Rock undermined by markets
There could not be a worse moment to sell and refinance its balance sheet.
The interest rates charged by banks and financial institutions for lending to each other – the now-famous – are soaring.
So bin the idea that the taxpayer-backed loan provided by the to the Rock is at some premium or penalty rate.
In current market conditions, the 7 per cent interest on it represents a remarkable bargain.
And don’t forget that, as I disclosed last month, only 5.75 percentage points of that is payable in cash.
The rest is rolled up and converted into subordinated debt, held by the .
Now the cash interest rate for strong banks that want to borrow from other banks for just a month soared yesterday to more than 6.7 per cent.
And the three-month bank-to-bank rate (as calculated by the ) increased to 6.62 per cent.
Those are the rates available to top-notch institutions: the Rock would have to pay more.
So what is the market price for a jumbo loan backed by the kind of mortgage-collateral which the Rock can provide?
Well , the medium size mortgage bank, has just borrowed £4bn for just two years from banks led by .
I am told that A&L is paying materially more than 7 per cent per annum in interest, if upfront fees are included in that rate (though bankers are refusing to confirm the rate, citing commercial confidentiality).
This matters, because all the possible rescue deals mooted for Northern Rock involve borrowing from banks to pay back a portion of the £25bn which taxpayers have lent to the Rock.
The , for example, says if it owned the Rock, it would raise £11bn; JC Flowers, the private equity house, would borrow £15bn if it owned the Rock.
If debt on that scale can be obtained in current tight market conditions – and that is by no means a certainty – they would kill the Rock’s profit margin.
There are four other possible rescuers: , , the Tyne Consortium (led by ) and (which would take only a minority stake in the business).
However none of them are in any better position than Virgin or Flowers to find a loan for the Rock at anything other than crippling interest rates.
In theory that should not bother the Treasury, so long as it gets some taxpayers’ money back now and all of it in a few years.
But here’s the thing: market mayhem is wreaking havoc with an element of any rescue package that is essential for the Treasury.
Under EU rules on state aid, the Bank of England’s loans to the Northern Rock can only be continued after February if they can be deemed to be on commercial terms.
And the easiest way to prove that they are on commercial terms would be for the Rock – if controlled by Virgin – to borrow its £11bn from banks, and reconstruct the residual £14bn or £15bn of taxpayer loans so that they are on identical terms to the bank loans.
This means that the collateral underpinning the bank loans and the taxpayer loans would have to be identical: the banks lending to the Rock could not cherry pick the best and soundest Rock mortgages as their security.
That seemed achievable only ten days ago.
Not any more, I am told.
Banks lending to the Rock want its best assets as collateral – which would leave the taxpayer in a weakened position in respect of its remaining loans.
Here’s the big problem for the Chancellor, Alistair Darling, and the Treasury.
A deal that handed all the best assets to the lending banks might not just be illegal under EU rules, it might also undermine Darling’s determination to ensure taxpayers don’t suffer any losses on their loans to the Rock.
On any scenario, the taxpayer will continue to have massive exposure to the Rock for two to three years.
And plainly the risk of losses on a residual £14bn or £15bn would be higher, if that loan were backed by less attractive assets.
All of which is to explain why the Treasury has retained the option of nationalising the Rock.
Nationalisation is not the Treasury’s preferred option.
No Chancellor in his right mind would choose to become the de facto chief executive of a commercial mortgage bank.
But the commercial solutions on offer may not work.
I'm 
°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment
I know I am stating the bleeding obvious, but here it goes:
WHAT A MESS!!!!
NATIONALISATION IS THE ONLY OPTION AND ALL THE HOUSES BECOME COUNCIL HOUSES.
To sum up your article into some key points:
- Libor rates are increasing 'dramatically'. Making money market lending more expensive.
- Bids for NR mostly involved paying off somewhere in the region of half of the Banks 'loan' .
- To avoid legal issues, the remaining half of the Banks money would be given similar terms to commercial financers.
- Commercial financers also want access to the better quality loans (fair enough, really).
From this you seem to have come to the conclusion that a sale is thus impossible? In my most humble opinion, this is more than a bit of an over-reaction.
I will play devil's advocate to your argument if I may.
The Banks loans would be at a greater risk due to not been given sole access to the best quality loans. This would worry the Chancellor as it risks taxpayers money..?
Its not the tax payers money. That idea is daft and born out of a lack of financial education (I'm referring to the country in general here, rather than Mr Peston). Further more, if half of the loan is being paid back, then the total financial risk is significantly lessened. What's left may be at a fractionally greater risk than before, but we are talking bits of a percentage point here..
These finance options could cripple the Rocks already damaged profit margins. True, but they would have potential for recovery.
In the mean time the Bank would have profited greatly from the higher, commercially/legally acceptable rates on its remaining 'loans'. Likely more than enough to balance any risk associated with weaker loans.
