Treasury鈥檚 five-year Rock loan
Alistair Darling doesn鈥檛 want taxpayers to lose a penny on the enormous financial support provided by the to .
And in a statement to the Stock Exchange he has said this morning that there is no certainty that any bidder for the Rock will have access to Treasury-backed Bank-of-England loans after February 鈥 which is when the current support package expires.
Those loans currently total about 拢24bn.
But what he didn鈥檛 point out is that there is a smaller financial exposure to the Rock by the Treasury which is not supposed to be repaid for five years (although there are options allowing earlier repayment).
Or to put it another way, the Treasury has already made one very long financial commitment to the Rock.
It arose because in October it 鈥 and the and the 鈥 became concerned that the relatively high interest rate being charged on the Bank-of-England loan could do severe damage to the Rock.
So the terms of the Bank-of-England loan were altered.
The Rock would only have to pay interest in cash equivalent to the Bank鈥檚 5.75 per cent interest rate.
A further interest rate 鈥減remium鈥 鈥 which I understand is 1.25 per cent 鈥 is rolled up into what is called 鈥渟ubordinated term debt鈥 with a minimum term to maturity of five years. And this subordinated debt is owed to the Treasury, not the Bank of England.
It actually qualifies as part of the Rock鈥檚 capital base. To be more precise, it ranks alongside tier II capital under BIS rules.
One very important characteristic of this subordinated debt is it would rank very low down the list of any creditors in any wind-up of the Rock. It is just a hairsbreadth away from being equity. Or to put it another way, the Treasury has already come very close to taking shares in the Rock.
And what should also matter to taxpayers is that if Northern Rock continues to borrow substantial sums from the Treasury 鈥 and the bank itself can鈥檛 see how to do otherwise 鈥 this subordinated debt could grow quite big indeed.
If for example the Northern Rock鈥檚 loans from the Bank of England averaged 拢20bn over two years 鈥 which is a realistic scenario 鈥 the rolled up interest would total 拢500m.
There are two ways of looking at all this subordinated debt.
Some will see it as a taxpayer subsidy to a bank which got itself into a mess and was unable to raise money in a conventional way.
However shareholders are likely to view it as a potentially crippling burden on the company which 鈥 if the Treasury wanted it back 鈥 could wipe out the value of Northern Rock鈥檚 shares.
Update 08:00 Northern Rock's shareholders have had a huge dose of bad news this morning.
The company says that the preliminary bids for the business all value it at significantly less than the current market value.
And the Treasury has said that neither bidders or the company should assume that the 拢24bn of loans made to it by the Bank of England will be kept in place after February.
The Treasury has also warned that the support it has provided to the Rock represents state aid under EU rules and may therefore turn out to be illegal.
It means that Northern Rock's battered share price will fall further this morning.
And it also means that the future of the Rock, for its 6000 employees, remains highly uncertain.
However the Treasury has reiterated that the Rock's depositors have nothing to fear.
It will continue to guarantee that they do not lose a penny.
And its other aim - which may be harder to achieve - is to prevent the taxpayer losing a bean.
I'm 
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NR, despite its lifestyle, has to be given free healthcare until its natural full recovery to the full health.
Charging it a penal rate is an ethical and moral issue.
Whether the current offers for the bank undervalue the business or not is of little concern to those taxpayers who do not hold shares in this failed business. Our only interest now is that efficent management is put in place to get the business back standing on it's own two feet as soon as possible and the state aid repaid in full.
Would the Rock have been bailed out to such a degree if their troubles had come to light AFTER the reversal of the plan for an autumn election?
I suspect not.
The current situation appears to me to be doing nothing but damage our country's reputation of financial competance. It's time for the government to grasp the nettle and nationalise Northern Rock, for the sake of the depositors and the taxpayer. As Mr Darling has made clear, the country does not have a duty towards the shareholders at all.
What about the chief executives leaving NR? Are they getting final payments? Where there are huge amounts of money executives award others enormous salaries so they can take enormous salaries themselves - is there no morality?
What about the chief executives leaving NR? Are they getting final payments? Where there are huge amounts of money executives award others enormous salaries so they can take enormous salaries themselves - is there no morality?
"The company says that the preliminary bids for the business all value it at significantly less than the current market value."
This just goes from bad to worse. Does Darling really have any other option than to nationalise the bank now?
NR is not in a position to rebuff offers it considers are too low. It needs a buyer with deep pockets - and fast. It must take whatever it can get. It should not expect to rely on taxpayer handouts to nurse it back to health so they can sell up and return some value to shareholders.
This is the free market system folks. If a company messes up this badly, the shareholders should be the ones losing their money, it should not cost the taxpayer a single penny.
The terms of these loans are not as onerous as a bank would offer one of its customers in difficulty.
good morning
re northern rock can't this bank just revert to being
a building society ?
Quite simply taxpayers money should not be used to hold up any private company. All investors are aware of potential risks involved. "I didn't know" is not a valid defense.
Those who have/had savings with the bank should have been protected only up to the original agreed amounts.
If you want complete safety for your money then tuck it under your mattress (though that raises a whole different argument) otherwise in any financial agreement there will be an element of risk. That is the price you pay for the money (interest, dividends etc) you make.
The taxpayer should not be there to bail out these companies, no matter the emotional argument.
The Northern Rock need to wake up and realise that their company is only "worth" what someone is willing to pay for it.
Their shareholders have taken a risk and were happy to take the returns in the good times. Now things are not so good, they must accept the consequences of their gamble.
How can a business claim that 'offers are below market value'? Market value is, quite simply, what someone in a market is willing to pay.
If this is the understanding of the basis of valuation practiced by the management of this outfit then it is no wonder that they have made other incorrect assumptions . . . all of which means that the potential purchasers have need to worry about the integrity of the entire business and are quite right to value it in a cautious manner!
I'd like RP to exPlain the essential facts for the benefit of readers & listeners.
Northern Rock's business model involved borrowing from other banks to supplements their deposits, in order to sell mortgages to more people.
This depended on a ready supply of cheap credit.
The US credit crunch, led to other banks declining to lend to Northern Rock, not because they were a bad risk, but because they needed to conserve their own assets to cover their own potential losses.
Northern Rock therefore turned to the Bank of England as lender of last resort.
Given that Northern Rocks borrowings are covered by solid mortgages, there seems to be little downside risk.
The premium interest rate imposed by the Bank of England, would cause a problem if it was in excess of typical mortgage rate, but this is a problem caused by the BOE.
Further, if the credit crunch is receding, why can't Northern Rock replace the BOE loan from other sources (as per its original business model)?
Did I miss something?
Looks like branson and the virgin group once again will waalk away with assets on the cheap. If they can't by NR they will scupper anyone else.
It was always highly on the cards that the bank bail-out was illegal state aid, especially in the form now revealed. Whilst other banks were offered the punitive rate, for reasons already well discussed it was virtually certain that there would be no takers. Perhaps the bidderless 'auctions' were in fact for the benefit of the Commission, to show that no-one was being offered anything that the wider market wasn't being offered, and the rates were punitive, and so couldn't be seen as 'aid'. However, the revised terms now being disclosed do not bear that out.
The only option left, I feel, is for a state sponsored takeover in the form of a debt-equity exchange, and eventual dissolution. We've done quite enough for the company already. Any systematic banking collapse brought about by the failure of the Rock has now been averted. Other issues are in play now, and its time to unwind the aid.
As a Northern Rock customer, I think that NR still has a lot to offer! Service is excellent, and the products are market leading. There is no need to dump it for a cheap offer, that would be stupid.
As things stand there is no shareholder value for NR. All offers will most likely give little or no return at all to shareholders. Rather than let financial vultures pick over the carcass and pick up 150m bonuses for doing so the government should nationalise the bank and when it is stabilised sell it on releasing the capital back to shareholders / bondholders.
At the end of the day the only problem that NR and its directors encountered was a credit freeze. Its loan book is apparently sound
"The Treasury has also warned that the support it has provided to the Rock represents state aid under EU rules and may therefore turn out to be illegal."
So, the gov't has gambled (trying to retain confidence in the banking system)... and who can blame them? They were backed into a corner and came out with a highly irresponsible knee-jerk reaction. Propping up a failed institution to the tune of tens of billions of pounds was a price they considered worth paying to keep the whole system running.
Hiding their heads in the sand comes to mind.
Deploying the best smoke and mirrors tactics, other high street banks are masking their truly gargantuan losses, delaying the inevitable and a gleaning a few more paychecks from a bloated economic system that is approaching its death throes.
The guaranteeing of NR customer deposits is a sham - if you have a deposit in NR, get your money out NOW!
NR cannot be worth more than the value of its assets less the cost of disposal. Therer can be no goodwill/ brand value.
What Iam not getting from this is two things: can it pay its obligations as they fall due? Is the support it is getting from Government not an unlawful subsidy under EU regs, or at least will it not become so?
