last couple of days. Its time to get behind NR and take a stand against the vultures who are hell- bent on destroying our mortgage market.
The Government, through its bale out, has already signalled that it is prepared to underwrite retail banks in trouble, effectively nationalising the industry. NR had a risky strategy and the shareholders knew (or should have known). I don't see any reason at all to support this failed bank and its too risky strategy. Let it fail if that what the market demands or other retail banks can embark on risky business models knowing that the taxpayer will bale them if things go wrong.
Dear Mr Peston.
At long last the select comittee have got round to dicsussing the damaging leaks for which you were responsible. It should only be a matter of time before you are asked to identify who these people are !
Robert has been against Northern Rock from the beginning, largely because when he was tipped off about the Bank of England loan, he could smell a big story which, with a bit of spinning, he could work up into a very big story which of course always comes in very handy come contract renewal time. Frankly, he needed to make a splash more than take a responsible approach to the story since he is quite obviously not a patch on Jeff Randall (whose coverage of the story, I believe, would have been much more balanced and less needlessly sensationalist).
Why are the likes of the Big Four banks not having a run on them? Because they have a network that stretches into Europe and so could borrow money on the quiet from the European Central Bank, as one very large UK bank did several weeks before Northern Rock. The difference is they sneaked it out in a very low key Stock Exchange announcement in the summer when no-one was looking.
Whilst Northern Rock management are far from blameless in this saga (in particular in the awful way they dealt with the PR side of things) they were by no means the only financial institution to suffer problems as a result of the credit crunch. OK, the business model opens them up to greater risk, but their lending criteria is stricter than most other mortgage banks (check the mortgage arrears and repossession rates if you don't believe me) and they cut down on credit card and commercial lending over two years ago to reduce risk. Perhaps if they weren't based in the North-East but instead in London, this amount of opprobrium would not have been heaped on their heads...
Why does Gordon not just nationalise the Northern Rock. He could then bundle it together with the Post Office, split National Savings into two and privatise the new Post Rock Bank in a couple of years time for a nice juicy profit. The tax payer would benefit and Gordon may find the cash comes in useful for a bit of extra spending prior to the next election. This would also save our Post Offices.
On the other issues the Northern Rock buinsess model was not perfect as it was too heavily reliant capital markets. The Ö÷²¥´óÐã and the rest of the media are partly to blame for the panic they created.
From today's enquiry
"Applegarth also said the leaking of the news of BoE's emergency loan to Northern Rock on Sept 13 did not help, fuelling the run and putting paid to hopes of a buyout of the firm from a third party, thought to have been Lloyds TSB.
Northern Rock was hoping to put out its announcement of the loan from the BoE on Monday, Sept 17, not the preceding Friday, which would have given it more time to reach a deal with Lloyds, Applegarth said."
Well done Robert. If you hadn't leaked that information, NR may have done a deal with Lloyds over the weekend which would have avoided the run on the bank and the total collapse of the share price. Are you proud that you have, in no small way, helped cause all this misery for shareholders?
Perhaps the Ö÷²¥´óÐã should pay for the 60% drop in the Northern Rocks share price. After all, Mr Preston, without your exclusive story, there would have been no "run on the bank". None of the customers would have panicked and there would have only been no crash in the share price. Indeed, without your "exclusive" Northern Rock customers would have been able to withdraw their money as easily as any other day.
You should be held accountable for this "crisis".
The one thing that Robert's report highlights is that it's tax payers money that is keeping interest in NR alive. If the Virgin consortium, or any other bidder, are interested they will want two things
1)Maximum potential profit for them.
2)Continued support of the BoE to ensure their is no risk to their money.
The sad thing is that to save the face of the Goverment, the FSA and the BoE they will get what they want and the tax payer will pick up the bill.
Come on guys .. give them a break.. this is a company that has been performing really well for sometime, reflected in its share price and EPS. I think its the over reaction of the public and the greed of oppurtunists that has pushed this company right to the edge of the cliff.. any more irrational attitude will just kill it.
Northern Rock was technically insolvent in that it was unable to meet its liabilities as and when they fall due. The fact that these were borrowings in the money market which could not be repaid by further borrowings makes no difference. In normal circumstances, ie. for any other business, an administrator would be appointed to either see the business through its crisis, or to find a buyer for the whole or the parts. From this perspective the shares have little or no value - not to mention that it only has 2bn of capital base propelling 80bn of loans.
It was economically and politically expedient for the BoE to shore it up. In the crash of 87, the Fed nationalised banks that had their capital used up, and later went on to have these merge with other stronger banks and brokerages. This is what the BoE should have done. Nor should it matter that it may not be immediately possible to offload NR. France has nationalised banks and they function adequately for the most part - Debit Lyonnais being an obvious exception.
Moreover, it would be quite possible for the BoE to parcel out the loan books, at a profit, to banks with the capital adequacy to support them. This could then leave a company able to function on a safer business model which could then be privatised or sold.
None of this could possibly be executed by an administrator because of the funding gap, but it can perfectly well be done by the BoE. So, shareholders, I would be grateful for what you have got.
As the Ö÷²¥´óÐã's Business Editor, do you not have a responsibility to reports facts in a neutral manner?
So much of Northern Rock's problems are directly because of the tabloid style sensationalism of your reporting. Why is the Ö÷²¥´óÐã giving such a negatively opinionated person such a platform to air his ramblings? Let's hope you're one of the 12% for the chop...
Its an interesting point that Mr Peacock makes (post 3).