And if you really think its the tax payers money being used then, presumably, if it does all work out ok in the long run, you will be the first to stand up and use your very loud and influential position to ask for the government to hand back this implied tax surplus?
Robert, all we want is a well written (done), well researched (seems to be done), unbiased (do.. err *cough*) piece of reporting.
Ian White, the Rock doesn't own the houses it owns the mortgage on. It merely has a right to reposess in the event of a default by the borrower. So far as I am concerned, forced nationalisation of the objects of the Rock's mortages would be very stupid indeed, buying a whole bunch of houses at a significant over-value. Nationalise the bank, yes, but not the objects of its mortgage business.
And Mr Preston forgot to mention the 11% PLUS equity kicker (assuming it still kicks for the investor, rather than just kicking the investor) that Citigroup agreed to last week. Is that the true measure of the cost of long term finance now?
If the banks are struggling to get a good rate for loans. Then it's going to be really expensive for Joe Public to borrow money!
Mr Peston, I would be interested in hearing your take on comments from the likes of Robin Ashby and Matt Sinclair.
Perhaps there is scope for a future article? Their quotes in the Daily (Hate)Mail were.. interesting.
If nothing else I'm sure it would recieve plenty of responses from NR staff!
It is quite wrong of Peston and others to refer to the money lent to NR as taxpayers' money - has he not heard of government debt? How do we know how much of this money comes from taxes imposed on us, and how much comes from lenders to the government? So how much interest is the government paying on its borrowing at the moment, is it more than the 7% charged to NR?
Of course, this money now cannot be spent on the needs of us taxpayers, it has been spent on the needs of NR borrowers (who are also taxpayers). In a sense it is taxpayers' money, but not in the way Peston claims.
As already stated - it's a bloody mess. But we are the share holders of UK incorperated, so we have to carry the can.
Ian White can you please run through how your genius idea. Turning all the houses currently with Northern Rock into Council Houses. Honestly some people
Don't worry: Northern Rock is solvent - Labour told us so.
Except that people on housepricecrash.co.uk were talking about NR's dodgy business model early 2007. How come a bunch of "doom-mongering" amateur economists got it so right, when the eggheads in the Treasury and the BoE didn't?
Ben,
Again I don't see why you and others have difficulty understanding this:
1) There is risk/reward structure to any, that is why you and me pay more interest on our loans than than the BoE for example. The loan to NR is at less than 30 bips above three month LIBOR but it is for FIVE years not three months and so is more risky. Even if we accept for a minute that NR is rock solid the premium being charged is not high enough, hence the taxpayer is not being rewarded for the risk taken.
2) Even if NR was rock solid, not only is it not being charged the right rate of interest but in terms of the security, we the taxpayer are last in line to receive any money just before the shareholders. That means everyone else gets paid before us and the equity holders.
3) And it far, far from clear that NR assets are rock solid. Even assuming the mortgages are given on perfect assets to people who never default, a unknown portion are securitised ie already sold and collateralised to someone else. So they may appear on the balance sheet but in reality we the taxpayer have no access to them or their cashflows.
4) And finally it must be pointed out that people to date have been unwilling to lend the amount lent by the taxpayer to NR at any rate.
Finally, if it does work out what chances do you think there are of getting the "profit" back? Darling has made the ultimate "other people's money" bet.
Ben (post 3)
As pointed out in a previous blog tax payers money is well and truly being used to finance Northern Rock.
Since the rock can't borrow money on the markets it has to be borrowed from the bank of England and since they can't just create money it is secured against the taxpayer by goverment borrowing which we all pay for in the end.
If commerical lenders are allowed to cherry pick the most secure loans from the books it means the bank of England is left financing loans where the payer may more likely default meaning it loses money.
It also means feasibly that the goverment would be repossessing homes in this scenario or if the bank is nationalised. They would have to go through with this if all other means fail which would no doubt cause them more bad press, and if they try and abstain from doing so it would be seen as breaking EU rules if they were to give an advantage to customers that they wouldn't be able to get from other banks.
Ben, by any chance do you trade in/package/repackage CDOs for a living?
Th point is that if the lending banks have asked for the best quality rock loan assets, and will not except anything else as security for its lending, that inevitably leave HM Treasury with mortgage assets value as being worth 'less' by the market, and unacceptable to the market. By definition, how can you have an asset backed loan using assets that the market has deemed unacceptable?
Is it not the case that the money lent to Northern Rock has been created by the Bank of England simply inflating the money supply?
If so what effect will that have on inflation?
Hi Danny,
You make several very good points that are very hard to disprove.
I certainly didn't intend to imply that there is no risk attached to the loan. That really would be foolish of me.
As I said, I was mearly trying to play devils advocate to Mr Peston's (in my opinion) overly doom and gloom attitude.