I have been looking at the FTSE this morning since it opened. Perhaps, the share price will improve, but I doubt it. Over the past week some kind of consensus (rare with money) has emerged across all zones that debt effects of the current situtation will not wash out for at least six months - possibly as much s 24 months (I favour the long term). This implies that not only is NR not worth a lot now, but it could be worth much less in the future. Most banks need depositors, and a reasonable number to generate a bed of cash. I just cannot see NR holding onto its deposit book - what kind of shape is it in - if the credit squeeze gets worse. People need cash and for most people they get it from a stipend and through savings. If the regular stipend is not covering rising costs, they save less, and since they can't boorow more, they will chew on their saving savings (or investments). The possibility of a bleak recessionary cycle is probable. The problem for ordinary NR share purchasers is simple (not the bidders for the group). Why buy its shares despite the discount, when more stable financial institutions also have their share trading at walloping discounts? I have a lot of sympathy for ordianry shareholders in NR. Will they recover their money by staying in?
The government would have been far better letting NRock go bust. It has created a moral hazard of its own. It is costing tax-payers a fortune. There is no value for shareholders.
Brown is to blame - banana republic banking regulated by Brown and his Darling!
This announcement from the government not to guarantee support beyond February is a very sensible statement to make.
The difference between the 'will's' of the bidders, such as Branson, and their 'abilities' to pay enough to buyout the taxpayer, is becoming all too clear. The government it appears has at last realised that it is time for the bidders to put up, or they will shut up the Rock.
I cant help but think that the taxpayer is going to lose on this one. Maybe it is a price worth paying though, as at least the Great North Run stopped at the Rock in the North East, and didnt move on to Bradford or Leicester.
Using public money to support depositors who have put their money into NR accounts believing it to be safe... Yes.
Using public money to ensure that any staff (below Director level) made redundant get decent severance packages... OK.
Using public money to pay off the Directors... No.
Using public money to support shareholders who have put their money into a company, the value of whose shares could go up or down... No.
If we do either of the latter two, then it will create an environment where the managers of any large institution are personally better off taking HUGE risks - if they come off, they get massive bonuses... if they fail, the taxpayer bails them out.
Put NR into administraion and then nationalise it and do it quickly before the sound mortgages are sold on leaving the loan from the government covered only by the less secure ones that could also decrease in value if there is a housing price fall. Time is slipping away. Once the the situation has been stabilised then NR can be sold at the best price in a year or two so the government has the best chance of recouping our loan.
Terry Cooper the only thing your otherwise excellent post missed was that the credit crunch isn't easing. If anything it might be getting worse.
Swiss re have announced a huge loss this morning to a single lender who protected themselves against this all going bad.
At the moment the World's banks and financial institutions are a bit like us in the middle of January. We know we over indulged over Christmas and the New Year and are waiting for the credit card bill to come through whilst we live of beans on toast for a week prior to getting paid again.
Until it becomes clearer where the losses lie it will stay very tense.
"And it also means that the future of the Rock, for its 6000 employees, remains highly uncertain."
So you're glossing over the 2 confirmed bids from the former Abbey boss and Virgin to take over NR and run it as a going concern?
Just checking. Half facts as usual.
The share price and the ongoing viability of the company are totally different things. No bids to take over the whole company and no bids full stop are totally different statements.
Come on Robert. Keep up. What is your degree in? Zoology?
Just a couple of points from someone who, at 49 & married with a working wife, doing a skilled job in IT, doesn't earn enough to get a mortgage for a 2-bed terrace and never will.
1. Can someone explain to me why supoporters of market forces and free capitalism bleat like kicked sheep when the government interferes in big business and bleat like severly kicked sheep until the government do interfere when big business makes an almighty cock-up. As a business you either support the free market in which case you stand on your own two feet or perish. Or you don't support it and look to the government to prop it up ( I believe this is known as centrally controlled soviet socialism).
2. It was jolly decent of the board of NR to resign. If I screwed my work up like they've screwed theirs I would have been summarily dismissed. I bet they didn't lose their pnsion rights either.
3. This is my money that is being poured into NR. I want it back. All of it, with interest. If I'm not going to get it back, then pull the plug on it - now.
Finally, I have no belief in capitalism at all. It disappeared about 10-15 years ago under the fraudster Thatcher and her heir B-Liar. It's a total con which in the long run profits no-one except the big guys. The people with the money should be propping up my life, not me propping up theirs.
I would love to know what the saving guarantee actually means if NR cannot continue.
If I remember what happened to BCCI depositors it was years before many of them got all their guaranteed money back and while they waited that money did not receive the interest it would have got if it sat in a bank elsewhere. I'm sure Keith Vaz could confirm that it took many people up to 5 years before they got their money back.
Considering that nothing has been done to resolve the complaint Melvyn King recently made that "The Bank, he admits, had not pressed hard enough for changes to Britain鈥檚 inadequate investor protection scheme. That meant Northern Rock鈥檚 retail deposits could not be transferred quickly to another institution once it was in trouble." I can only recommend one thing.
If you have any money in the Northern Rock and there is any reason why you may need it in the next 5 years getting it out today would be a good idea.
This announcement from the government not to guarantee support beyond February is a very sensible statement to make.
The difference between the 'will's' of the bidders, such as Branson, and their 'abilities' to pay enough to buyout the taxpayer, is becoming all too clear. The government it appears has at last realised that it is time for the bidders to put up, or they will shut up the Rock.
I cant help but think that the taxpayer is going to lose on this one. Maybe it is a price worth paying though, as at least the Great North Run stopped at the Rock in the North East, and didnt move on to Bradford or Leicester.
The Treasury now needs to spell out how much it is prepared to lend to NR and for how long, within the limits it is able to agree with its EU lords and masters.
Only then can bidders be expected to put forward firm proposals to buy NR. It will then be for shareholders (the NR Board can only recommend) to decide whether to accept the best offer for their shares.
If they don't like the price, they can presumably subscribe for a discounted rights issue to ensure NR has enough capital either to fund the additional interest on the Treasury loan or to give enough comfort to an alternative lender on market terms. (Once the short-term credit crunch passes, as it certainly will, well-capitalised mortgage lenders will always be able to raise finance in the market if the price is right, and this will be reflected in rates paid on mortgages.)
Unless the Treasury/BoE is willing and able to provide sufficient credit in the meantime, then the outcome for NR will be inability (through illiquidity) to repay its debts as they fall due - which means the company will go into administration. Surely that is a highly undesirable outcome for all parties including the Government.
In spite of various speculative comments about lowering interest rates and ongoing BoE help, I wonder how this disaster is REALLY going to end. Hmmm...
I think the most likely outcome is that, in the end, the taxpayer will lose vast quantities of money underwriting a bank who were only ever concerned about making a quick buck no matter how ludicrously risky their strategy was. This is certainly the nature of capitalism, but who really benefits here? Who really believed that supporting a failing institution with unlimited amounts of public money would somehow make the whole problem go away??
The Northern Rock is now being used by the Conservatives and its Daily Telegraph readers to hit Labour on the head. North East does not equal Labour!
This announcement from the government not to guarantee support beyond February is a very sensible statement to make.
The difference between the 'will' of the bidders, such as Branson, and their 'abilities' to pay enough to buyout the taxpayer, is becoming all too clear. The government it appears has at last realised that it is time for the bidders to put up, or they will shut up the Rock.
I cant help but think that the taxpayer is going to lose on this one. Maybe it is a price worth paying though, as at least the Great North Run stopped at the Rock in the North East, and didnt move on to Bradford or Leicester.
> As a Northern Rock customer, I think that NR still has a lot to offer! Service is excellent, and the products are market leading.
Erm, would these "market leading" products happen to include 125% mortgages at 6 times salary, perchance, Robert?
They were the problem! Try to keep up.
Thanks
Fred
In the current climate,would any financial institution,that could raise 拢20 billion,not choose a safer haven for it,than NR?
How can a 'bank' which depends on massive loans for survival possibly have any real stock market value? Derek Wanless has once again created the ideal conditions for a bank takeover - first NatWest, now Northern Rock.
How can a 'bank' which depends on massive loans for survival possibly have any real stock market value? Derek Wanless has once again created the ideal conditions for a bank takeover - first NatWest, now Northern Rock.
On one of your previous blogs on Northern Rock I asked if providing a 'state subsidy' to a private company was legal. I was told by some commentators that I did not 'understand' the financial system and that the 拢25bn was a loan and not a subsidy. I think we can all guess whether what the eventual status of this 拢25bn will be.
But can someone please answer the following question: Why have we propped up a company with a market valaution of 拢495m (as of this morning) with a 'loan' of 拢25bn. It makes no commercial sense. Waht insanity ? Is this a record figure for a state subsidy ?
Merv King's initial instinct was correct. NR mades poor decisions. It should have been left to go to the wall. It would have been cheaper for the taxpayer. It had assets of about 拢12bn if I recall correctly, with account holders saving of 拢20bn. So under Alistair Darlings pledge to underwrite all account holders the loss to taxpayer would have been 拢8bn - only.
What really is urgently required is reform of the banking system ? If state subsidies were made to any other industry there would be a public outcry, let a alone a subidy for such a colossal sum. Why is the banking system different to other industries? How has NR (and other banks for that matter) been allowed to get in this mess ? There should be more stringent rules on banks lending criteria for a start.