I'll see it, and raise it a $75bn sub prime purchase fund being raised currently in the US. The purpose? To buy up, repackage and sell on the sub prime securities that have caused the problem.
Does anyone have any interest in this except the banks? 1: its stimulates the market. 2: it tries to restore faith that maybe these things aren't quite so toxic as everyone thought, if the banks are ploughing money into them. Its fairly common ground that what drives the market is humans. Fear and greed. Control these two emotions and you control the market.
We would all do well to remember the old chinese proverb:
"Fool me once, shame on you. Fool me twice, shame on me."
Dear Robert,
NR needed taxpayers money to survive, that is undisputed.
As a pensioner tax payer I expected the UK government to take this action and stabilise the UK money markets thus stabilise my other than NR investments and those of the subscribers to this column.
That is what we pay our taxes and have a government for, a government that has done something effective for once with our money.
I hope some lessons are learned to prevent a similar situation in the future, that is also a government responsibility. Let's see if they are up to it by securing the future of NR and recover the taxpayers money with interest.
#53 You would do well to remember that Nick Leeson's results were apparantely stellar until he ran out of capital backing.
I am not comparing NR to Leeson, and do not believe that anyone at NR has been dishonest. That said, both were taking a long term position using short term funds.
Well Robert, you say we should share in the spoils of tax payers money shoring up the rock on the upside. Should we not share in the spoils aquired by the Ö÷²¥´óÐã exports of public funded programming, such series as 'Walking with Dinosaurs', Teletubbies, Tweenies (my favourite)and lots more. All have which earned the Ö÷²¥´óÐã a substantial revinue. Is this not the same - if different?
Im really hacked with Northern rock saga what about the banks who didnt lend in a manner that wasnt bad.
Why should banks that didnt get involved in these practices pay for a government shoring up 6000 Northern Rock jobs in Northern Labour country amazing they wouldnt let this bank go under based in the North and elections coming up dont tell me this didnt play apart. Why as a tax payer am I funding a dodgy banks lending practices for the governments political gain.
If indeed the NR has now borrowed 25 billion pnds from BOE then the average balance o/s has been 12.5 bn. Assuming that money has been set to work ( a big assume admittedly), then the actual cost to NR is approx. a 2% gap ie. 12.5 bn pnds x 2% for one month is
21 Million pnds. Now this is the kind of money that shareholders can fund.
If each share puts up a pound that raises 421M pnds. This amount can fund expensive credit for 21 months and preserve the share price. All NR needs to do is promise to contract its loan book over time, unless of course the deposits roll in. Dont knock it.
You are not responsible for the run on the Northern Rock, because if you had not reported it another journalist only interested in their own career would have. Only a fool would say they did not expect the public to react like they did. Come on, the slightest whiff of a fuel protest and every garage is sold out of fuel. Please don't tell me you are that stupid?
Ascorbic responses to an unusally accurate article from Preston. The general public is ignorant in their high estimation of NR's value while Mr Preston is correct.
NR is a bank and as such is a highly leverage entity supporting 100bn of assets with 2bn of equity. There is additional capital in the form of subordinated debt, and then a series of other sources must be utlised to finance the rest of the assets, (eg deposits, senior debt, covered bonds, securitisations). The credit quality of NR's 100bn assets may be deemed sound and good by industry standards but this does not mean that they are worth 100 cents on the dollar. NR wins mortgage business by offering cheaper mortgages or higher leverage than its competitors. If NR no longer has the liquidity to hold the mortgages it originated then it can try to sell them to other banks, but these banks are the very same who offer mortages at higher rates or with lower leverage and thus lost out on the business originally. Hence the maximum resale value of recently originated mortgages is subpar because they yield less than comparative loans on other banks books. Given the high leverage of the balance sheet only a small haircut on the assets produces an equity value of zero.
NR has no brand value and a tiny retail branch network so any acquiror is likely valuing the business based upon the amount of capital they need to invest to support the mortgage book and the returns they can earn on their capital given a certain level of delinquencies as they run the book down. Given the low level of competition and the risks involved a bid is likely to value the company at nothing for the equity and deeply discounted for the subordinated debt capital. However, such a scenario will obivously not be palatable for NR shareholders or bondholders. The situation is complicated further by intense political pressure - by guaranteeing all future deposits and broadening the terms of the facility to accept all colateral the government has shown a level of support I had not previously imagined possible! As a result determining the (very small) value of NR's equity and its junior bonds is not as easy as a quick and dirty breakdown of the balance sheet might suggest
I don't know if Jon's point is a good one. I couldn't read any more after he used the word "ascorbic" to decribe Mr Peston's correspondents.
What if they are full of vitamin C? Is that relevant? Is there something we should be told?
To Lambert - NR is actually one of the banks that didn't get involved in risky lending - as shown by its very low arrears level. Get your facts right.
#65, I believe that HR's arrears record has already been largely discredited by people notincing that some of its products actually facilitating borrowing more to cover any arrears that may arise. That's rather like throwing good money after bad, and only serves to either a) cover a short term hole in the customer's finances created by unexpected expenditure, or b) enable the borrower and lender to hide a lomg term risk to capital under the carpet of ignorance and wishful thinking.
"If the public-sector financial support remains in place for weeks or months after a takeover (as it will have to, as the sine qua non of a deal, whatever the Treasury may hope), the quid pro quo should surely be an option or warrant over new Rock shares for the Exchequer" which means, in English ...... ?? (I thought it was only scholars and clerics who would show off by speaking or writing in Latin)