If I am reading correctly, your very last sentance answers your second point. I certainly don't expect to see any share of any potential profit that the Bank/Treasury may make!
Its all an issue of confidence really, I have confidence that the Rock will pull through (likely under a different name..) and that the Bank will not lose any money. Plenty of people have differing opinions and that's fine by me.
I do agree with point 4, but would take it a bit further.. the crisis came about because nobody wanted to lend to anybody.
I don't think many of the people you are refering to do not understand what your saying. I think they just see the risk/reward ratio as acceptable.
But then, I must admit to being very biased - so feel free to take my comments with a bucket of salt.
Ben
Ian,
In answer to your question - everyone is right sometimes.
The Doomsayers you pass on the streets wearing billboards proclaiming the end of the world will, at some point in the next few billion years, be correct.
Why is it that the money loaned to NR is constantly referred to as 'taxpayers money' but that the hundreds of billions of dollars and euros pumped into the markets by the Fed and the ECB - let's not forget that NR situation would not have made the news if it were a eurozone bank - are not spoken about in the same terms?
Our country/government/central bank has simply drawn more attention to its dealings but those dealings are not unique in these bumpy times.
I got to ask you Ben #3... who do you think Mr Preston is biased against?
THe Government? NR? The BoE? The NR's current suitors ...as a whole or individually? Who?
Seems to me though, that the ongoing crunch with no hype from anyone will get worse before it gets better. And what's most intresting now is the disconnect that has transpired between the base rate and the libor rate. So while the Boe won't be dropping the base rate this side of February, even when they do, morgage rates will be unaffected. Those rates will most probably continue to rise.
However, as for NR; as with so many things in life, there is an enevitabilty of least? desired outcome... in this case nationalisation.
The solution to the Norhern Rock situation is simple:
NORTHERN ROCK NEED TO INCREASE THE RATE THEY CHARGE ON THEIR VARIABLE-RATE MORTGAGES
Problem solved.
(The days of cheap credit are over. Remaining in a constant state of denial of that fact will not solve anything.)
I too am interested in the 'disconnect' between the BoE base rate and LIBOR.
I would like to find more about this, if some of our more fiscally aware posters have some information on this situation.
It seems that the 'old lady' is becoming rather impotent in her old age.
Andrew K (#11),
Has the government recently asked you to hand over some cash for the Rock? I'm a taxpayer, I haven’t been asked. The BoE can create money (simplification) – my understanding of the exact ins and outs of how this is done and how it may effect inflation is not great, others have explained it better in previous blogs.
Andrew H (#12),
No, I do not deal in CDO’s. If your asking if I am biased in NR’s favour, then the answer is yes, that, I am more than happy to admit.
John (#17),
I believe that Mr Peston’s blogs have been overly critical of the Rock and biased against it. Please do not take that to mean my opinion is the exact opposite – but a little less doom and gloom would be nice. You say it will get worse before it gets better? I think you may be correct, but I hope you are not.
Carol (#18),
I believe your post may prove prophetic.
Two points.
1.Please let's not overlook that if the same Chancellor or his advisors at the Treasury had possessed the presence of mind, the necessary market expertise, and the personal "nouse' to see the incredible good sense of permitting TSB to buy NR before 'the proverbial hit the spreader' there would be less of the technical discussion going on here;only the EU to mollify.....and TSB shareholders.
For me, Darling wrote his own testimonial in that early episode of this saga.
2. The resolution fault -line is political;the North East being pure-gold Labour territory.That is the primary reason for any talk of "Nationalsing" this private company that failed.
John C.
The UK market has in its history seen the fall of many well known brands with loyal customers and good products when things have been tough eg M&S, Sainsbury, Lloyds etc...all have been reinvented and remerged to be successful when taken on by strong teams with a clear vision. Virgins Brand recognition and Bransons ability to reinvent in this sector is a strong proposition. Few banks are actually 'liked' by their customers.
The UK mortgage market is not in meltdown like the US.
Nationalisation is not an option. Northern Rock is tarnished goods now. Virgin seems to represent the only option and the best one. I am sure NRs customers would be very happy. After all the people that matter in this are in fact Northern Rocks customers.
On reflection from the days and days of posts on this and the credit crisis hysteria has kicked in.
If LIBOR rates are higher surely if you are lending the money to the other banks your making more money? No?
Crisis - A mixture of danger and opportunity?
Ben is talking utter rubbish and not appreciating the handicaps that come with owning shares. The facts to date are simple savers deposits are secure shareholders are no.
The Chancellor showed a total lack of understanding and still does in regards to what his actions have generated to date.
NR is classically insolvent, and the deemed assets are only as good as what can be realised which in a buyters market is very little.
It needs to be wound up asap. Shareholders will get diddly squat and those with mortgages will still be paying them off to whom so ever takes them over.