Why should the banking industry be the only industry that seemingly gets a subsidy twice - once when making a loan under the fractional reserve sytem i.e their ability to create money , their licence to print money and secondly - a bail out if they get it wrong. This is a recipe for poorly run industry which knows that the taxpayer will always come to their rescue if they make poor commercial decisions. Whatever happened to the Capitalism which did not rely on the state and made the best allocation of scarce resources, allegedly ?
Will BoE lend to any other bank at the PUNITIVE 5.75 per cent interest rate?
Applegarth for Chancellor campaign.
This announcement from the government not to guarantee support beyond February is a very sensible statement to make.
The difference between the 'will' of the bidders, such as Branson, and their 'abilities' to pay enough to buyout the taxpayer, is becoming all too clear. The government it appears has at last realised that it is time for the bidders to put up, or they will shut up the Rock.
I cant help but think that the taxpayer is going to lose on this one. Maybe it is a price worth paying though, as at least the Great North Run stopped at the Rock in the North East, and didnt move on to Bradford or Leicester.
I don't see the problem here ...
- NRK is solvent, not bust ...
- they still expect to make a profit ...
Yes the BOE has lent then a lot of money and a high interest rate ... but so what, they are good for it and as long as there is no asset strip by a bidder, it will all get paid back plus interest ...
Thus UK PLC will be quids in and have a nice tidy sum that can then be spent on vital services ... far better that UK PLC earns this than some other bank ...
Oh dear. How does this morning's announcement reaffirming the safety of depositors' money square with the pulling of the support in February?
Could you advise why the agencies who assign levels of financial risk against companies and countries nor many of the financial institutions did NOT forsee the sub prime market collapse in the USA.
Best Regards
Northern Rock is bust in all but name. It is solely our money via the Bank of England that is keeping it afloat.
The reason is very simple there are a lot of people in the North East whose jobs are tied up with the on going safety of the Northern Rock.
I'm not talking about the employees of Northern Rock I'm talking about all those labour MP's in the North East. David Milliband, Hilary Armstrong, Alan Milburn and Stephen Byers amongst them. Of the 30 MP's in the North East 28 are Labour. Whoops there goes Gordon's majority!
If you don't believe me see the attached for more information.
"It means that Northern Rock's battered share price will fall further this morning.
And it also means that the future of the Rock, for its 6000 employees, remains highly uncertain."
And just as it should be for any bank that invests its money into loan portfolios that turn out to be essentially worthless, or minimally tenfold overvalued.
The tooth fairy puts a quarter or a at most a few pense under your pillow, not 拢24bn.
That 拢24bn is only a reorganization loan.
So, reorganize. Reorganize along the lines of a failed bank that has lost all of its commercial goodwill equity as well as a bankruptingly massive amount of its more tangible equity.
Don Robertson, The American Philosopher
My goodness David Wilkinson what hypocrisy. If a Conservative government had bailed out a failing bank to the tune of 拢24 billion to shore up votes from their heartland, I can't begin to imagine what an outcry there'd be from the anti Tory press. In fact the media response has been rather muted considering the enormity of public funds involved.
I hope the experience of Northern Rock will be heeded by the investors in the few building societies that have not demutualised and who may be tempted by future offers of free shares etc etc if they vote for the ending of mutual status.
There's a great deal of towing and froing over this, with people like Robert banging on their blogs like crazy in order to make some kind of news, about it being bad news for shareholders and how the company will have to be sold immediately.
The fact is, the status quo is likely to remain for some time yet. Northern Rock, despite lots of people foaming at the mouth to the contrary, is still making money and is still running as it ever was - minus the lending strategy. Any debt to the Bank of England, or the treasury (and we have no real idea how much money NR has drawn), will take time to settle in and become clear as to how it will be paid off, what impact it will have in the long-run and to any buyer.
You know what? The cynic in me suspects that had this been any other bank (and other institutions are covering up their bad debts like crazy), then less fuss might well have been made.
Chrissie #32
All banks have massive loans. Its the nature of their business. They borrow money (loans ) and they lend money. In the case of NR they are forced by market illiquidity brought on by failings in the system - that the BoE was partly responsible for -to go to the lender of last resort to get its loans.
indeeed murray, and curiosly no one seems to put any blame on the depositers who voted in favour of demutualisation
Is Robert Peston still maintaining that the chancellor is 'misleading' the public (and the house) by stating that the BofE loan is backed by NR assets as he asserted on Radio 2's Jeremy Vine show this afternoon?
There is a simple - if painful- solution here. The Treasury / Govt should put the bank into special administration. Depositors will remain guaranteed and the Government will be the senior creditor against the bank's collateral - its mortgage book. As mortgages are paid down, the interest will fund repayment of the loans. This all could mean the loss of all shareholder's moeny - hard luck - and all but a handful of jobs - also hard luck - but that's the way of this modern world, ask Rover workers.....
Teh question that no one has asked yet is: If NR is solvent why is the Bank of England lending it anything? Or is its solvency contingent on the Bank of England. Some where soemone is running a spin that can't be true. Shareholders knwo that they can be in for the kill or a total write off. The game is up and teh credibility of our Regulators is in total dissaray.NR sharholder will see nothing the depositors are alreasdy protected so lets just do what is inevitable and get on with life. The longer this fiasco continues the longer every compoany on hard times or suffering from poor management will run to the Bank of England for a bail out.
We need to sort out our Regulation and not say we can learn from this, as will no doubt happen but put in place rules of practise that are not so opaque they are a joke.
Free markets must work through good and bad times or else the plot is lost.
Dilly dallying Labour under this
(prudent....not!) Prime Minister has shown its true incompetance in handling a real crisis and he must go along with the Chairman of the FSA so that a real stright forward honest hitter can get something. Is Cameron the one? I am still not sure but at this moment anything and anyone must be better than this shambles that wants to cling to power regardlkess of the damage it is forcing us to live under.
Robert, It seems that you mislead us with your broadcast on Today. Darling said your figures were hugely overstated on the borrowing premium. He also said that the loans may continue beyond Feb next year. Guess there is no point in waiting for a retraction from you?
Is it reasonable to treat Northern Rock (NR) as a going-concern?
1. It's got a huge mortgage book that was, until recently, financed in no small part by short-term borrowings on the inter-bank market. This source of borrowings is, apparently, no longer open to NR.
It needs to find a source to finance it's mortgage book, so that it can repay amounts borrowed from those who are not prepared to roll over existing loans.
If available, the cost of this new borrowing facility in terms of interest paid needs to be able to be passed on to existing, as well as new mortgage holders. NR must have some favourable spread between the cost of its lending and the cost of its borrowing.
Is this something that can happen?
2. The scale of NR's business was determined by how much lending it was able to do. It seems that the only fundamental constraint in the past was the existing size of the business, and how quickly it could enlarge the volume of its operation. It could always borrow as much as it had lent, at inter-bank rates of interest.
The future looks to be very different. It's no longer the case that there is a bottomless well of easily-available, cheap funds to find a home for at (low) cost-plus.
It seems that it's ridiculous to think that NR's internal structure can easily be adapted from one in which the focus is almost entirely on selling loans to one in which at least equal attention must be given to the raising of the funds to be loaned, and to keeping the costs of this at a level at which lending terms can still be made attractive to borrowers. I'd suggest that this is a very different discipline from the one that NR have followed during their period of massive growth.
Is it reasonable to think that they have the skills, flexibility and internal culture to be able to transform themselves in this way?
ANY company that gets into a similar situation, ESPECIALLY where a lot of Labour MP`s have constituencies, knows what to do now.
PURE NU LABOUR HYPOCRISY - WHERE ARE THE MEDIA - NO FUSS WHEN THEY SHOULD BE SCREAMING FOR BROWN AND DARLINGS HEADS.
It's very naughty of the Treasury to agree to a sub debt purchase without Parliamentary debate. That's investing public money in Tier II capital of a private bank.
Obviously the City didn't think much of Darling's statement... Just looked at the FTSE and it's down nearly 150... It began almost to the second Darling stood up !!
At least we shouldn't hear any more about "financial prudence" and "Black Wednesday" from this Government and its' supporters (I can hope).
Robert Marshall asked: "is Cameron the one?" (to sort out the NR shambles). If he is, why is he taking so long to let on how he'd do it? But while he's keeping so shtum, his man, Michael Fallon MP, the senior Tory vice chair of the Treasury Select Committee, has ruled out (in a 主播大秀 World Service interview at 5am today) the only workable proposal so far advanced for putting a swift end to the crisis: he doesn't want immediate nationalisation, stabilisation and then re-privatisation (or re-mutualisation) of NR as proposed by Vince Cable, to guarantee the NR savers' savings, and to return + interest, the 拢900 of public money so far lent to NR by every man, woman and child in the country. He and Cameron, just "want to guarantee the return of the taxpayers' loan", but they're not saying how. A conflict of loyalty, perhaps, between their traditional friends - the owning class - and their "new friends", namely the rest of us? This might be borne out by Fallon also choosing to treat the worldwide audience to some irrelevant criticism of the NHS (for being in public ownership). Was his leader listening at 5am? Did he approve? 'New friends' beware!
NORTHERN ROCK HAS TOO MUCH DEBT TO IGNORE. IT HAS TO BE NATIONALISED UNDER A SPECIAL EEC EMERGENCY DIRECTIVE AND THE DEBT ABSORBED INTO THE NATIONAL DEBT. ALISTAIR DARLING IS SIMPLY PISSING AROUND AND LACKING ANY LEADERSHIP.
IF WE ARE NOT CAREFUL, HE WILL TAKE US ALL DOWN WITH HIM.
Do all those people who think Labour only stepped in because they were worried about losing votes in the North East not think that any votes won in the North East may be 'slightly' offset by all the other voters they'd lose elsewhere?
Labour does nothing for the North apart from take its voters for granted.
The Labour treasury did very little to save Railtrack and protect the national interest of it investors and shareholders. Also alot of ordinary people lost their lives due poor management employing sub contractors but the profit takers ie the goverment did very little to compensate those who lost their lives.
In conclusion only the private sector should have bailed out NR as there was no loss of life.
This has made me feel that the political class think they can do whatever the feel like with our tax.
Two things remain unexplained.
1. The money the Bank loaned to Northern Rock went to pay off its commercial paper, and was therefore a massive injection of inflationary liquidity into the markets. Were the day-to-day surpluses drained?
2. Solvency is a daily situation, not general net worth - I used to run the daily book of one of the UK top 100s, so I know. Northern Rock's problems lie in the mismatch with the excessive long-term debt they bought, and the questionable valuation of this, particularly in a fire sale. As there's no serious indications of restructuring, the Old Lady must soon stop being promiscuous, (I suppose that's the appropriate term for bailing out someone whose promissory notes fail - and since I bought the first UK CP note ever, let it ride) and at that time there appears to be only one possible outcome, winding up, although this may take a very, very, very long time. In the mean time, the only people likely to come on board as new directors are probably vultures.
Now, the suggestion of subordinated debt is lacking one viewpoint, and that's one of translation: you can call it what you like in English, but it'll come out as something very different by the time the ECB and Commission translators have done with it. You can bet your bottom euro it'll be a French translator and a German one, because they always translate into their own mother tongues, and as a result the rabbit coming out of the hat will be painted a very different political colour from the one that's being put in here. A colour which will be carefully crafted to put as many nails in the Old Lady's coffin as they can possibly manage, probably in the form of calling a spade a spade and deciding it's illegal State support.
Given the incompetence demonstrated so far by the FSA, BOE etc, it's little wonder if the interested parties put in a ridiculously low offer to test the water and see what happens. Early days yet.
Watching the Chancellor's statement this afternoon the Labour M.Ps from the North East speaking with regards to the safety of the 6000 workers there.
the Treasury have loaned 拢20billion to prop them up.
That equates to 拢3.333 million for each worker.
Treat NR as they would treat any one of their customer's in default. It is quite outrageous that the government slyly changed the terms in order that the 'onerous' (my foot) interest rate is deferred and not added to the loan daily and charged interest on - just the kind of wheeze bankers find appealing..
>> "As Mr Darling has made clear, the country does not have a duty towards the shareholders at all."
True - but he doesn't have a 'duty' towards the depositors or the company either. An open ended commitment by the government is pure folly.
Once you decide that anyone with money at risk is 'entitled' to a bailout you are in deep trouble as taxpayers. The only government money is what they either print or raise in taxes, so why should the population as a whole bail out those who invested their money unwisely?
I'm fascinated by the concept of 'absolute value' as suggested by the Northern Rock board; the 'Rock' is only worth what people think it is worth. For Government, that is how many votes will this get them in their northern constituencies and at what cost to credibility. This is, after all the Government of 'Prudence' and 'Costed' commitments, willing to attack George Osborne over an uncosted 拢1.5 Billion inheritance tax pledge, asking 'Where will you find the money?' - I guess from the same place they found 拢24 Billion, and rising! I wonder why, if they are so flush with cash they need to keep raising taxes?
I am disgusted that a labour Government would use tax payer's money to prop up a bank and spend Billions protecting very very rich people as well as the depositors, in a bank that was fully embracing unethical practices by risking their depistor's money by employing a clearly unsustainable business model, and yet this same Labour Government refuses to compensate the pensioners who are suffering near starvation due to mis-sold and closed down final salary pension schemes.
It is saying something when the labour party risks so much to help the financial elite at the expense of Pensioners especially as the Tories have promised that the very first thing they will do on gaining power is to guarantee that all these pensioners get every penny that they are entitled too.
What would the labour party and the liberal media make of a Tory Government helping the Northern Rock in the same way that labour have? They would be apoplectic with rage and screaming of elitist fawning and fat-cat dodgy deals.
do you ever lie awake at night about your role in this affair?
My business entered difficult times. I only needed 拢50k to get us though a cash problem till invoiced funds came in. The government didn't bale me out. So why should it be spending 拢900 for each tax payer in the UK, yes, 拢900 per tax payer, to bale out this basket case that is in the state it is in becasue of they policies they adopted.
I find all this somewhat amusing. Though not for the shareholders!!!
Gordon Brown has driven the UK economy in much the same way as the board of Northern Rock drove their company. Make predictions and borrow on the basis that these expectations will be fulfilled. As the country is about to find out, Gordon Brown ran the UK finances just like Northern Rocks board ran theirs.
I am pleased the Chancellor is not being railroaded. The fact there are serious commercial bidders for NR gives the lie to all those who say it is worthless and the Gov will not get back taxpayers money.
The issues are about price and conditions. Its a poker game. The gov wants rid at no public cost and the bidders want lowest price. The bidders are not just playing against the chancellor but against each other. So the Chancellor must allow time for competition to develop between bidders. And that's what he is doing; he's got it right.
Robert, are we going to get a revision of your misleading information on the Today programme this am?
Your misreporting could be seen as grounds for a formal complaint to the 主播大秀 that you have wilfully/ carelessly put misleading price sensitive information into a 主播大秀 news programme.
can anyone tell me why the Governemnt has bailed out NR but allowed Equitable Life to fail.
No savers have lost money (or seem likely to either) with NR yet, but lots of sensible folk sufferered big lossess with Equitable.
Confused
Robert, I have just taken the trouble to read the full Treasury statement issued this am. It is perfectly clear that you misreported what it said. This is on top of your misreporting of the cost of the premium on BoE loans to NR.
The Treasury statement clearly says that bidders should not assume state aid beyond Feb next year 'at this stage'. As made clear elsewhere in the statement this should be interpreted as meaning that it is not a given that state aid will continue; bidders should make a case for it. This is not bad news Robert and at best your reporting is partial and inaccurate.
I don't think anyone, including Mr Peston, actually understands what is going on in the surreal twilight zone at the heart of Central Banking.
Tim Congdon let the cat out of the bag in the FT the other day....
"The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.
Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate.
Instead the interest cost on its 拢21bn loan (and indeed its 拢30bn loan if it reaches that level) is zero. So the Bank's profit on the operation in the circumstances discussed would amount to about 拢2bn (that is, 6戮 per cent on 拢30bn)."
The (quite breath-taking) fact of the matter is that the Bank Of England may create credit at nil cost any time it chooses. When this is cash, then there are costs, eg printing and distribution, but no interest charge.
If it is electronic money - ie a book entry and a "loan" created to a bank - then it literally costs the BoE nothing.
So not a penny of "tax payers money" is at risk here. If there were a default on this loan, then the effect on the BoE is exactly the same as if they were to burn a couple of extra skip-loads of time-expired bank-notes.
ie a big fat Zero
So the 5.75% paid to the BoE is bunce - a windfall to the UK tax-payer.
The additional 1.25% "penal" charge is not actually being paid by Northern Rock, and is being "rolled up" as a liability, subordinated to all other debts, apparently, but ranking BEFORE shareholders in any liquidation.
If losses wipe out shareholders' capital then the Treasury is last in the queue of creditors, therefore.
But while this may AT THAT POINT be a "loss" to tax-payers they are only losing what they have been given for nowt by the Bank of England.
ie a big fat Zero again.
At the heart of this whole charade is the fact that our banking system is "deficit-based" so:
- Money is in fact Debt, and literally costs nothing to create, whether by the Bank of England, or by clearing banks;
- Credit does have a "cost" to clearing banks, but this is nothing whatever to do with the arbitrary price set by the BoE and comprises their operating costs, and the costs of any defaults by borrowers.
Clearly the experts here are not aware of the truth of it, so what chance has the general public got?
Trail blazing stuff RP, only a week behind the same story in the Guardian:
Keep up the good work
Re: post 13:
"Given that Northern Rocks borrowings are covered by solid mortgages, there seems to be little downside risk. Did I miss something?"
Yes you did, namely that the housing market is slowing. If the housing market goes into decline the value of the mortgages starts to diminish.
If the rate of default on mortgages starts to rise then the flow of income starts to slow, and the value of the collateral ends up lower than the outstanding loans.
In other words if you buy a house with a mortgage, the house goes down in value so you end up with negative equity, and you then default on the mortgage the bank has a problem. In theory it can chase you, but how do you recover money from someone who is bankrupt?