The B of E must stop this continuous support of a dead duck, it is serving no purpose what so ever.
Part of the equation for sorting out this mess will require heads on the block, most notably the present Chancellor and the Chair of the FSA. The Prime Minister will suffer a far more ignomimious fall when the electorate act in mass in due course.
There seems to be an approach of delaying matters until at least february, which seems inapproapriate and injudicious.
Sapping £500 million a week is insane when there is no bottom line reason for it, save to protec a few incompetant people with over inflated salaries and delusions of grandeur who must be removed from events so that matters can realy progress.
Finally we also need to ask what made Mervyn King adopt a total reversal of opinion in finding it
o k to support a bank who had got it wrong through poor management.
How are all companies now to view their future? and will the B of E and the next Chancellor rush to every company's aid with a support package if they fall on bad times? Such a proposition is technically insane but the longer the NR fiasco goes on, the more reality will be ignored and the madness will become the precedent, hence lets all back get on this planet asap.
I liked your take on the situation Simon. Business is business and life is life. A company couldn't foresee the future and made some risky decisions which came back to haunt it when the market climate changed. It's time to move on. Tesco beat the sales gloom today, OPEC has a chance to turn markets on their head, yet all we get is more number crunching, finger pointing Northern Rock tripe!
Tp Ben # 20
The Northern Rock should have been declared bankrupt on September 20th. It wasn't not because it would have caused a financial crisis but because the result of the closure would have caused the crisis.
Until the law is changed (and it seems that it is being changed rapidly) when the Northern Rock went bankrupt all the deposits would have been handed over to the administrator to resolve. The last time this occured it took up to 5 years before depositors got all their money back (BCCI) and I think it was the discovery that that was going to occur which the treasury feared more than the closure of northern rock.
Lending £30bn to NR is a monumental screw up. However, nothing could be done legally to avoid having to lending them the money.
Rob #23
The reason why libor is high is not to make money but because there is very little money out there to be borrowed. 31st December is year end for many banks and it always used to be the cause that banks prefered money in their own hands rather than others on that day.
> The UK mortgage market is not in meltdown like the US.
You would have to be blind to think that. Walk down a high street and look in bank windows. All the advertisements are for savings accounts. This time last year it woud have been loans and mortgages. Care to reason why the change has come about? The banks can't lend using the Rock's model anymore, they need our cash to make loans the old fashioned way.
In summary, the people who actually still have liquid cash to lend are now charging a significant premium and demanding blue chip asset backing to those who are short of cash.
Those that don't have the cash are whining that it's costing too much (if they can't get it) or saying nothing (If they can ie Citicorp)
However nothing is more sure than the price the banks are charging us for credit whether for mortgages or loans or credit cards, is going to go up by 1 - 2 percent over the next couple of months, because that is what they are having to pay for it.
Wait for the screams........
And the current house price stagnation is going to turn to deflation next year - 1989 - 90 here we go again, but from the market not the government!
Wish I had a few hundred million to lend at the moment, like the OPEC countries.....
ive looked at housepricecrash.co.uk and as Ian said they seem to be those amateur economists are getting a lot of things right.
Ben (from Ian).
Everyone is indeed right sometimes. But several points arise:
1) The reasons given on hpc were the reasons that turned out to be right
2) They (ie the consensus opinion on there) also predicted the general credit crunch, and the consequent effect on the housing market (interestingly Merv was warning about this also last year - but no-one (least of all the ³ÉÈË¿ìÊÖ) was really listening).
3) If everyone is right sometimes, then economics is no better than astrology - why are we paying all those economists so much money to steer the economy then? They would be as useless as the so-called City financier parasites then....
I have thought credit risk was mispriced for over two years now and was pleased to see the cost of insuring against default jump earlier this year.
I have thought property in the UK, USA, Spain, Australia, and basically every Western property market fuelled by securitisation would see higher prices when compared to historical fundamentals. And pose a very real risk of breaking down important micro-psychological dampening mechanisms such as profit taking, investment diversification etc.
The effects of securitisation have increased the lending funds of mortgage brokers, driving down mortgage rates and bringing the entry point to the mortgage market down so low, that it significantly raised the number of property market participants (approvals rose).
This increased demand supported prices thus reducing the risk of negative equity.
The reduced risk of negative equity allowed lenders to raise their LTV ratios (oddly some even over 100%).
This pushed prices up further as greater leverage was available to mortgagees, breaking more important psychological barriers on the way.
We are now pressed hard against the ceiling of affordability, reducing the number of people able to participate in the property market from the bottom up. Avg FTB's are now in their mid 30's that age is rising, not by choice but by proxy.
Many require help from their parents to afford their first home, this requirement is economical nonsense for those in employment, let alone skilled workers.