Why is the Govt treating NR differently from Equitable Life? -where no Govt monies have been forthcoming over several years despite inquiries/reports. Also every block possible has been put by the Govt in the path of the Parl.Ombudsman to prevent her reporting early on the issue of Govt mismanagement of its supervisory role.
Could it be because NR territory is in the NE and lots of Labour votes are involved?
How does this differ from the Lady Cohen so called gerrymandering of a decade ago?
Comment 64 : Jel : 5.24PM
Thanks for your comment. I'm afraid I can't help with either of your questions, but maybe you can with one of mine?
Northern Rock is currently the only firm in this sort of trouble. What I'd like to know is whether you think the reason for its isolation is:-
1. That it is, in fact, the only organisation to have been caught with its trousers down; that it was pursuing an uniquely hazardous path, and that it can quite properly be regarded as a rogue business in no way typical of the market in general.
2. That it is just the most extreme of any number of businesses that have pursued a similar business strategy. And that the reason for its singular fall from grace is that it's position at the extremity has caused it to topple off the knife edge on which many other businesses are now balancing.
3. That there are many businesses, if they had been subjected to the same judgements as those applied to Northern Rock, that would by now have been humiliated in the same way by the commercial paper markets. However there has been a concerted attempt to preserve the perception of the solidity of the rest of the banking sector by throwing Northern Rock to the wolves; attempting to create the impression that NR's demise is due entirely to internal faults, none of which are shared by any other institution.
What do you think?
So no knees up tonight for Mother Brown despite another brilliant articulation in the Commons by Ally D. Somewhere along the way the great unwashed are getting the clear impression that Northern Rock was an ill thought out and belated attempt to save New Labour skins from the lack of supervision of a bank with a crummy business model. Whatever happens Prudence had to be saved otherwise Mother Brown would find herself being compared to Mother Hubbard. Saving the financial system from meltdown sounds so much better than admitting that 拢25 billion of taxpayers loot has been Shanghied to rescue a minor bank from its own incompetent management. Did anyone really expect Bungee man and the rest of the gang to stomp up a pile of dosh for an outfit that is bankrupt in all but name. Surprise surprise those interested in relieving the taxpayer of their involvement want their cake and eat it. Rock shareholders can whinge as much as they like if they feel really hard done by why not call in the boys from Carey Street? There is no obvious solution to this mess which will not cause political damage to Mother Brown so in that sense we should be happy. The trouble is at what price will the lesson have to be learned that Prudence was a myth. Meanwhile back in fantasyland the show goes on and the band is striking up the music. Mother B is getting prepared for another knees up and Alli D is reaching for the Alka Seltzer.
things are just starting to get interesting with the rock....
it seems this government may have 'leapt' before they 'looked' on this one, probably instinctively to protect their labour seats in the north, as several people have already pointed out, and probably commited taxpayers money in the form of a loan without the required skill set and resources to analyse the risk in doing so effectively. oh wait, that's how the run on the rock started in the first place...
a few people are assuming that everything has died down and if the government winds up the rock, it won't cause a run on any other institutions following their revised guarantee. quite simply put, i believe it will, and i think our guys do too, or all of this would be wrapped up already.
the other point i wish to make is if the loan book is solid and transparent enough to put some sort of approximate valuation on after several weeks studying the books, why wouldn't the government re-package the loans and provide a few more promises to any takers here and there, ridding themselves of all this negative publicity.
the longer they are associated with the rock and financial incompetence, the more damaging it becomes.
the only conclusion i can draw is their mortgage book is potentially very toxic indeed which may only be surfacing now as time goes by.
the biggest problem now will be justifying use of taxpayers money to the extent they have, based on the market value of the company throughout all of this. one thing is certain - they can't backtrack and be seen to have called this one wrong in the short term and won't be winding up the rock anytime soon. i expect a quick sale with some very sly promises made.
34. At 12:17 PM on 19 Nov 2007, Frederick James wrote:
> As a Northern Rock customer, I think that NR still has a lot to offer! Service is excellent, and the products are market leading.
Erm, would these "market leading" products happen to include 125% mortgages at 6 times salary, perchance, Robert?
I would like to stress again that Northern Rock's mortgage book has and average ltv of 59%, again people confuse the real issues with spin! Northern Rock's together product did not cause the credit crunch!!!!
Robert Peston it amazes me that with all that has been written on the Northern Rock saga people still don鈥檛 understand the economics of it all and now politicians are trying to gain political points on the subject (particularly the Lib Dems who are demonstrating a deft failure to understand the issue and shouting for nationalisation).
Let鈥檚 keep it simple there is no state subsidy. The Government has made an investment in 1st class mortgage assets (all be it unwillingly) and will receive a return well in excess of what they would on a similar investment in normal market conditions. So in fact it is Northern Rock that is subsidising the tax payer in reality. (Remember the government can borrow money cheaper than the rate at which it lends to the Rock so it is not costing the tax payer anything)
When will the tax payer get their investment money back? When the Northern Rock mortgage holders pay off their mortgages the investment will be gradually returned or when credit markets relax and Northern Rock can refinance. It will happen eventually, see what happens in Jan / Feb 08 when all the 'big banks' finally come clean with their US sub prime investments as part their annual reporting. (Note: Northern Rock has minimal exposure to these risky investments).
As for the breaching EC subsidy regulations, The Bank of England offers the lender of last resort facility to all banks so I can鈥檛 see where the unfair competition / subsidy claim comes from, particularly when Northern Rock is paying above the market rate for the loan. What is the difference to the lender of last resort and the ECB pumping money into the European credit markets to assist European banks?
Ok Darling, you should have reacted quicker to reassure the public in the early days to avoid the run on the Rock but redeem yourself and see this crisis out. Northern Rock small shareholders have had to endure the effect of 'moral hazard' and the UK banking sector execs will be wary of the implications of tempting moral hazard in the future, however the livelihoods of 6000+ families still hang in the balance, remember Northern Rock is the only Financial Institution of any size between Edinburgh and Leeds. When 6000 jobs and the associated losses in supply industries take affect it will be at this point the Government subsidy kicks in, in the form of unemployment benefit payments.
Hey, D. A. Mog (#71),
Do you really think that this wouldn't have happened in a universe without Robert Peston?
Get real. NRK had a brittle business model and has been propped up unnaturally ever since the credit market dried up. The shares should be suspended and the mortgages sold and depositors paid off as best they can.
The party is over, call a cab and go to bed.
Does anyone believe the government will increase taxes to cover this fiasco?
Not a chance.
They will continue to fire up the cash printing presses (as is already happening) and inflate this travesty into oblivion.
Expect interest rate cuts, an increase in the already rampant M4 money supply followed by a sharp devaluation of the pound.
Prudent savers will pay for this.
Robert Peston I have just seen your report on the 10 o'clock news. Have you learnt nothing from the criticsm about you borderline tabloid reporting on the Rock. Throwing up headlines such as 拢40bn of tax payers money at risk is balderdash and very tabloid. Last lime I looked Northern Rock had in the region of 拢100bn of assets. Your report assumes that 4 in 10 of Northern Rocks mortgage holders will stop paying their mortgages tomorrow and their homes will be reposessed and have have zero resale value!
I have just looked out the window and the world is still turning, no tsumami's or earthquakes in the UK so presumable my house will be worth much the same tommorrow as it is today.
Come on 主播大秀 stick to the facts and give the masses a balances view of the issues that matter.
Re: post 13:
"Given that Northern Rocks borrowings are covered by solid mortgages, there seems to be little downside risk. Did I miss something?"
Yes you did, namely that the housing market is slowing. If the housing market goes into decline the value of the mortgages starts to diminish.
If the rate of default on mortgages starts to rise then the flow of income starts to slow, and the value of the collateral ends up lower than the outstanding loans.
In other words if you buy a house with a mortgage, the house goes down in value so you end up with negative equity, and you then default on the mortgage the bank has a problem. In theory it can chase you, but how do you recover money from someone who is bankrupt?
Since you (Robert Preston) first drew my attention to the turmoil that is now engulfing the financial markets around the world, I have read with interest several articles on this subject, written by a number of financial experts giving they're personal view of the events as they have unfolded.
One interesting article I read was written by an American named John Markman entitled "was the credit nightmare meltown planned" and in it he suggests there is a small group of rich individuals who wanted this meltdown to happen. In his words, they had plan, they're sticking to it and it's working.
That set me thinking is the current turmoil in the financial markets a contrived game being played out by a small group of of extreemly powerful and unscrupulous people, who from time to time feel compelled to safeguard the capitalist financial model and more especially how dealings in the financial markets are controlled. Regardless of what it costs and if so was Norther Rock simply an early victim.
I first became aware that such people exist way back in the 1960's when Harold Wilson and the British press said the actions of the Gnomes of Zurich was instrumental in causing the devaluation of the pound. Every decade or so since then it appears that these financial power brokers seem to come together to to re-establish order (as they see it) in the financial markets and to shake out any would be pretenders or miscreants, regardless of the cost.
It's just a thought but wouldn't it be interesting if that is what really happens.
Every day some people end up in court facing bankruptcy, instead of realising their dream of getting rich through a business venture.