This is exactly the kind of micro-psychological barrier that has been destroyed by the vast channels of capital flowing via the securitisation markets and buoying property prices.
These people will reel with pain, and many will scream foul in the re-stabilisation/correction.
Widespread expectations are that property can somehow rise inexorably in comparison to other investments. An entirely implausible assumption.
Current market expectations are due, on the whole, to the global securitisation markets, channelling Asian savings into Western property equity. And the smashing of one psychological barrier after another right up until people on the ground no longer knew what to think, they then decided... it can only go up, risk free, forever. They have been bidding accordingly.
What we are witnessing rippling through our global financial markets (sub-prime fall out), is a reminder that our world is finite and fragile, and that to assume otherwise is often fatal.
And...
Property prices have only been rising because Asians are saving enough money for Asian funds to buy Mortgage Backed Securities, and they are only buying these securities because they believe they are very, very safe.
In fact they are not as safe as once thought. They are part of the positive feedback mechanism described above, based on the growing savings of Asia.
And as Asia becomes more developed their savings rate is bound to fall, not grow, it is in fact going to converge on Western savings rates.
Which in the US have even been negative!
A bubble in every sense, which I can prove mathematically, if you so wish.
Fortunately for the next generation of the UK population the bubble has been lanced (admittedly in the latter stages), due to the closure of RMBS markets (following the US debacle).
This will likely mean a steep fall in property prices here, as the capital required to support the previous lending levels is simply not forthcoming.
Hopefully the impending falls will instill some of the psychological barriers we have lost over the past ten years.
A blessing in disguise for everyone but the baby boomers.
NR has already raised its standard variable rate to something outrageous like 7.8%.
However the fact that NR is borrowing at 5.75% cash and the remainder is PIK raises an interesting question as to why this should be the case. In theory, any increase should follow its underlying cash borrowing costs. It will also be interesting to see what would happen if NR is nationalised because it would then be a government entity and in theory mortgage borrowers should be able to borrow at government rates - although I suspect that won't happen either!
The real losers in this case are the people (yes I am one of them) who have mortgages with NR and are therefore being charged a penal rate for their failed business model (I know I can get out but that takes time and incurs arrangement fees).
"11. Andrew Knight wrote:
Since the rock can't borrow money on the markets it has to be borrowed from the bank of England and since they can't just create money"
Eh? That's exactly what the Bank of England does.
And since the Bank of England can just create money "at the flick of a pen", there isn't exactly much risk associated with the process.
And if the said loans are replacing existing commercial loans, they aren't even inflationary. Anti competitive they may be, I can see all the other bankers getting jealous.
"The bank hath benefit of interest on all moneys which it creates out of nothing." - William Patterson, founder of Bank of England, 1694.
I have a question - what if all the NR mortgage payers move their mortgages to another lender? What state will that leave the NR's loan book in? Who would want to save NR in that situation?
Simon,
You say that most banks are not liked by their customers - but actually NR is. Many NR customers are from the North East and identify with the current brand- I can't see any reason to suppose they will identify with the 'virgin' brand and some bloke in a silly jumper fannying around in a hot air balloon.
Like many banks over the years, I expect Northern Rock has foreclosed mortgages on customers who could not pay their debts. They didn’t operate as a charity – they repossessed the properties to make sure they got their money back when the loans went bad.
So now the treasury has to foreclose on Northern Rock. The treasury also doesn’t operate as a charity – they must repossess this property to make sure they get their money back because this loan is turning bad. It should be done like banks do it to lone parents who loose their jobs – without a second thought. What goes around comes around – the shareholders didn’t show mercy towards bankrupt home owners, so why should we show mercy to the shareholders? Liquidate it, take our profits and throw the bones away. Like Northern Rock would have done.
Eek
Accept your point but if you can take a controlled risk and afford to lend the money for a higher interest rate you will get a better return...unless of course it's a 'sub prime bank'...in which case run aaarrrrgghhh!
Gary, (Post 36): "what if all the NR mortgage payers move their mortgages to another lender? What state will that leave the NR's loan book in?"
I would think NR would be delighted. The current problems NR are experiencing are due to a lack of liquid assets. If you move your mortgage from NR to another lender, NR gets paid off in full at once, less the future interest of course.
Gary (#36) - If they all remortgage with other lenders, the Rock will be sitting on 40 billion quid or so, and won't need to be saved.
Surely NR should be encouraging people to move elsewhere just as fast as they can process the paperwork?
Gary #36,
It will leave the mortgage book smaller, alot smaller. It would also allow the ROck to pay back its own debts as the size of its mortgage book is part of the problem!
Scarecrows wake up use your brain.
There is a fraudulent financial system at the heart of M
oney creation. British and American Bankers collude together to maintain power in Creating Money from Nothing and then collect Interest!
Read WEB OF DEBT.Let the Polititians
know that we want DEMOCRATIC MONEY.
NORTHEN ROCK is now owned by the British People!at the moment the Government create just 3% of the money supply, TAKE BACK THE OTHER 97%
As a people we can then vote on what we want new money to be spent on.
No more money as DEBT, creating money
from inflated house prices is cynical and will potentialy cause a financial collapse.
Fairpoint. Made me laugh anyway. A little lightness amongst a lot of hot air.
As you rightly say NR customers like NR. NR will survive and turnaround and at the moment is undervalued.
So I have to go now and take a punt on the share price for the long term.
Mr Smith.
You are correct. The bank can create money out of nothing. However, what it cannot create is value. The price of a commodity is a function of the supply and the demand. Assume for a minute that demand is a constant (this is incorrect, as demand will lagrely vary inversely with supply, which only exacerbates the problem about to be demonstrated). Where supply is increased, the price will decrease. Therefore, by printing more £, the price for those £ in the market place will decrease, and the £ will be worth less. In other words, by exercising their right to print more money, the Bank will have created inflation in the price of goods as measrued against Sterling. Ergo, they will have created money, but destroyed value as the cost of that money, a historically guaranteed way of increasing the likelihood and severity of a recession.
I'm sick of th negativity being spouted by two individuals on the Northern Rock issue.
Is it just me or has everyone had enough of Robert Preston - It seems to me he is trying to make a name for himself in amongst all of this turmoil, with a constant doom and gloom message - Whats wrong Mr Preston did NR decline you for a mortgage - this looks like a vendetta to me.
With regards to small shareholders, of which I am one. Mr Ashby, self appointed spokesperson for small shareholders, has been bleating about his loss on shareprice - Does he understand how shareprices work and the term "risk"??? Looking at his quote in the mail of "My shares were worth £6,000 at their peak, now they are £600. " Anyone capbale of doing the maths can see he is not an investor, but is the benefactor of free shares awarded to him when the company went public, he hasn't lost anything, he simply didn't cash in at the right time and now has an axe to grind.
Well done the Rock for the pay award, the staff have no involvement in high level decisions and have remained on the ball" throughout these turbulant times, a credit to the company and the region.
I've rarely found the Financial Times such gloomy reading. The outlook for commercial property in 2008 is horrible just as one might expect. Small investors piling into commercial property firms in recent years should have been asking themselves what the economic worth of empty builiding really is. Some major sites have been empty for years and yet will have an astronomic value attached to them on the balance sheet. Now those buildings will have to be sold at an increasingly knock down price.
What we are seeing here is not another 1998,1989, 1973, or 1929 as Tony Jackson mulled over in his FT Monday column.
It looks much more like 1873 - a sudden banking crisis followed by economic contraction. A growth recession which lasted on and off until 1896.
It's against that possible prognosis that the Rock sale should be analysed. Nationalisation is the only option.
I am very interest to know:
Has the Libor has previously diverged from the BoE base rate?
If so, is there somewhere on t'internet chronicling it?
Comment 32 : ?...! : 1.57 PM
I like this comment. Just about agrees with my own thinking.
Can you explain to me, though, why the Asian funds inflow went into logic-lite lending in the property market? I understand that these funds had to go somewhere, and I also appreciate that splitting bundles of debt into tranches does create significant amounts of better quality debt (and some really toxic debt, as well). But what I want to know is why was the domestic property market chosen to become the home of this creative financing?
Is there some element of Asian self-interest in this? Did they look for investments in western economies that would maximise the amount of the "lent" money finding its way into domestic consumption, and therefore demand for Asian goods? And so Asian investment in more logically robust sectors was vetoed primarily on the grounds that it wouldn't lead to enough recycling back into demand for Asian goods?
Finally, I'd like to know what is the reasoning behind those who chose to end up holding the toxic tranches of the property CDO's. I can understand that there are spectacular returns available on taking on these dodgy investments, and I also appreciate that as long as property values don't fall there's no real downside to holding them. Is it merely that some people became mesmerised by an apparently foolproof way to instant millions? Or do we really have a structural problem where it's just too easy to inflate current profit by under-providing for future risk? Thereby allowing today's bankers to enjoy the fruits of multi-billion pound successes that are almost entirely illusions? Will the new fair-value accounting standards deal effectively with this, or have ways already been found around these reporting requirements?
A quick point following on from #46 in relation to the staff remaining on the ball and acting in an exceptionally loyal and professional manner throughout this period of uncertainty.
When the brown stuff hit the fan on Sept 13th (Thanks to Robert Pest !), it is fair to say that there were a number of customers who wished to withdraw their funds from NR. My contacts within the company have confirmed that the Chief Executive gave a categorical assurance (to his credit) that it was business as usual and anybody was free to withdraw what ever funds they wished to.