The bank is a business venture designed to make money (not provide a charitable service!) and shareholders chose to share that risk with them.
If Northern Rock was successful who would share the profits - why the people that took the risk - the shareholders, certainly not tax payers - so how come it works different ways at the other end of the pendulum.
This is not ignoring the charitable support provided through its foundation - but not sure even that good work justifies a bucket load of "bail out cash" - the treasury would have done better to fund the foundation for a year or so - a much smaller bill for the tax payer!
to Oscar Miller: The Northern Rock is not being bailed out! It has been loaned money that it has to pay back. This ignorance is just typical of the misleading coverage given to this issue. The 主播大秀 and other media must take its share of the responsibility for this affair. Robert Peston appears to be turning this into a Labour/Conservative fight and spinning the story in favour of the conservatives. How can you accuse me of hypocrisy? I've never commented on a conservative party propping up a failing business.
If Northern Rock is still making money as some people claim, how come it can't pay the full penalty rate of interest and has to have rolled up as Robert describes. Also what is the rate of interest they pay on the rolled up balance they owe the treasury? Surely this should be 7% too?
#73 a good point well made... year on year, inflated predictions for UK growth accompanied by increased levels of borrowing... off balance sheet those PPI's n'es pas?
#79 again good point well made. Anyone who was older than 18 in 1990 or has a memory rated above that of a goldfish will remember the reposessions of the early '90s.
Thought it would never happen again?
Did you think intrest rates could only go down while property prices could only go up?
Thought buy-2-let was a licence to print money?
Did your morgage advisor tell you it was so?
Then let me tell you, as an estate agent, in the last six weeks the number of enquires from new buyers has dropped to 0 ...that's zero, nil, nana!
No buyers = no sales which means, in my considered opinion, the floor is about to drop out of the housing market, for all the reasons that had been building anyway, but exagerated by this on going crisis.
Which means for NR, the morgage is only good if the morgagee keeps paying. How many of those 125% - 拢20,000 cash back morgages will still be on the books in 12 months time?
A financial crisis becomes a financial scandal quickly becomes a political one! UK tax payers in for 拢40billion with 1.25% rolled up off balance sheet? All claims of Brown and Darling for 'prudence' died today... mark it in your diaries, 19.11.07 is the day Labour lost the next election.
The problem as I currently see it is that a Conservative Government is now trying to put pressure on a Labour Government, even though they would almost probably done exactly the same thing to protect Northern Rock Savers and keep the bank afloat (they keep copying each other don't they?).
Unfortunately, the uncomfortable truth is had Northern Rock been let go to the wall, you can almost guarantee that any other bank in a similar situation would go to the wall with it, especially if the bank concerned had exposure on the US sub-prime market. The result is that the government are in a panic because they are a major shareholder in a company that has no future, which has already undermined confidence in the UK banking sector.
If they let go now, unemployment in the city will rise as we really being to find what has fuelled 10+ years of growth while watching our manufacturing base disappear. You can almost see the Bank of England looking nervously at all the other major banks virtually willing them to ensure that they are not about to get caught out by reporting large profits when really they are hiding huge losses or worse credit problems.
It would have been easier and more cost effective to save MG Rover. It is just that they were in the wrong business market.
I think the game of poker is over.
@Whoever mentioned Tim Congdon: well he may not be that smart.
NR got into trouble because it was borrowing short term and lending long term, so when the markets pulled back from interbank lending they caught a cold. Why do banks fund like that and take a risk (they call it liquidity risk)? Well as an economist Mr Congdon should have figured that the banks will fund that way (with mismatched durations of their assets and liabilities) if they think that they are going to make more money. Short term interest rates are generally lower than long term interest rates (and with a bit of fancy hedging they can hedge out the risk of yield curve inversions etc), so by borrowing short term and lending long term the banks can pick up an extra profit. Or in the case of NR they can lend at finer margins.
Again Mr Congdon should have figured that there must have been a reason why NR was the fastest growing mortgage lender in the UK. The answer was that their loans were priced more attractively because they were passing through some of the savings from their funding costs. However, if and when the bank is funded on a more level headed basis, with long term debt and a more reliable deposit base, then perhaps it won't be as profitable. In fact, since NR wasn't really that profitable before, perhaps it won't be profitable at all. So perhaps the shares really are worthless.
Then again Mr Congdon, being such an esteemed economist, should have figured that lending to NR even at a 'penal' rate is not necessarily such a good idea if the rest of the market won't lend to it at all. Does the BoE/Treasury know something that the bank market does not? Probably not. So the bankers who understand how to price risk choose not to lend at any price, whereas the central bankers and civil servants have somehow figured out a margin that Mr Congdon reckons represents good value for the UK taxpayers. As an economist, Mr Congdon should have realised that if it was such a great deal for tax payers then every bank in London would be offering the same terms to Northern Rock.
Perhaps he isn't such a 'wise man' any more.
Once again, I will re-iterate this for the hard of hearing, reading and for Robert Peston:
1. Administration only happens for businesses that cannot carry on with day-to-day business and operations. With Northern Rock, that is just not the case. Salaries are being paid, creditors are being paid and contracts are being fulfilled. NR is still a 600 million pound profit business, except with a different business strategy and slant - *obviously*.
2. Explicit nationalisation is not going to happen, because this would only be needed if Northern Rock was in danger of ceasing day-to-day operations and going into administration (and the BofE not getting their money back), and that is *not* the case.
Note: In many ways, because NR is borrowing BofE money, it is already nationalised to an extent ;-). There will certainly be conditions attached to any loan of money as to how the BofE will expect NR to operate. It will certainly not be free money.
3. If points 1 and 2 were necessary, then the BofE and the Treasury have been extremely irresponsible in lending money to an exceptionally bust and bankrupt company. Northern Rock is still a functioning business, on the other hand. This shows the lender of last resort facility has actually *worked*, and the Chancellor did an exceptionally poor job of explaining this.
NORTHERN ROCK IS NOT GOING TO GO OUT OF BUSINESS TOMORROW MORNING, SO OPTIONS 1 AND 2 WILL ONLY RESULT IN THE BofE NOT GETTING THEIR MONEY BACK AT ALL! So, forget options 1 and 2. None of the interested parties want that at all.
4. The BofE and the Treasury do not simply reach into their back pockets and pull out 25, 30, or 40 billion pounds of public money and hand it to a company. They would go bankrupt! This is just naive. Quite frankly, I don't know where these figures come from, and they seem to be as a result of peoples' fears more than anything concrete. NR and the BofE come to some arrangement about drip feeding money gradually from a fund that *could be* up to 24 billion or some other figure, with conditions attached. It doesn't mean they have blown that amount of money thus far, and if they had they would really be in trouble. People seem to be getting very excited over something that is not very exciting at all, and RB seems to be at the heart of it again.
5. The prospective buyers seem to want the BofE facility to last for several years not because they have any specific fears based on knowledge, but because of uncertainty and fear. This uncertainty and fear is only going to subside many months, and possibly two or three years from now.
6. The buyers also seem to be under the mistaken impression that they can buy NR on the cheap and that they're in a position to play hardball. They're not. NR only owes the BofE an unspecified sum of money, and the BofE is not going to call in that debt tomorrow morning and force NR into administration, as previously discussed. In every other respect, the business functions as normal. It simply isn't going to happen. Quite frankly, I'd buy now at 1 pound per share, because when more confidence is restored and as time goes on with nothing very much happening, that will rise.
The more I see of this, the more it points to nothing of very much significance happening for some time. Hopefully, RB will have found something else to blog about by then, or possibly, be working *somewhere else*.
The Labour chairman of Parliamentary Financial commitee has just let the cat out of the bag on Newsnight.
He described the NR business plan as 'flawed' and the board of NR as 'incompetent' and that 'government had to do something about that'.
Why?
Any other private company, cocking up while led by fools would ordinarily be allowed to go to the wall... and tough on all concerned.
But not the Rock?
If the idea was to safe guard the reputation of the British financial system then I would for one suggest that current sentiment amougst the British financial system would rather Darling 'f..k off' and play with someone else's toys.
Safeguard the depositors? Retail depositors totalled 拢20 billion approx.... not 拢40 billion so what gives?
And what about the shareholders? From the moment the run began, the NR shareholders were screwed...
Dead money watchin' a red screen turnin' red!
So why spend taxpayers money at a rate of 2 for 1 to safeguard depositors money? Why trash a reputation more thoroughly than the orginal event? Who is winning from all of this?
If I were to take a guess I would ask... who else (bank wise that is) is nightly dipping into BoE funds like a thirsty man(men?) in the desert? Who else ran...runs borrow short - lend long as a morgage business plan? And who politically is intellctually incapable of handling a situation where the last 10 years of success is shown to built on the same descredited debt model such as ordinary consumers borrowing on assets that are turning increasingly into negative equity?
...I am an estate agent. I wouldn't buy a property now (with or without a morgage) not now....not atleast for the next two? years. Put it in a reputable building society and rent.
#81 ...I would suggest that most lending banks here and in the US have been unable to borrow 'over night' in any meaningful sense of the word 'borrow' for the last 6 weeks (approx.). Hence on a daily basis, and exempting their woefully low savings to loan ratio (max 4%) and their book assets ie morgages on going, they are basically been bust.