For a few days, this caused a logistical nightmare for the company. Staff coped with the requirements of this period in a quite exceptional way, they slept in the offices and ordered in Pizza to keep themselves going. This was because they didn't want to let the levels of customer service deteriorate markedly despite significantly increased levels of business. There is an element of pride in the work they do and that should be applauded.
These are not multi millionaires, far from it, and they are not people who were party to the funding strategy within NR. But they are extremely dedicated and professional and in my view they deserve their bonus. It is my understanding that senior management are not being offered a bonus, I believe this is correct.
Who ever takes Northern Rock over, if they choose to retain the workforce in its current guise, will be getting a bargain in more ways than one.
Well done to the staff of NR.
Earlier today Ally D asked for a corner table at Tubby Isaacs. He was joined by one of Mother B's minions and the mood was grim. Apparently Mother Brown had gone ape when it was explained that Libor could undermine his brilliant scam to pass the Rock to the bearded one even if the taxpayer might end up on the short end of the deal. So now the pressure was on again and it was up to Ally D to revive Plan B and prepare the great unwashed. Plan B was nationalisation and somehow this would have to be spun as the sensible course to steer bearing in mind the current turbulence in the financial markets. The Canary Wharf circus was washing its hands so it was over to you Ally. Ally blanched as he realised that High Noon had arrived and £25 billion might well look like chickenfeed if the Rock ended up in Carey Street. Does Mother Brown realise that we could be in for £40 billion if this goes belly up? Well yes but forget the we because this will be presented as your plan to rescue the Rock. Ally stopped eating his pie and mash and it finally dawned upon him that this was going to be the final knees up. Mother Brown would plead that he was under the table and that he would organise a serious review to find how £40 billion had been risked for such an iffy venture. Ally D would tough it out for a while but then it was bye bye ministerial limo and a post haste dash for the border. What a day and he hadn't even had time for a second cuppa.
Rob @ 39,
I think its because there is little space on the balance sheet to lend money to any other bank.
Gary : Comment 36
The short answer is that the NR Mortgage Holders wouldn't be able to refinance their loans elsewhere on anything like as friendly terms as they are currently enjoying.
So NR's Loan Book, with its contractual interest agreements, is worth a lot less than its par value, because there are better yielding investments for today's surplus funds than taking on NR's commitments.
It remains to be seen how robustly NR's contracts have been written, how swingeing are the termination clauses, and how easy it will be to recoup through future interest rate increases the enticement costs of low initial rates etc. But, in truth, they will only be able to recoup these initial costs if they hold on to the loans, and if they have to increase their interest rate well above the rest of the market, they'll just lose the loans to another lender, termination costs or no termination costs.
Robert Peston I do not believe is being negative. He, in my opinion, realises the importance of the Northern Rock situation and what it could lead to and what it represents. The Rock is the thin end of a very large wedge. In short, he is facing reality and thinking about the consequences of the predicament.
Obviously it's difficult to predict the future, but if you are following the logic of the situation and not being distracted by details of specific historically telling data at certain points (which can be useful but are so changeable month on month then quickly become irrelevant) then you may be more than apprehensive.
What are the choices for Northern Rock? No one, without exception, knows how bad the loan book could become - a bank with such fast growth may not have the strictest lending criteria and as unemployment starts to rise then people who are hanging on will start falling off - which explains the pittance being offered for the company. No one is going to offer significantly more. The current situation is nationalisation effectively and presents a nightmare political scenario in many ways: 'Govt repossess 50 homes a week!" or "Govt cuts nurses but spends £30 billion on Northern Rock". The government would have to be mad not to get rid of the Rock under any acceptable circumstances or which can be spun that way.
It's not just being negative; it's not just fear. Loans are not going to be paid back: people are going to lose their jobs and there is going to be a recession because that is capitalism (and this isn't an attack on capitalism). The internet, Bank of England independence, a growing Asian market and economic stability will not change the iron laws of the economy.
Re: James #33
NR has already raised its standard variable rate to something outrageous like 7.8%.
So why aren't all the people on these mortgages moving them to other providers? Perhaps they can't because other providers aren't lending? Hmmm... that sounds very much like the problem Northern Rock themselves are suffering from and are thus having to pay higher borrowing rates. But of course, their customers shouldn't have to pay market rates for their mortgage borrowing, Northern Rock should be subsidising them. Not.
The real losers in this case are the people (yes I am one of them) who have mortgages with NR and are therefore being charged a penal rate for their failed business model (I know I can get out but that takes time and incurs arrangement fees).
Yes, and let's quietly forget that their "failed business model" meant that those "losers" benefitted from extremely low borrowing costs in the early stages of their mortgages. If you really can get out of your outrageously high mortgage rate then do so - Northern Rock will no doubt be extremely grateful for the repayment of the loan.