Chris Cook in comment 77 says the taxpayer is getting a windfall from the northern rock bailout because it can create money with the press of a button and recieve 7% on the cash. This is a misleading oversimplification because any central bank can print money at any time and recieve the interest on its cash without the need to lend to a troubled institution like nortern rock. Central banks do not usually print money because it would promote inflation. Typically when a central bank intervenes in the market, eg for example selling its own currency to stop it strengthening, it will then sterilise the cash it creates through money market operations. If the central bank is sterlising the additional cash it has introduced into the system then the cost of this will not be far off the base rate of interest. The central bank sterlises its currency by lending out government securities on term repo in exchange for cash. It pays a repo rate on the cash which will not be far off the baserate.
The retail depositors should be paid promptly, debt recovery process be instituted with the full force of the law, the management and board of the bank be charged pro rata according to their levels of blame for the bank's excessive risk taking. The auditors and the rating agencies could also be called in to pay their share of negligence if they are found cuppable.
For the 6,000 employees, other existing banks could be persuaded to absorb them as part of discharging their corporate social responsibilities as social peace would ensue.
Blimey Chris Cook post 77 - that's about the most naive post about money I've ever read. Beautifully written garbage.
There are a lot of people saying that the NR suffered from a global credit crunch and there is nothing wrong with their business model, and the mortgage book they have is solid.
The NR were selling loans with no proof of income needed, I know because I got one, and now I can't afford to pay it back. I wonder how many other people are in my situation?
Are there any more? Do I brush my teeth in the morning? Do dogs have fleas? There's everything to frighten the horses here.
The problem is that the regulators haven't regulated, they're too hug-a-mugger (sic) with their erstwhile banking colleagues to do their job bringing to the public's awareness that the complex instruments being marketed over the last fifteen years have new, improved risk-transfer features hidden in the package, like it's pass-the-parcel time with a number of nasty hidden I-never-noticed-that-about-its in the middle. The problem is the parcel can be re-wrapped with other surprise goodies as well, so nobody really knows what they've got: in many ways it's reminiscent of the original South Sea Bubble, with companies registered with objectives like "but that nobody shall know what these objectives are".
The big fault lies with the governments who're quite happy to behave like Nick Leeson, burying their heads in the sand when they should be sorting out and putting in cut-outs to limit the problem. The packages should be forcibly undone now, and the people who created the problem in the first place made responsible for their chicanery.
Northern Rock's primary fault is gullibility, believing that the tooth fairy exists. That, however, was compounded by greed, taking short-term borrowings to fund long-term speculation. Any tyro know that risks in the long term will sooner or later become certainties,which is why this was foolish, and why this operation must be undone.
It is ridiculous that US sub-prime risk become UK responsibility, when it's probably actually illegal under US law for the UK to acquire large chunks of US prime estate - this was the kind of thing which went out with the Dutch sale of New York. Perhaps our just revenge would be to convert these areas of unloved US into nuclear storage...
Post 81 there are a number of reasons why NR are the only ones in the position they are in.
Firstly the NR business plan was the most extreme of those banks that followed the concept of growing their mortgage books and thus their assets by borrowing short on the commercial markets and lending long.
Whilst they were far from alone in this most of the others who followed this path were less exposed and also had bigger pre existing asset books or were part of more diversified organisations that had other areas to help bail them out.
NR were hit by the fact that they had to roll over a large amount of loans just as the panic struck. This meant that they had very little "cash at hand" to see them through the crucial few weeks. Had the credit crunch have appeared a couple of weeks later the wheels would only now be coming off.
On the point that you make re a veil of secrecy over others I am sure this is probably true to an extent. The point is that being less exposed and having more cash at hand these banks have been able to keep making the payments to date.
You will notice that application fees for mortgages have shot up over the last couple of months. Deals that had application fees of 拢 399 are now having costs of 拢 999 or more. They cost no more to deal with but are a means to firstly increase income and profits and also to reduce demand.
Also the lending criteria has been tightened with thousands of the most competitive deals being withdrawn. This has acted to reduce supply in the mortgage market which means they need less cash to back them.
In the current market, or non market to be honest, it is much easier for a bank to raise money against mortgages with a maximum of 75% to assdet value than for 95 or 100% loans.
And what would have happened if NR had been allowed to go bust?
拢20bn of deposits owned by many more people than just those who work for NR would have been at great risk, and would have been frozen for at least 6 months whilst the regulators got around to activating the deposit guarantee scheme.
Vast fees "earned" by firms of accountants to wind up NR.
Large numbers of depositors in other banks would pull their deposits out and therefore cause a run on that bank. Barclays?? A&L??
The govt allowed BCCI to go down because it was a crooked bank, foreign owned with a small UK deposit base.
NR does not have missing deposits and unexplained black holes. Their problem was simply that all the banks stopped lending to each other because they needed the cash for themselves.
The credit crunch was not a problem made in the UK, or a problem created by NR, but if NR had been allowed to fail, other UK banks would have followed.
It not commonly known that some of the commercial lenders to Northern Rock are public bodies. This includes County and District councils who lend their our tax money to banks when they have a cash surplus. It would be interesting to know how much exposure public bodies have with Northern Rock. This would I guess be in addition to the recent figures announced by Central Government for its lending. The Conservatives idea of not protecting the interests of commercial lenders could well hurt County and District councils.
Lets be very clear about the situation. If the credit crunch hadn't happened NR would have still be trading very sucessfully. IF the Treasury had not made such a mess about the BOE lending to NR ie let it go ahead when it was needed, then again there would not have been such a mess. The directors in NR will not be getting huge payoff's since most of their payoff would have been in shares which are just about worthless. The management team have been in place for a long time. There are 6000 jobs on the line and the creditibility of the UK banking sector. The media haven't helped either by helping to scaremonger the population. Once the credit crunch is over NR should be able to get back on a better footing however its share value has to go up otherwise its market capitalistation will not be sufficent to support it. Stop beating the company up.
In the hullabaloo everyone seems to have forgotten Lloyds TSB's plan to take over which was vetoed by Darling, causing the whole crisis. It would appear that this was to prevent announcements of job losses in Labour heartlands in the run up to the planned election. Even now it is those Labour constituency jobs which are running the Rock agenda. I am amazed that enough of our money to run the health service for months could be stuffed into a private company for political reasons without any safeguards. No wonder it is illegal under EEC rules.
Like another poster mentioned the Labour govenrment are simply trying to protect their vote in the NE by demonstrating protection of NR employment in traditional Labour area. Pretending as politicians always do that they can 'fix' anything - when the reality in my view is completely the opposite.
My bet is that taxpayers dosh will continue to be poughed into NR and it will be money that will eventually be lost - Delorean Motor Company style. Oh well the endless pockets of taxpayers foot the bill for another gubmint cockup of mammoth proportions.
1st rule of a politician is to ensure their seat / party is elected. Self-interest, business as usual.
I am hoping you'll have something to say today Robert (20th). The share price this mornign is grim news for ordianry shareholders but is in the territory I predicted last Thursday. At around 80p per share, a takeover (in some form) is attractive. We are not getting the figures on the deposit drain, which must continuing. Whoever takes over NR will be combing the mortgage books for grades of risk. I can't see this process being amiable. To consolidate teh book, some foreclosures will occur. We don't know (we presume) that NR have been managing this book carefully over the past few weeks but staff morale must be appalling low. A forgotten factor is the likely number of NR staff who have 'favourable' mortgages the NR. If the current share price does not hook a bidder then I would be worried. It may not reel one in but it has to get due diligence etc. out of the traps. The worry is that the bidders have gathered intelligence that things are much worse than we currently believe. I am a bit concerned that the Chancellor is draggign the affair out too long and I don't know waht Meryvn King is thinking at all. Hoepfully at close of business this week, an offer will be in sight.
So the Directors of NR think bids are too low......
At this time who's valuation is likely to be more realistic? The Directors of the company concerned or the market??
It seems to me that as in the Wall Street Crash of 1929 , when the US economy only recovered years later aided by the Treasury under Pres.Roosevelt, it is a case of capitalism being the best system for us to follow until it hits the rocks( pun intended).Capitalism probably is the best system but to be logical if financial businesses want markets to be un-regulated and free of state intervention then they must stick by that policy through good times and bad.Otherwise how can it be fair to tax payers to bail out banks etc. when crisis strikes?
When they are making huge profits and advising governments how to run financial affairs and demanding more freedom they reign supreme in our society and their managers are hugely rewarded and treated almost as demi-gods.Perhaps they and the system itself is not so clever after all ? We seem to have now semi -nationalised Northern Rock but for who`s long term benefit I ask?
Re my post 104 it seems I may spoken too soon as Paragon are the next to be hit by the ongoing crisis. See the attached from todays business page.
Paragon seem to be taking the following approach to this. We will need more money by February if matters don't improve. Does this give a vulture capitalist (sorry venture capitalist) the opportunity to buy them up at a knock down price?
I think we can expect to see more companies hit by this fallout over the next few weeks.
Jeremiah Harpur: The share price this mornign is grim news for ordianry shareholders but is in the territory I predicted last Thursday. At around 80p per share, a takeover (in some form) is attractive.
The share price is all but meaningless now. If they had reservations and nothing happened at 拢1 or 90p then I expect nothing to happen for a while yet.
Tony: At this time who's valuation is likely to be more realistic? The Directors of the company concerned or the market??
Ultimately, it's a decision for NR and the directors as to whether the valuation is enough. If they can afford to say that it's not enough then it's not enough. The only reason they'd be forced into taking what was on offer is if they were in imminent danger of going out of business, and that's not the case.
The interesting thing here, I thought, is that all the buyers seem to want the BofE facility to continue for some time yet. This means that any buyer is not really going to help out Northern Rock in terms of paying off any BofE loan. This basically means that any buyer, at the moment, is essentially useless to the BofE, the Treasury and especially to NR.
The share price simply doesn't reflect NR's current position in terms of how desperate they 'appear' to be. It's an interesting situation.
at the end of the day it is greed by the banks lending too much to the people i.e buy to lets another greedy society who think nothing will happen
cheap credit is great but when it falls down like a pack of cards
the next three yrs will be very hard higher commodities=higher intrest rates
i hope so too much cheap money and the world knows it
unless you are living in clown cookoo land
Could I suggest that readers should go to the NR website and download the Annual Reports. Every one for the last 5 years involves a self congratulatory pat on the back for record growth in assets, record growth lending and record growth in profits.
When one company has managed to get such a large share of the market the alarm bells should have been ringing.
NR should increase the mortgage rates to reflect the current cost of borrowing and the mortgage holders will look elsewhere for their loans to get a better deal. If the quality of the loans is a good as we are being told, the Bank would soon be down to a manageable size that reflects it's savings accounts. I suspect that the some of the assets backing the loans aren't nearly as good as we are being told.
I strongly suspect that, despite the guarantee to depositors, NR customers are continuing to withdraw their money. This will be exacerbating matters regarding the NR unmatched book. In turn this will make NR worth less and less. The frightening thing is that there just aren't enough customers with available deposits to prop up the banking system which has overlent globally on depreciating assets. No amount of government guarantee can make the slightest difference to that state of affairs. Let us pray it isn't quite that bad, because if it is God help us!
Yes the treasury is really caught between a rock and a hard place (groan) in deciding wether or not to keep bailing this bank out. Let em sink I say. When private individuals have financial problems they are hammered into the ground by the banks and other lenders. It's time they had a dose of their own medicine!
Let me qualify why I say there were a number of players at risk: two weeks before this hit, the Daily Telegraph surveyed the profile of the UK CP market and predicted that the volume of near-simultaneous rollovers and dodgy ratings was a recipe for trouble in the 2-6 week timeframe. How right they were! Which means to say that NR was at best a scapegoat and at worst a bellwether.
Sadly I seem to be one of the few who have sympathy with shareholders, who aren't millionnaires that can afford to lose thousands. I feel sorry for any law-abiding citizen who loses money. What about original depositors of the Rock when it was a mutual, they were part owners and got shares when it went public. Many hung onto those shares with the view that it would perhaps contribute toards a daughters wedding, or a child's university education. The only fault is perhaps not constantly reading financial news articles as they thought that being a bank the shares would be OK.
As for the clamour that the tax payer shouldn't prop up a private business, well it happens all the time. Business grants for example, then what about the millions given to farmers via the EU (and UK contributions) they are private businessess too. These happen because the Govt thinks the long term gain will be greater. Businesses succeed, pay more corporation tax, employ more people who will pay tax etc. If the Rock is supported enough to continue it will recover, the treasury loan will be paid back (plus interest lets not forget) and for years to come will be paying millions in corporation tax, the employees will be paying plenty in income tax. This must be too logical a scenario, or is it that it's too long-term?
As for breaking EU rules, well what are they going to do? The French do it plenty i.e beef imports so that shouldn't stop us looking after ourselves.
"90. Geoff Brown wrote:
One interesting article I read was written by an American named John Markman entitled "was the credit nightmare meltown planned" and in it he suggests there is a small group of rich individuals who wanted this meltdown to happen. In his words, they had plan, they're sticking to it and it's working."
If you look at the history of banking this is an old game, sometimes with truly horrific consequences.
In the past, the Rothschilds were implicated in contracting money supplies and acquiring assets during the following slump. Today, the central bank, certainly the BoE is state controlled rather than private, so it shouldn't be possible for a small group to completely cut of a nation's money supply.
I think I'll let a quotation from a Sir Josiah Stamp (A director of the Bank of England from 1928) make the point...
"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in.
But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."
It's long past time for an implementation of full reserve banking.
Re post 121 - I quite agree.
Most of the staff will be shareholders too (as well as being taxpayers) - these aren't separate groups.
And how often are foreign companies given grants to move to the UK - or to parts of the UK (like Siemens in North Tyneside, who left very quickly afterwards)?
The taxpayer hasn't lost anything as (a) the money has been created by the BoE and (b) because despite the efforts of politicians, the media and the shorters, NR is still in business. If allowed to, it will pay the loan and the interest back, and someone will pocket the profit.
Someone should point out to our darling Chancellor that it was cheaper to buy votes witha pint of beer.
It seems to me that the government's actions in providing a safety net to the Rock has done nothing at all. There remains unresolved problems in the pipeline for the banking sector, and nothing done so far, has changed this potential risk and it may have made it worse! Maybe seeking public credit for saving a pooly run company is part of the Labour Governement's DNA!
It would have been simpler to deal with this in a normal low-key way, as has always been done by the banks!
Teddy agrees with post 73, 79 and 94 and disagrees with post 88 and 108.
Teddy and myself have been renting since the last housing crash. We remember it very well. It took 3 years to sell a good 3 bed house in a very good area for a 20% loss. Teddy nearly ran out of honey.
We knew the party would end one day.
Jel 104 and 120, Ian 105 and 114
Thanks for responding to my post 81. I'm going to post some more thoughts on the later, "Rock "needs" 拢1bn" thread.
Here is a very simple analysis:-.
NR is a business and its management have made a mess of it. They appear to have been well paid to accomplish this situation.
The Shareholders have invested in it because they expected to make money from it.
The Depositors saved with it because they wanted good return on their deposits.
The staff chose to join NR.
No economic analysis,or clever talk can change the above facts.
The company should be left to its own devises to "sink or swim".
This is a tough world and there are more deserving cases to support if we are being charitable.
The 6,000 employees have to take their chances as everyone else does.
Am I wrong? convince me.
Re the #77 posting that the loans are illusory in the sense that the Bank of England is uniquely placed to create the money 'painlessly', or without cost.
Perhaps we should tell the Government in Zimbabwe that their 25,000% inflation rate is a misunderstanding of the true position---or more to the point tell the people in the bread queue that their worries are over... the loaf may be US$1 or Z$2,000,000 in the local currency...but the Government are sorting this problem out because they are busy printing more money...and so the bread will be cheaper tomorrow.
I suspect that it is no coincidence that the refinancing of the lender-of-last-resort loans to Northern Rock took place in the first week of October. That was the time of maximum Government vulnerability, before the election had been called off. How delicious the irony must have been for the management of Northern Rock to be persuading the Treasury to adopt the very structure of quasi-ownership, subordinate term debt, by which it held its interest in Granite. A payment of 拢380,000 to Mr Applegarth represents not a reward for failure but a modest success fee for this spectacular coup.
121, you are saying that you have sympathy with shareholders. Well, that's fine. Not all shareholders can afford to lose thousands. That may be true.
Just tell me which shareholders can't read?
The value of shares may go down as well up.
If you are so sympathetic, use your money to pay off shareholders, who are often institutions, the very same institutions who have raked in billions in dividends from RBS, HSBC, Barclays et al over the last few years.
The government has paid for NR. If someone will buy it, and refund the govt in full, then any money left after depositors are paid, belongs to the shareholders. Nothing else.
131, why turn on someone just for showing sympathy, why can they only show this if they give money they no doubt don't have to hedgefunds.
Yes shares can up as well as down and it's easy to throw that one around, when a parachutist jumps out of an aeroplane they know there's a chance the chute will fail, your way of thinking means that their bereaved families deserve no sympathy if the worst happens.
I suspect 121 was talking about the northerners who have next to nothing to start with.
re Michael Cornelius (128)
No you are not wrong. You do raise a fair few points, however have you ever been in the situation where you...
Invested your savings into a bank, only to be swept up in public and media hype and stood in the freezing cold to withdraw the very money you have worked all your life for, worried incase the said bank should collapse and you would lose everything?
or
Get up on a morning to find yet another story about your employer being bought, collapsing, critiscised etc. Go into said employer, concerned (well frightened to death actually) that in the next hour, day, week, month, you may not have a job - and are left with a mortgage, debts, family to support?
Then come home to find yet another story about your employer being bought, collapsing, critiscised etc.
Have you? Convince me.
Oh, and 132 - Northerners with next to nothing to start with? Thats just the type of narrow minded thinking that makes everyone hate southerners.