The Guardian today is reporting that £71bn of NR's assets have been secured through Granite (a subsidiary in the CI). This leaves about £41bn. available assets. The B of E has loaned somewhere between £25bn and £30bn which would indicate to me that we, the taxpayers are holding the majority of the least attractive assets.
The time is fast approaching for the Chancellor to be asked on what basis he made his loans and the information he received. The position for the taxpayer must be looking bad and could make Black Wednesday seem like a passing shower.
The pass-the-bomb mentality, in coming undone, is undoing my-word-is-my-bond: this has been happening for twenty years (Barclays in particular having led the way in reneging on some important clients) and imploding a balanced market.
Without confidence in lending, the markets will melt down and destroy the economy.
It seems that the Rock's 'profits' are about to be squeezed even more.
I have a Silver Saver account with them, and this morning I received an email from them informing me that the interest rate had gone up wef 30th November from 6.30% to 6.49% AER.
In addition to this, all savers who had a savings account with them on 1st December 2007 and who keep their money invested until 1st March 2008, will receive a bonus of 0.50%
Looks like they are getting deperate to stop the steady haemorrhaging of depositors funds. Given that the guarantees are still in place, this just might do the trick, but at a cost.
Dave, post 48 the quickest way to find the LIBOR rate is to either go to the British Bankers Association website and then click on the BBA LIBOR link or simply type in LIBOR on any search engine. For ease I have attached the BBA site link below. It is no surprise that the historic LIBOR rates are the most viewed page on the site this month.
The Bank of England base rate can also be found easily on the Bank of England website. I have attached the link below that details the rates since 1997 when they took over responsibility for setting rates
Hope this is of use.
Re: 58. Dave C
It seems that the Rock's 'profits' are about to be squeezed even more.
I have a Silver Saver account with them, and this morning I received an email from them informing me that the interest rate had gone up wef 30th November from 6.30% to 6.49% AER.
In addition to this, all savers who had a savings account with them on 1st December 2007 and who keep their money invested until 1st March 2008, will receive a bonus of 0.50%
Looks like they are getting deperate to stop the steady haemorrhaging of depositors funds. Given that the guarantees are still in place, this just might do the trick, but at a cost.
No - this is just Northern Rock offering market rates to savers. They need to attract more cash deposits, so they offer higher savings rates. The consequence of this is that they then need to charge higher rates to its borrowers. THE COST OF CREDIT IS RISING.
"45. Andrew H wrote:
In other words, by exercising their right to print more money, the Bank will have created inflation in the price of goods as measrued against Sterling. Ergo, they will have created money, but destroyed value as the cost of that money, a historically guaranteed way of increasing the likelihood and severity of a recession."
All banks create money in an almost identical manner to the Bank of England. Whether it is the BoE or some other financial organisation is largely irrelevant. And inflation doesn't destroy value, it simply makes it more difficult to measure. The value is still there, it's the measuring stick which has changed, not the real asset.
I don't know if you've been watching, but the money supply statistics have been... Ridiculous... For the last few years, and with any expansion in credit based money, a contraction is inevitable at some point... Debts have to be paid... Oooh look... Here it comes now...
Still. Since I learned how it all works I have managed to sidestep this one. Think of it as financial JuJitsu.
The Daily (Hate) Mail misquoted me, icluding factuual inaccuracies. Certainly bears out that some journos print "stories"!
eg I made reference to some stakeholders being more equal than others, not shareholders.
It is iniquitous for, in effect, the taxpayer to pay bonusess to people in this way
Mr Ashby, (assuming this is a genuine post)
Would you have complained in the same manner if you had been given your dividend payments?
Re #62
Mr Ashby has still not denied that he hasn't actually invested a penny in the company. I would agree you can be mis quoted by a newspaper, it happens everyday, but what was the mis quote???
I agree with Keith - its obvious that this Ashby bloke hasnt even invested his own money in the rock. He should not have kicked up such a fuss about Virgin because if NR are nationalised he may well get nothing for his poxy 500 shares!
Lets not forget that a lot of NR staff had a heck of a lot more shares than him!! To complain about them getting a small xmas bonus is pathetic - wonder who leaked the note to you eh Ashby?! Disgraceful!
And Peston - you have done a lot of damage here. Its fairly obvious that you wont let this lie until you have ruined this bank and brought the British banking system into further disrepute.
hi if you got mortgage with northern rock, will your house be repossessed even if we making regular payment? we got 3 year fixed interest only mortgage? please help. thanx
#66 Piyush, your house definitely isn't at risk if you are making regular repayments.
A mortgage lender owns the the right to receive your repayments until the balance is fully repaid, not the asset against which that promise is secured. You would have to default in making your repayments before the lender has any right to repossess.
Even if your mortgage was to be sold to another financial institution, that new FI does not suddenly own your house, only the right to continue to receive repayments from you until the loan is fully repaid.